Huawei, ZTE investigation may trigger trade war

Chinese telecom equipment manufacturers Huawei and ZTE--long the subjects of whispered allegations regarding close ties to the Chinese government as well as rumors of product dumping--may soon face an official investigation in the European Union, but some industry observers and insiders fear such a move will spark international trade battles.

According to a Friday Financial Times article, the EU is preparing to bring a formal case against Huawei and ZTE, perhaps as soon as next month, regarding allegations the two have benefited from illegal state subsidies that enabled the companies to sell products below cost, commonly known as product dumping.

It was reported last year that European regulators had uncovered some unanswered questions regarding China's support for its country's businesses following complaints from Belgian modem maker Option, which were subsequently withdrawn, according to Mobile Business Briefing. The FT said this most recent trade investigation was initiated by the European Commission, the EU's executive arm, on its own accord rather than in response to any specific complaint.

Huawei responded to the FT article on Tuesday as did ZTE. "Huawei has not received any communication from the European Commission regarding an investigation, but we are aware of media reports on this matter," Huawei said in an email to Reuters.

"We deny claims made in the media that Huawei employs dumping practices and has benefited from illegal state subsidies. Huawei also objects to the investigation that the European Commission is reportedly launching on the basis of these claims," the company continued.

ZTE also said it has not been contacted by the EU. The company claimed it "receives no illegal or hidden subsidies, nor does it dump products in any markets where it operates," according to Reuters.

Attractive contract bids from both Huawei and ZTE have enabled them to build strong positions in the wired and wireless infrastructure industries, with rival suppliers sometimes arguing that the companies' aggressive bids have led to an overall erosion of vendor profit margins. If it is determined that China has acted illegally to prop up Huawei and ZTE, the firms could be subject to punitive tariffs, likely prompting Chinese retaliation against European firms.

European telecom equipment manufacturers are therefore wary of supporting a probe into their Chinese counterparts' business activities. "European business is genuinely worried about possible retaliation against their market presence in China," Hosuk Lee-Makiyama of the European Centre for International Political Economy, told the FT.

Ericsson opposes the European probe. "The EU faces the risk of initiating a negative spiral by targeting individual firms," the company's head of government and industry relations, Ulf Pehrsson, said in an email to Reuters. "Ericsson is a strong supporter of free trade, and we don't believe in this type of unilateral measure."

Nokia Siemens Networks told Mobile Europe: "As a European company that also has a strong presence in China, we do not believe it would be appropriate for us to take a position in this case. Our presence in China includes close cooperation with Chinese customers and R&D and manufacturing operations." The company confirmed that the European Commission has informed it of an investigation, and said, "We understand that this is an initial step which is an investigation into the facts. It would not be appropriate to speculate about any potential consequences at this stage."

Ethical concerns are dogging Huawei and ZTE on numerous fronts.

Last week, Reuters reported that the U.S. Department of Commerce is investigating ZTE for allegedly selling embargoed U.S. computer products to Iran. If the allegations are proved true, ZTE could face a host of penalties, including fines worth double the value of the U.S. products, a Commerce Department official told Reuters.

In addition, this month brought reports of an unusual "backdoor" that could have been deliberately installed in ZTE's Android-powered Score smartphone. The security hole enables anyone with the device's hardwired password to access its root directory, allowing hackers to add, remove or copy data. ZTE promised earlier this month to issue a patch to effectively plug the security gap in the Score, which is available from U.S. operator MetroPCS (NYSE:PCS). ZTE has promised to issue a security patch to fix the issue.

Also this month, Nokia Siemens used its blog to draw attention to some striking similarities between its marketing collateral and Huawei's.

Looking back a bit, in March 2012 it was revealed that Australia's government had banned Huawei from entering equipment tenders for the national broadband network over fears of espionage and cyber attacks from China.

The U.S. Congress' House Permanent Select Committee on Intelligence in late 2011 began probing whether the presence of Huawei and ZTE pose security threats to U.S. telecommunications infrastructure and might provide opportunities for Chinese government espionage. Earlier, national security concerns torpedoed Huawei's bid to win part of a multi-billion-dollar network modernization contract from Sprint Nextel (NYSE:S), which was ultimately awarded to Alcatel-Lucent (NASDAQ:ALU), Ericsson (NASDAQ:ERIC) and Samsung.

For more:
- see this Financial Times article (sub. req.)
--see this Mobile Business Briefing article and this article
- see this Cellular News article
- see this Reuters article and this article
- see this NSN blog post

Related articles:
Report: Huawei, ZTE lead the pack in TD-LTE
ZTE warns of security vulnerability in Score Android phone
Jarich: Has China lost its innovative spirit? (Huawei, ZTE and the future of competition)
Huawei banned from Australian broadband buildout
Huawei acknowledges U.S. missteps, but has hopes for future growth
Commerce Department probed carriers over Chinese equipment security concerns