Huawei, ZTE may be doing espionage for China

Huawei and ZTE are the number 2 and number 5 telecom equipment makers in the world respectively. While they are most visible in the US market as wireless handset makers, they are also large manufacturers of carrier class telecommunications switching equipment and enterprise switchgear, competing with the likes of Ericsson, Alcatel-Lucent and Seimens-Nokia.

These two Chinese giants were founded in the 1980s and have risen rapidly to being global leaders through government subsidies common in China, where a significant number of their largest companies are government owned. ZTE was started by state-owned entities affiliated with the Ministry of Aerospace Industry. Its cross-town rival, Huawei was founded by an engineer in the People’s Liberation Army. ZTE has been publicly listed in Shenzhen since 1997 while Huawei is “privately” held.

The two companies are no strangers to controversy, in 2003 Cisco sued Huawei alleging illegally copying of its equipment. The companies are known to blur the lines of business ethics in their dealings in South America, backing clients into buying gear that was offered on “free” trials to outright bribery. ZTE was thought to have sold embargoed computer equipment to Iran in violation of a UN sanction.

In Europe and the US, there have been openly voiced concerns about the relationships these companies have with the Chinese government. The EU was considering tariff actions against the two companies on allegations of dumping their products below cost. In the end, no action was taken however.

Now in the US, a report is expected on October 8th, capping off a year-long Congressional investigation into the two companies. The House Permanent Select Committee on Intelligence has been looking into the companies’ business expansion in the US and whether it presents an espionage danger or threatens the telecommunications infrastructure in North America.

Congressman Mike Rogers (R-Michigan) told CBS News “60 Minutes” that US companies dealing with Huawei that also have a concern about national security or their intellectual property should “find another vendor.” Huawei obviously contests that assessment. The fears about the companies’ motives were not helped when ZTE admitted that on its ZTE Score smartphone, and possibly other models, the company had built in a hardwired backdoor which would allow anyone with knowledge the ability to control the handset. ZTE states that it was a means to push software updates, but in May 2012 when they acknowledged the issue, the company addressed it as a security flaw.

The two companies do not have a large presence in the US. United Wireless, a small wireless carrier based in Kansas did some business with Huawei and was subsequently visited by investigators. The president of the company told them that he was not aware of any American company that made the equipment he needed. While there may be few, if any American-only companies that make that type of gear, it is an ironic statement given how mature the telecom infrastructure is in the US.

We may learn more once the report is released, but if the demeanor of those that have been investigating the matter is any indication, the picture does not look rosy. When asked if Huawei was ordered by the Chinese government to spy on the US, former government foreign technology analyst Jim Lewis said, “the state tells them what to do and they do it.”

sources: Electronista (current), Businessweek (archived 2005), Strategic Studies Institute (reference)