* Cisco Systems ends sales tie-up with China's ZTE
* Reuters stories spark probes by U.S. Commerce Dept, FBI
* Congressional committee says ZTE, Huawei security threat
LONDON, Oct 8 (Reuters) - Cisco Systems Inc. has ended a
longstanding sales partnership with ZTE Corp after an internal
investigation into allegations that the Chinese
telecommunications equipment maker sold Cisco networking gear to
Iran.
Cisco's probe followed stories by Reuters in March and April
that documented how Shenzhen, China-based ZTE had sold banned
computer equipment from Cisco and other U.S. companies to Iran's
largest telecom firm. ZTE also agreed last year to ship millions
of dollars worth of additional U.S. tech products, including
Cisco switches, to a unit of the consortium that controls the
telecom firm.
The stories sparked internal probes by the companies
involved, as well as investigations by the U.S. Commerce
Department, a congressional committee, and the Federal Bureau of
Investigation. ZTE's general counsel at its Texas-based
subsidiary alleged that the parent company plotted a cover-up,
including possibly shredding documents, after the first Reuters
story broke. The FBI has launched a criminal probe into the
allegations.
The U.S. House of Representatives' Intelligence Committee
said in a draft of a report to be released Monday that ZTE and
fellow Chinese telecom equipment maker Huawei Technologies Co.
Ltd should be shut out of the U.S. market because potential
Chinese state influence on them poses a security threat. Both
companies deny the allegation.
David Dai Shu, a ZTE spokesman, said of Cisco's decision to
cut ties: "ZTE is highly concerned with the matter and is
communicating with Cisco. At the same time, ZTE is actively
cooperating with the U.S. government about the probe to Iran. We
believe it will be properly addressed."
In a recent interview, John Chambers, Cisco's chief
executive, declined to discuss the results of the company's
investigation of ZTE's sales to Iran. But he said Cisco doesn't
"tolerate any direct or indirect" sales of its equipment to
embargoed countries such as Iran. "And when that occurs, we step
up and deal with it very firmly. So I think you can assume that
you will not see that happen again."
THE IRAN CONNECTION
Cisco and ZTE partnered for the past seven years in a
relationship that was at times rocky, according to a former
Cisco executive with knowledge of the matter.
ZTE described the initial partnership as an effort to
develop business opportunities in China and Asia Pacific,
excluding Japan.
The partnership expanded about five years ago when Cisco
began viewing ZTE as a means to combat Huawei, the world's
second-biggest maker of telecoms equipment by revenue after
Sweden's Ericsson. Huawei had been beating out Cisco in emerging
markets by offering significantly cheaper products.
Part of Cisco's strategy, the former Cisco executive said,
was "we would license technology to ZTE and they would produce
equipment locally, and we could therefore have a range of
equipment in the marketplace that would be cost-competitive with
Huawei."
ZTE was "reasonably successful" in reselling Cisco products
inside China, where it was well entrenched in the marketplace,
the former executive said. But the plan to develop projects
jointly, and offer them in markets such as Africa, floundered.
The two companies couldn't get their teams to collaborate and
clashed over the U.S. market, this person said.
"ZTE wanted to bring things to market in the U.S. with our
help. We really didn't want them to do that," the former
executive said.
By 2010, the partnership had basically ended, although ZTE
continued as an authorised distributor and reseller of Cisco
products, according to a person familiar with the matter. The
ZTE spokesman did not comment on its relationship with Cisco.
ZTE has continued to do business in Iran where American-made
tech products long have been subject to U.S. sanctions. A parts
list dated July 2011 for an equipment contract between ZTE and
Telecommunication Co of Iran (TCI) included several Cisco
switches. ZTE later agreed to sell five Cisco switches to a unit
of the consortium that controls TCI, according to documents
reviewed by Reuters.
After the Reuters report in March, ZTE, China's second
largest telecom equipment maker, said it would "curtail" its
business with Iran.
Ashley Kyle Yablon, ZTE's Texas-based general counsel, gave
the FBI an affidavit in May in which he alleged the company had
plotted to cover up the Iran sales. The affidavit became public
in July.
ZTE recently placed Yablon on administrative leave,
according to his attorney, Tom Mills.
(Edited by Simon Robinson)
