Chinese vendors Huawei and ZTE responded to a U.S. government report that said they pose a security risk because their equipment could be used for espionage. The report will likely damage both companies' long-term prospects in the market.
Both companies were prepared for the House Permanent Select Committee on Intelligence's report. Huawei set up a website to provide information on the security of its equipment and notified employees in advance that the report would repeat "misinformation" about the company, according to the Wall Street Journal.
The Journal said that on Sunday Huawei executives finalized a company blog post and prepared to confront the allegations in the report. "The outcome was predetermined," William Plummer, Huawei's vice president of external affairs and chief spokesperson in Washington, told the Journal. "The political agenda was one of poking China in the eye and holding hostage an innocent, independent, employee-owned company," he said.
After a year-long investigation that lawmakers said Huawei and ZTE failed to fully comply with, the report recommended the U.S. block acquisitions and mergers involving the two firms and also recommends that the U.S. government and U.S. companies avoid using equipment from the two Chinese companies. In addition, the report said that the panel received "credible allegations from unnamed industry experts and current and former Huawei employees suggesting Huawei, in particular, may be guilty of bribery and corruption, discriminatory behavior and copyright infringement." Huawei attacked the 52-page report's lack of specificity and evidence of illegal behavior.
ZTE, which was not accused of any illegal behavior, reacted somewhat more muted than Huawei, but still pushed back strongly against the notion that it poses a security threat. "It is noteworthy that, after a year-long investigation, the Committee rests its conclusions on a finding that ZTE may not be 'free of state influence,' " David Dai Shu, ZTE's director of global public affairs, said in a statement. "This finding would apply to any company operating in China. The Committee has not challenged ZTE's fitness to serve the U.S. market based on any pattern of unethical or illegal behavior."
Still, both companies' reputations have been impacted by the report, which comes at a time when both were hoping to expand their wireless business in the U.S. "This puts an established intelligence community stamp on the idea that these are companies that pose a potential serious threat," Stewart Baker, a former U.S. Homeland Security Department official, told Bloomberg. "They are going to be treated more harshly than other multinationals for the foreseeable future."
it is unclear what implications the report might have for companies that already use Huawei and ZTE network equipment. Cricket provider Leap Wireless (NASDAQ:LEAP) and Clearwire (NASDAQ:CLWR) both use gear from Huawei. Additionally, all of the major U.S. wireless carriers use handsets form Huawei and ZTE. However, the report indicated that there were no concerns with those devices.
"We're not talking about handsets," Rep. Mike Rogers (R-Mich.), the committee's chairman, said Monday. "Only those devices that involve the processing of data on a large scale." ZTE devices accounted for 5.4 percent of global shipments in the second quarter, and Huawei's devices accounted for 3 percent, according to ABI Research.
For more:
- see this WSJ article (sub. req.)
- see this separate WSJ page (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this CNET article
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