* Report targets China's Huawei, ZTE for security concerns
* Cites odd behavior from companies' equipment
* Says U.S. companies should look for other vendors
* Huawei, ZTE aggressively deny allegations
By Jim Wolf
WASHINGTON, Oct 8 The U.S. ambitions of two
Chinese telecom equipment makers were stopped in their tracks on
Monday as a congressional report urged American companies to
stop doing business with the firms, raising fears of retaliation
Huawei, the world's second-largest maker of routers and
other telecom gear, and ZTE, the fifth-largest, for years have
been stymied in their efforts to make big inroads into the
United States due to national security concerns, but Monday's
report escalated the dispute.
The U.S. House of Representatives' Intelligence Committee
warned industry that Beijing could use equipment made by the two
companies to spy on certain communications and threaten vital
systems through computerized links.
The panel urged network providers and others to seek other
vendors for their projects.
"It's absolutely devastating," said Roger Entner, a telecoms
analyst at Recon Analytics. "While Huawei had its hands tied
already, it's one thing having restrictions that aren't voiced
publicly, but it's another thing entirely when the government
comes out publicly and says not to use Huawei."
The report also advised the Committee on Foreign Investments
in the United States (CFIUS), an inter-agency government panel
that vets foreign deals for security concerns, to block any
future business tie-ups involving Huawei or ZTE and U.S.
The demands come at a very sensitive time for U.S.-China
relations, ahead of the U.S. presidential and congressional
elections and a transition of power to a new leadership in
Tensions have recently been ratcheting higher thanks to a
series of trade actions against China by President Barack Obama,
including his blocking of a privately owned Chinese company from
building wind turbines close to a U.S. military site, and his
challenge of Chinese auto and auto-parts subsidies in a World
Trade Organization case. His Republican opponent, Mitt Romney,
says if elected he will label China a currency manipulator from
Ed Snyder, an analyst at Charter Equity Research, said the
committee's report could lead to retaliation against U.S.
companies that sell products in China in the telecommunications
industry and beyond. He mentioned Cisco, Google
, Qualcomm, Apple as examples but said
non-tech U.S. companies could also be hit.
"By calling them out like this they're almost certain to get
retribution," Snyder said. "There's a lot of ripe targets."
The report capped an 11-month investigation that Huawei
itself had urged in early 2011. Huawei, which already has a U.S.
presence with its handset sales, had hoped that such a probe
would remove suspicions that had killed its bid for U.S.
communications company 3Com and U.S. server technology firm
The move apparently backfired.
Committee Chairman Mike Rogers, a Michigan Republican who is
a former FBI agent, said at a press conference on Monday that
American companies must protect themselves against the national
security risks posed by Huawei and ZTE.
"My argument is that if this helps the Chinese government
get out of the business of cyberespionage, then that's great,"
Huawei unequivocally denies the allegations in the report,
said William Plummer, a company spokesman in Washington.
He said the panel's recommendations would set a "monstrous,
market-distorting, trade-distorting policy precedent that could
be used in other markets against American companies."
ZTE, in a newly released copy of a letter to the committee,
said it "profoundly disagrees" with allegations that it is
directed or controlled by the Chinese government.
"ZTE should not be a focus of this investigation to the
exclusion of the much larger Western vendors," it said.
POSSIBLE DOJ PROBE
The committee's document was long on suspicion and short on
evidence. A classified annex provides "significantly more
information adding to the committee's concerns," it said.
Rogers said that some anonymous U.S. users of Huawei routers
had told the committee of what he described as unauthorized
shipments of large amounts of data to China late at night.
Asked why the report did not detail those accusations, he
cited what he called "proprietary" concerns involving
confidential disclosures to the committee's investigators.
The panel also said it had referred to the Justice
Department and Department of Homeland Security credible
allegations suggesting Huawei may be guilty of bribery and
corruption, discriminatory behavior and copyright infringement.
DOJ spokeswoman Rebekah Carmichael said, "We take all
credible allegations of foreign bribery seriously, and will
review the materials when we receive them."
Rogers said lawmakers' concerns had been heightened by what
he and the panel's top Democrat, C.A. Ruppersberger of Maryland,
described as the companies' lack of full cooperation with the
Chris Johnson, an analyst at the Center for Strategic and
International Studies, said Huawei is not doing itself any
favors by not being more forthcoming about sensitive aspects of
its business, such as founder Ren Zhengfei's history as an
officer in the Chinese army.
"They've taken a lot of steps, they've gone out and hired
lobby firms and people like Bill Plummer to try to address the
situation but it clearly it isn't working, based on the report
and the general sentiment people have," Johnson said.
MOBILE PHONES SPARED
Employee-owned Huawei has made greater strides expanding in
Europe and India, becoming the world's second-biggest maker of
routers, switches and other telecommunications equipment after
The committee's warning comes as Huawei weighs a possible
initial public offering, sources said, as part of an effort to
overcome suspicions that have all but blocked its U.S. efforts,
including business tie-ins.
Huawei's U.S. sales totaled $1.3 billion last year, a small
fraction of its worldwide sales of $32.4 billion. Handheld
devices accounted for about three-fourths of the U.S. sales in
the United States last year, including via T-Mobile, AT&T
ZTE's U.S. telecom infrastructure equipment sales last year
were less than $30 million. In contrast, two of the larger
Western vendors alone had combined U.S. sales that topped $14
billion, ZTE has said, alluding to Espoo, Finland-based Nokia
Siemens Networks and Paris-based Alcatel Lucent
Rogers, responding to a question at the press conference,
stopped short of urging a U.S. boycott of mobile phones and
other handheld devices made by Huawei and ZTE.
The panel's warning pertains to devices that involve
processing of data on a large scale, he said, not Huawei- and
ZTE-made mobile phones.
While the biggest U.S. wireless providers do not use Huawei
equipment in their networks, some smaller companies including
Clearwire Corp use the Chinese vendor.
Clearwire announced in 2009 that Huawei would supply it with
equipment for its wireless network. It declined to say on Monday
whether it will do any more business with Huawei in the future.
'A BAD MIX'
Huawei and ZTE may not be the only companies that present a
risk to U.S. infrastructure, the committee's report said, but
they are the two largest Chinese-founded, Chinese-owned
companies seeking to market critical network equipment in the
The report underscores how little return Huawei in
particular has gotten from its significant investment in
lobbying in Washington after suffering the setbacks with 3Leaf
and 3Com. Private equity firm Bain Capital had partnered with
Huawei for the latter deal.
Huawei has brought on seven firms registered to lobby U.S.
lawmakers, including APCO, Doyce Boesch and Fleishman-Hillard,
according to forms filed under the lobbying disclosure act. That
is up from four firms in 2011, two in 2010 and one in 2009.
But China trade analyst Derek Scissors of the Heritage
Foundation said Huawei can only do so much to overcome its a
fundamental image problem.
"A company that's in a sensitive sector that has both theft
and the possibility of espionage? That's a bad mix," Scissors
said. "No one will be surprised if Huawei and ZTE continue to be