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US vs Huawei/ZTE: The Verdict

5:00 AM -- The U.S. House Permanent Select Committee on Intelligence has decided that Chinese telecom equipment vendors Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) pose a security risk and that U.S. companies should not engage in business with them. (See More Chinese Whispers and Huawei, ZTE Probed by Intelligence Agency.)

That, reports Bloomberg, is the general conclusion of the Intelligence Committee following a probe that saw members of the investigating team visit China and representatives of both Huawei and ZTE give evidence to the Committee (testimony that included some ill-advised claims). (See Huawei, ZTE Get Grilled in US.)

The Committee's main concern, it would seem, is that it's not possible for Huawei and ZTE to operate without influence from the Chinese government, a claim that both vendors have always rejected and which ZTE has once again denied, reports Reuters.

The verdict should come as no surprise to anyone. The tone of the Committee's statements always suggested that the only thing in doubt was just how damning of the Chinese vendors the final conclusions would be.

That's not to say that the Committee's findings have no validity and, for sure, both Huawei and ZTE have been guilty over the years of having indulged in less than creditable business practices, including industrial espionage and bribery. To what extent those two companies engage in those practices any more than their counterparts is another issue altogether -- international business in any industry is far from squeaky clean.

Once the full report is released it'll be interesting to see the full details of the Committee's decision. What's immediately clear, though, is that this provides a greater opportunity for the Chinese vendors' rivals to win business in the critical U.S. market and that any engagement with Huawei and ZTE by U.S. companies hereon in is likely to be public relations suicide.

Of course, the fallout from the Committee's verdict could be far more wide-ranging. China's foreign ministry has already issued a statement about the verdict, urging the U.S. to set aside any prejudices when dealing with Huawei and ZTE, reports Reuters. It's hard to imagine that the Chinese government's reaction will begin and end with a statement.

— Ray Le Maistre, International Managing Editor, Light Reading

paolo.franzoi 12/5/2012 | 5:19:19 PM
re: US vs Huawei/ZTE: The Verdict

Well, I stated two views in this thread:


1 - The 60 Minutes piece would have the biggest impact on the general US public and;


2 - There were only smaller players that are US companies outside of Cisco (who is only partly a carrier company).


 


I also answered a question about what it would be like if you treated Telecom Equipment like Defense products.


Now, a bit of my personal history.  I worked at AFC who had a dicey Intellectual Property history.  AFC sued and settled with Marconi.  We had approximately 10 "clones" (aka copies) in China and other places (one in Brazil and one in the US outside of Marconi).  One of my jobs was locating the latest clone at Supercomm so that we could tell them to get the heck out of the US.


But I am not done.  In 97, AFC did $50M in China.  We found out in 98 that we were to be excluded because foreign companies had to have approval for their V5.2 interface and we did not.  Local companies did not have to have that approval and continued to sell.  By the time we got the approval (the first as far as I know approved), we had systems in China with both our cards and clone cards in them.


Much of this information is available or determinable publicly if you want to research it.  To do so, you can look up AFC's legal actions, the shareholder lawsuit against AFC for the stock drop in 6/98, and finally the insider trading involving two engineers (one of whom worked directly for me).


So, my IP rights and open trading views of China are definitely biased.  But I also have issues with the current state of the Chinese currency.  My solution is to allow Huawei, ZTE, and others in with two things.  First, complete disclosure and hacking by the CIA/NSA/DHS of all designs sold into the US market.  In other words, give the US government complete capability of hacking the designs.  Second, tax ALL Chinese imports 100% until the currency is completely floated.  But that is just me.  I also do not think this needs to be fair.  


seven


 

melao2 12/5/2012 | 5:19:19 PM
re: US vs Huawei/ZTE: The Verdict

Brookseven, so in what state the world is now? 


Are we going to move forward to some sort of cold war again. I mean only the telecom companies from allies can enter the US market?


Because if you remove the chinese, there are only european players, as major players.


US lost Lucent, and Canada lost Nortel.


 


NEC will invest again in the foreign market, will NEC be eligible for the US market?


 


Just some thoughts about the whole security debacle. :)

cstoyle 12/5/2012 | 5:19:20 PM
re: US vs Huawei/ZTE: The Verdict

I mean really? Now the federal government decides that telecom networks and equipment is worth saving after years of refusing to do anything to mitigate the fall out from cheaper goods and the disaster of divestiture, trivestiture and quadvestiture, etc., etc? Obviously the car industry was a much more worthwhile industry to save than the telecom one was. Given how much Chinese parts, etc. goes into what little remains of the "US" telecom market this really does seem a little bit like too little too late. I'm just sayin'

Pete Baldwin 12/5/2012 | 5:19:20 PM
re: US vs Huawei/ZTE: The Verdict

Neyo -- no self-censorship; it's more that we're in a busy week with a lot of internal stuff going on (tradeshow participation and the like) and with two editors on the road.


I've glanced at the report but haven't seen anything too surprising or new beyond what's been reported (or what we already knew) -- but again, that's just a very quick glance.


If you find anything in there that's particularly eye-popping, do let us know.

neyo 12/5/2012 | 5:19:21 PM
re: US vs Huawei/ZTE: The Verdict "Once the full report is released it'll be interesting to see the full details of the Committee's decision."
So I believe the report is out. But no news/analysis about it on light reading. Is this some kind of self-censorship?
JTiggy 12/5/2012 | 5:19:21 PM
re: US vs Huawei/ZTE: The Verdict

I am very pleased with the U.S. government for not allowing the Chinese to potentially infiltrate our networks.  As someone stated the first thing  to go in any war would be our ability to use the network to defend out selfs.  But, maybe more importantly not give them the ability to spy and learn the secrets of U.S. Manufacturers on a daily basics. 

jepovic 12/5/2012 | 5:19:26 PM
re: US vs Huawei/ZTE: The Verdict

Lightmonkey has a point. Compared with how insanely much money the US spends on military equipment, where it would be unthinkable to use Chinese suppliers, it seems a bit weird to let Chinese vendors supply the telecomuncations equipment for essential parts of the major networks.


Then again, if the telecom business was run the military industry style, an iPhone would cost about 5 MUSD and mobile phone users would be counted in thousands. Not sure that's the way to go. Also, I doubt that any country can reach any reasonable level of independence in terms of homegrown suppliers for telco equipment, when everyone is so dependent on vast networks of subcontractors.


By the way, I wonder if this decision should worry Apple. They're a pretty obvious target for any retaliation in terms of trade policies.

paolo.franzoi 12/5/2012 | 5:19:27 PM
re: US vs Huawei/ZTE: The Verdict

uguess,


Telecom equipment would then be like the defense business.  The question one has to ask yourself:  Is it more important that a military truck or a communications system comes from your country or its allies for national security?


Each person can answer that question for themselves.


seven


 

uguess 12/5/2012 | 5:19:28 PM
re: US vs Huawei/ZTE: The Verdict

That would limit telecommunications company to only supply equipment/services to their own country.  This move of the US government will potentially hurt Cisco and Alcatel-Lucent in the China market.

lightmonkey 12/5/2012 | 5:19:30 PM
re: US vs Huawei/ZTE: The Verdict

I agree seven.


 


I think the US Govt. is finally waking up to the fact that there is no big US supplier in a key strategic industry.  It's clearly a problem. 


People here talk about protectionism, it's not about that so much.  It's really about the ability of a foreign government to essentially turn off or disrupt the communications infrastructure of the United States.  In any war, the very first thing that's targeted is the communications infrastructure. 


And BTW, the US is not alone here, the Germans came to the same conclusion.


http://www.lightreading.com/bl...


 


 


 

Rupert_Baines 12/5/2012 | 5:19:32 PM
re: US vs Huawei/ZTE: The Verdict

I'm not sure that protectionism is ever a good way to save jobs. Trying to use laws to keep out technology, to try to protect uncompetetive domestic amnufacturers is not usually recommended...


Indeed, in contradiction to your point, it is Europe that has accepted the challenge from Huawei & ZTE, with European operators buying from them.


But looking at the Tier 1 OEMs (Ericsson, Huawei, NSN, ALU, ZTE - and sort of Cisco) it does not seem to have hurt European business.


So what exactly is it that Europe should listen too?

exon 12/5/2012 | 5:19:33 PM
re: US vs Huawei/ZTE: The Verdict

no doubt the verdict is highly political and way too influenced from lobbyists. Nevertheless is good for US interests. I wish the europeans could have the courage to do something similar rather than watching Huawei (mainly) and ZTE reaping one after the other the deals through price damping & other obviously illegal practices. They could have possibly saved some major tech firms (and many thousand jobs) from going under.

Soupafly 12/5/2012 | 5:19:34 PM
re: US vs Huawei/ZTE: The Verdict

The leading headline is questionable journalism...imho. Its fair to say that LR & its parent company have commercial revenues and concerns to consider, so I understand that.


However, certain lines & journalistic integrity will always remain important.


This topic is going to rumble on.


The article alludes that the UK approach is better than the US. Am not sure I agree. Whilst its true that the UK process is arguably more transparent, I don't assume that the US process is wrong and baseless, just because they have not published their sources & rationale. There may be reasons that we are not aware of, as to why they have done that.


I do think that Huawei's top team including Ren got complacent & arrogant in regards to the US and breaking into the NA marketplace. They have fallen for too many fast talking texans and hustlers instead of paying careful attention to the environment & basics. ZTE are relatively inconsequential outside handsets and have immature tech, so not really worth commenting on - in detail. The alliance with Cisco in china is a counter-tactical play against Huawei, based on the frenemy principle, amongst others.


NA is strategically important on multiple levels, so whilst this will lead to another rounds of strategic reviews, the NA market is a no retreat, no surrender territory. AL, Ericsson, Cisco, Ciena, HP, Apple, IBM - all the big global players are there and that is something that cannot be understated.


Will they break through? No question. Yes.


Only 1 US carrier needs to break & be seduced by free or very cheap tech that is world class (and there R&D has done an amazing job on the tech!) and the floodgates will open. If 1 major operator gains a strategic cost advantage that will cross contaminate the balance sheet for all & lead to price war.


Thats what has happened in the EU market place and numerous others. The NA market is in no way special, in that regard.

sam masud 12/5/2012 | 5:19:34 PM
re: US vs Huawei/ZTE: The Verdict

Saw the 60 Minutes "report" last evening--it was hilarious, but not in a light, funny way. 

paolo.franzoi 12/5/2012 | 5:19:35 PM
re: US vs Huawei/ZTE: The Verdict

Rgru,


None of those companies are $20B+ like Cisco, Alcatel, Erriccson, NSN, Huawei and ZTE.  The whole point is that the US companies that you listed there are Tier 2 and Tier 3 players.  There are no Tier 1 Telco Equipment Manufacturers left in the US, as Cisco in many ways is more of an Enterprise company.  The only one that the US really had was Lucent but that died long ago.


seven


 

non_linear 12/5/2012 | 5:19:35 PM
re: US vs Huawei/ZTE: The Verdict

What about HP's H3C unit? They operate as a completely independent company in China, where HP essentially acts as a reseller (with limited influence on features and roadmap) of H3C gear Rest of World?  Seems to me that this sort of "ruling" should apply to them too, no?

Chhilar 12/5/2012 | 5:19:35 PM
re: US vs Huawei/ZTE: The Verdict

That is extremely inaccurate regarding the origin of telecomm equipment.  Ciena, Infinera, Tellabs, Adtran, JDSU, Oclaro and others...  There are many American telecomm equipment and component companies.

paolo.franzoi 12/5/2012 | 5:19:36 PM
re: US vs Huawei/ZTE: The Verdict

The bigger issue for Huawei is 60 minutes which did a piece on them last night (but not including ZTE).  I would say the chances of the American Public not being highly suspicious of Huawei after that report are slim and none (and slim just left).  


One of the very interesting bits came to the end when 60 minutes told folks that basically all the comm gear we buy (outside of Cisco) is foreign owned.  Of course that is not true, but Cisco is the only major American supplier out there.  


seven


 

Rupert_Baines 12/5/2012 | 5:19:37 PM
re: US vs Huawei/ZTE: The Verdict

The Economist had a very intersting piece on this over the summer.


 


They discuss a lot of the issues: Huawei's success, the very genuine concerns about security in general, how other countries are facing these issues.


They contrast the US approachj (a panel of politicians) with how UK Govt has invested & involved GCHQ in audits and diligence. 


They also made the point about complacency: merely because a product is US owned is no particular reason to trust it is secure (after all, how much of the technology used in Western Company X's product was developed in China anyway...?)


http://www.economist.com/node/...


That said, there are things Huawei & ZTE could and should do to improve clarity.


Maybe this move will help that - but I suspect the reality may make little difference to US Trade Policy.

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