BEIJING/HONG KONG, Oct 9 (Reuters) - China's leading telecom
equipment makers accused in a U.S. congressional report of being
a potential security risk may face fresh scrutiny in other
markets, while American firms operating in China could be
vulnerable to retaliation.
The U.S. House of Representatives' Intelligence Committee on
Monday warned that China could use equipment made by Huawei
Technologies Co Ltd and ZTE Corp
- the world's second- and fifth-largest makers of routers and
telecoms gear - for cyber-espionage through software embedded in
Chinese-made network equipment.
In its 52-page report, the committee noted that "China's
military and intelligence services, recognizing the
technological superiority of the U.S. military, are actively
searching for asymmetrical advantages that could be exploited in
any future conflict with the United States. ... Malicious
implants in the components of critical infrastructure, such as
power grids or financial networks, would also be a tremendous
weapon in China's arsenal," it stated.
China's official People's Daily newspaper accused the
committee on Tuesday of acting on a "presumption of guilt"
against Huawei and ZTE. "This foolhardy political step ... will
impede the healthy development of Sino-American trade
cooperation," said a commentary in the newspaper, which
generally reflects government thinking.
It added that the committee had produced "not an iota" of
evidence to back its accusation that Huawei and ZTE products
were used for espionage in the United States. "This report,
which spurns the facts and is suffused with prejudice, is a
vicious expansion of trade protectionism," it said.
"COLD WAR" MENTALITY
The blow-up - a Xinhua English-language commentary spoke of
"a Cold War mentality" in the United States - comes at a
sensitive time for U.S.-China relations, ahead of U.S.
presidential and congressional elections and a leadership
transition in China.
Tensions have ratcheted higher with a series of trade
actions against China by President Barack Obama, including his
blocking of a privately owned Chinese firm 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 (WTO) case.
His Republican opponent, Mitt Romney, says if elected he
will label China a currency manipulator from day one.
Ed Snyder, an analyst at Charter Equity Research in San
Francisco, 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
Systems Inc, Google Inc, Qualcomm Inc
, Apple Inc 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."
BALANCED RESPONSE
Sun Lin, an independent telecoms consultant in Beijing,
however, played down the threat of retaliation against U.S.
high-tech firms, such as Cisco.
"We have to remember that on a technological level, China is
no match. Chinese customers want state-of-the-art products. In
some sectors they can only come from the United States, Europe
or Japan. If you shut down that source completely you will lose
in the end," he said. Cisco and Hewlett-Packard dominate
China's enterprise networking equipment market, where Huawei and
ZTE lag in the range of products and services they offer.
Sun said Beijing was likely to seek a compromise between a
political response balanced against Chinese business interests.
"I do not believe we are going to see a substantial degree of
retaliation in China," he said, though he did not rule out a
possible kick-back at the U.S. pharmaceuticals or agriculture
sectors.
Rather than direct action such as raising tariffs on imports
from the United States, China is more likely to "make life a
little more difficult" for U.S. firms operating there, said
Enzio von Pfeil, an independent economist in Hong Kong. "It
could be a sort of whisper campaign (to discourage Chinese from
buying some U.S. products)," he said.
An executive from a major Chinese networking equipment
distributor, which uses mainly Cisco products for its clients'
enterprise networks, also said there was unlikely to be any
sudden switch to Chinese products.
"Cisco has been in the market for many years and has built a
good reputation. I don't think people will make the switch to
other products immediately," said the executive, who is not
authorised to speak to the media and didn't want to be named.
"Maybe things will die down after the U.S. elections."
NOT A CASE FOR WTO
Similarly, few felt China would have much of a case if it
went to the WTO, which arbitrates in major trade spats.
"It's a political problem, not a trade problem," said Tu
Xinquan, a WTO expert at the University of International
Business and Economics in Beijing. "Both governments are facing
domestic pressures. The United States is looking at Chinese
competition more seriously and trying to do more to lower the
competitiveness of Chinese companies, especially when many big
companies are related to the government. But those restrictions
will be counterproductive," he said.
The U.S. report capped an 11-month investigation that Huawei
itself had urged early last year, hoping such a probe would
remove suspicions that killed its bids for U.S. communications
company 3Com and U.S. server technology firm 3Leaf.
The panel said it 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.
Huawei and ZTE, both based in Shenzhen in southern China,
denied the allegations in the report, with Huawei spokesman
William Plummer warning the panel's recommendations would set a
"monstrous, market-distorting, trade-distorting policy precedent
that could be used in other markets against American companies."
In Hong Kong, ZTE shares fell by as much as 8 percent on
Tuesday, following Monday's 6 percent drop. The stock has more
than halved this year, underperforming the benchmark Hang Seng
index's 14 percent gain.
MASQUERADE
Employee-owned Huawei, founded by CEO Ren Zhengfei 25 years
ago after he was laid off by the Chinese army, has expanded in
Europe and India, and says its products are currently used in
more than 150 countries. More than two-thirds of its annual
revenue of $32.4 billion is earned outside China.
Luke Coleman, media relations manager for Huawei Australia,
said the company has "zero" Chinese government involvement, and
there should be no impact on its business in Australia, where it
supplies telecoms equipment and handsets and builds networks for
mobile operators such as Optus and Vodafone,
universities and a major state rail company.
Huawei, which has been barred from taking part in contracts
to build the government's $38 billion national broadband
network, had Australian revenue last year of A$229 million ($234
million). "There's nothing new. From our perspective, this is a
trade issue masquerading as a security issue," Coleman said.
A senior telecoms industry official in India - where Huawei
has sales of about $1.2 billion, excluding handsets - said that
while the government will watch the situation closely, business
would still buy Chinese equipment, primarily because of price.
"For operators, the biggest draw for buying Chinese
equipment has been the price point and the financing available.
It'll be a difficult proposition (to not buy Chinese gear) when
the whole industry is under liquidity stress," the official
said, declining to be named due to the issue's sensitivity.
In New Zealand, opposition parties called for an inquiry
into Huawei's involvement in building a government-sponsored
ultrafast broadband network. The Chinese firm last year signed
an equipment deal with network operator Chorus Ltd,
which is building most of the network.
"The taxpayer shouldn't be giving Huawei hundreds of
millions of dollars to make it easier for Beijing to potentially
spy on us," said Gareth Hughes, information technology spokesman
for the Green Party. The government said the opposition was
painting "a misleading view of the situation".
