Analyst: Chinese Face Spy Scandal Fallout

A report suggesting that the Chinese military has hacked into German government computers could have a negative impact on the prospects in Western markets of Chinese equipment vendors Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), believes an analyst at Dresdner Kleinwort .

German news magazine Der Spiegel reported recently that computers in the German chancellery and the foreign, economic, and research ministries had been infected with Chinese spyware software, and German officials say they believe the hackers were linked to China's People's Liberation Army. (See China's Premier 'Gravely Concerned' by Hack on Germany and China to Use Computer Viruses as Cyberwarfare First Strike.)

The incident overshadowed German Chancellor Angela Merkel's state visit last week to Chinese Premier Wen Jiabao.

But the ramifications could go far beyond international relations and even damage Chinese companies' prospects for IT and telecom contracts in the West, believes Dresdner Kleinwort analyst Per Lindberg.

"The ability of Huawei and ZTE to participate in, let alone win, telecom infrastructure tenders in the Western hemisphere may have lessened considerably following last week's shock report," writes Lindberg in a research note issued Monday. "It could trigger a return to national security clearance when it comes to procurement of telecom networks," he adds.

But Heavy Reading chief analyst Graham Finnie is cautious about the potential impact on the likes of Huawei and ZTE. He says the effect on Chinese vendors will depend on whether this incident is a "flash in the pan" or turns into something bigger.

"There has always been an issue in the U.S. that these companies have links with the Chinese government. But it hasn't been quite so much of an issue in Europe," says Finnie. "This is another stick that people can use to beat the Chinese suppliers with."

"It clearly would not be in either company's interest to be seen to be working for the Chinese government," he adds.

Both Huawei and ZTE have been gaining ground with Tier 1 contract wins in Europe and the U.S. this year. Huawei notably won HSDPA contracts with Vodafone EspaŮa S.A. and Telecom Italia Mobile SpA (Milan: TIM). (See Huawei Wins in Germany, Huawei Wins Vodafone Deal, KPN Picks Huawei, Alltel Uses Huawei Card, Huawei Wins at TIM, ZTE Wins Sprint WiMax Deal, ZTE Wins 3G Deal, and Huawei Gets Vodafone Award.)

But Dresdner says the spyware incident in Germany threatens to slow that momentum. "It could stifle China's telecom export push, trigger urgent replacement of 'unwanted' equipment, and put an end to price dumping tactics," writes Lindberg in his research note.

— Michelle Donegan, European Editor, Light Reading

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digits 12/5/2012 | 3:03:19 PM
re: Analyst: Chinese Face Spy Scandal Fallout It's sad that an analyst should need to draw such a conclusion, but I think Lindberg has a point, though the extent of the impact could vary a great deal.

There's every chance of a knee-jerk reaction to such incidents, even while they're unofficial, but Huawei and ZTE might just find themselves under even greater pressure with regards to security provisions as a result of this report.

Some service providers could find themselves in a bit of a quandary if, on the one hand, they find themselves under any sort of pressure from their national government or government customers about working with Chinese companies, while at the same time finding the likes of Huawei or ZTE to be the best placed suppliers. That would be a tough call.

runnyme 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout I was wondering why no other companies are accusing Huawei of stealing. Actually Huawei is more successful in the telecom sector rather than the Cisco's router field. Have they stole all their stuff from E//, Lucent, ...? I doubt.
Stefan Sip 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout In the maturation process of any company or society, what you have seen out of Huawei and ZTE are very normal. Think of Toyota in the G«ˇ60s or Hyundai in the G«ˇ80s. Were they not copying or accused of copying the best of American and European vehicles? They won primarily on price. Once they gained a solid foothold in the market, they started to innovate and improved on quality and customer service. In my opinion, HuaweiG«÷s history mirrors that of Toyota and Hyundai. Huawei started with a low-end PBX that was sold exclusively to remote parts of China. I read somewhere that in 2006, Huawei filed 4 times the number of patents compared to Cisco. I certainly donG«÷t have any inside information regarding the Chinese government forced Cisco to drop the lawsuit. Perhaps Delphi or others can shed some additional light on this. Regardless, would this be similar to the fact that the US government, as a precondition for China to join the WTO, forced China, via China Unicom, to not only go CDMA, but must deploy x% from Lucent and y% from Motorola, while benefiting Qualcomm in the process.

Look, we are all grown-ups who are fully aware that we live in a complex world, where individuals, corporations, and governments charter a course for their own self interests. In my opinion, to single out China or Huawei/ZTE is very na+Ľve and biased. For the billions of Chinese and tens of thousands of Huawei/ZTE employees who put in 15hr+ days, it is also very insulting. I recommend that everyone go and read John PerkinsG«÷ book, called G«£Confessions of an Economic Hitman.G«•

Lastly, the overall theme of the spying article is a bit silly. One can write a similar article, titled, G«£US policy in Iraq affecting Lucent/Motorola/Cisco in the Middle East.G«• Such an article can go on and describe how Muslims are disgusted with current policies, so much so that operators in the region are signing major deals with Huawei and ZTE, instead of NA vendors.
t.bogataj 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout >> Stefan Sip: One can write a similar article, titled, "US policy in Iraq affecting Lucent/Motorola/Cisco in the Middle East."

No need do do that. The Chinese are already strong in both East Africa and in the Middle East. Check out "Huawei Wins Iraq Deal" ( http://www.lightreading.com/do... ) and "Huawei Adds ME" ( http://www.unstrung.com/docume... ). What more is to be said?

geekay 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout Stealing and copying can not be justified in the name of "maturation process". Copy hardware and steal software then sell it for cheap? This has been repeated in past by not one but several Chinese vendors.
delphi 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout A few last comments.

Does anyone know who the founders and investors of Huawei are. Check it out. Ex generals.

Also one should see the art they used to hang in their visitor center. It was a completely disected Cisco router. Get the message.

delphi 12/5/2012 | 3:03:18 PM
re: Analyst: Chinese Face Spy Scandal Fallout It is amazing that this has not come to light sooner.

Every Chinese equipment vendor has stolen all of their product designs from western companies and then the Chinese government has colliued in forcing even Cisco into dropping their law suits in order to continue doing business business with China.

When will the US and Europe wake up to the fact that doing business with China should be based on the mutual enforcement of IPR rights.

China is spying on Europe in a gross and deep manner. Every student is beholding to the government whether they want to be or not.

Naive does not begin to cover the Euro governments and policies.

China is indeed your worst fear, not Microsoft.
chip_mate 12/5/2012 | 3:03:17 PM
re: Analyst: Chinese Face Spy Scandal Fallout All Your Base Are Belong To Us....

China military hacks Pentagon.

China disputes claim.

Stefan Sip agrees with China and is elected to People's Committee for American Disinformation.

Right wing view:

Left wing view:

Source: Reuters.com

Stefan Sip 12/5/2012 | 3:03:17 PM
re: Analyst: Chinese Face Spy Scandal Fallout Nobody, including myself, justifies the Cisco incident as part of the maturation process. What I stated was that virtually every company does it in order to find the easiest way to crack the door.
t.bogataj 12/5/2012 | 3:03:15 PM
re: Analyst: Chinese Face Spy Scandal Fallout chip_mate,

Grown-ups are supposed to form their views and opinions based on available information; children, loyal subjects and narrow-minded citizens willingly accept their parents' or their governments' views. What category do you fall into? Apparently, the latter: what you just demonstrated is nothing but labeling people (Stefan, in this case) based on cold war mentality and McCarthy's methods. Instead of discussing ad rem, you resort to brainless criticism ad personam.

Get serious. Use your brain. As Charles McCabe has put it: "Any clod can have the facts, but having opinions is an art."

tata, T.
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