Bloomberg News

Huawei, ZTE Strain to Convince U.S. They Don’t Aid Spying

September 14, 2012

Huawei, ZTE Strain to Show U.S. They Don't Aid Spying

Mobile handsets form a Huawei Technologies Co. sculpture at the Mobile World Congress in Barcelona, Spain, on Tuesday, Feb. 28, 2012. Photo: Chris Ratcliffe/Bloomberg

Executives of ZTE Corp. (000063) and Huawei Technologies Co., China’s two largest phone-equipment makers, tried to dispel allegations by U.S. lawmakers that their potential expansions may increase cyberattacks and spying.

Instead, in what was described as the first appearance by Chinese executives at a congressional hearing, they heard accusations they haven’t cooperated with an investigation or shown they’re independent from a government accused of stealing U.S. intellectual property.

After yesterday’s hearing, one member of the House Intelligence Committee joined a colleague in urging law firm DLA Piper’s Washington office to reconsider representing ZTE, citing “threats your client may pose to the national security of the United States.”

“We have been hindered by unsubstantiated, non-specific concerns that Huawei poses a security threat,” Charles Ding, a corporate senior vice president who testified for Huawei, said in his testimony.

The exchanges showed the Chinese companies may face more restrictions on supplying the telecommunications gear that powers networks used by U.S. consumers as well as banks, utilities and tech companies shifting data around the country.

The hearing also continued a pattern of tension between the U.S. and China on a variety of economic matters. Yesterday, U.S. Ambassador Gary Locke, in Washington, said the yuan needs to appreciate against the dollar. Republican presidential candidate Mitt Romney has said he would label China a currency manipulator on his first day in office if elected.

More Suspicions

Huawei and ZTE, both based in Shenzhen, told lawmakers at the hearing the companies aren’t controlled by the Chinese government, which Mike McConnell, a former U.S. director of national intelligence, has called the “the most prolific” state thief of U.S. intellectual property.

The companies haven’t provided full answers and supplied “very few” documents that relate to the committee’s probe, the committee chairman, Representative Mike Rogers, a Michigan Republican, said during the hearing.

“We need answers to very specific questions. And when they don’t answer those, it just raises more suspicions,” Rogers, a Michigan Republican, told reporters after the hearing.

“There’s concern because the Chinese government can use these companies and use their technology to get information,” Representative C.A. “Dutch” Ruppersberger, of Maryland, the top Democrat on the panel, told reporters.

‘Long Process’

The U.S. will “eventually” accept Huawei, according to the company’s founder and Chief Executive Officer Ren Zhengfei.

“The U.S. still needs time to understand us,” Ren said in a transcript of remarks he made in the U.K. on Sept. 11 that was supplied by the company in an e-mail today, after the U.S. hearing. “The U.S. is such a big country, after we explain everything clearly to Texas, we need to explain again to Virginia, and then Boston. It will be a long process.”

Zhu Jinyun, ZTE’s company’s senior vice president for North America and Europe, in a statement e-mailed after the hearing, said the company has set “a new standard for a Chinese company in cooperating with the U.S. government.”

Lawyer Letter

Republican representatives Sue Myrick of North Carolina, a member of the intelligence committee, and Frank Wolf of Virginia in a letter yesterday told DLA Piper they’re disappointed the law firm is advising ZTE “as it attempts to circumvent U.S. government concern and gain a larger share of the U.S. marketplace.”

ZTE appears to have violated U.S. sanctions by selling gear that would allow an Iranian government-controlled entity to monitor mobile, landline and Internet communications and oppress political dissidents, Myrick and Wolf said.

DLA had no comment, John Merrigan, a Washington-based partner, said in an e-mail.

Zhu, the ZTE executive, told Myrick during the hearing the company hasn’t sold gear to the Iranian government.

“We conduct normal business operations in Iran, but we are gradually reducing our present operations and we are not starting any new business operations in Iran,” Zhu said.

Ownership Questions

ZTE isn’t state-owned or government-controlled, Zhu said in testimony yesterday. According to the U.S.-China Economic and Security Review Commission, an independent body that advises Congress, government-affiliated entities appear to retain a majority share of ZTE’s stock.

Ren founded Huawei in 1987 after leaving the Chinese military, and built it into the world’s largest maker of equipment for phone networks after Sweden’s Ericsson AB. (ERICB)

Ren’s military record and his selection to the 12th National Congress of the Communist Party of China in 1982 have been cited by U.S. lawmakers as reasons Huawei may pose a security threat. Ren hasn’t maintained any ties with the military since his retirement and the government and military hold no stake in Huawei, according to the company.

In 2010, then-Commerce Secretary Locke expressed concern about Huawei’s participation in bids for a network upgrade by Sprint Nextel Corp. (S:US) The company awarded the contract worth as much as $5 billion to companies from France, Sweden and South Korea.

Huawei and Bain Capital Partners LLC dropped a bid to buy computer-equipment maker 3Com Corp. in 2008 after U.S. officials opposed the transaction. Last year, Huawei unwound the purchase of patents from a computer-services company, 3Leaf Systems Inc., after U.S. objections.

About 70 percent of Huawei’s $32 billion in revenue comes from outside China, Ding said in his testimony. Huawei is owned by its employees and the Chinese government “has no influence over Huawei’s daily operations, investment decisions, profit distributions, or staffing,” he said.

Will Remain

Huawei will remain in the U.S., Ding said in an interview after the hearing “We’ll be in the U.S. forever,” he said. “We have customers here.”

The company sells handsets and other gear, and is seeking to sell network equipment in the U.S., Ding said.

“I did my best to answer all the questions,” Ding said. “I understand they have concerns about companies from China.”

To contact the reporters on this story: Todd Shields in Washington at tshields3@bloomberg.net; Eric Engleman in Washington at eengleman1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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