Oct 8, 2012 · 4 minutes

It's been a rough day for Chinese telcos Huawei and ZTE, which the US House Intelligence Committee has effectively blocked from expanding into the US.

The just-released report makes five recommendations:

  1. That US government contractors shouldn't use Huawei or ZTE equipment or components and the Committee on Foreign Investments should block acquisitions, takeovers, or mergers involving Huawei and ZTE given an alleged threat to US national security interests
  2. That US network providers and systems developers should seek other vendors for their projects
  3. That jurisdiction committees and enforcement agencies in the US Congress and Executive Branch should investigate unfair trade practices of the Chinese telecommunications sector, and that particular attention should be paid to the Chinese government's continued financial support of key companies
  4. That Chinese companies, especially Huawei, should become more open and transparent, and responsive to US legal obligations
  5. That Congress should consider legislation to better address the risked posted by telcos with nation-state ties
Huawei has responded with a statement that compares itself to a Silicon Valley startup and says, "Despite our best effort, the Committee appears to have been committed to a predetermined outcome."
Unfortunately, the Committee's report not only ignored our proven track record of network security in the United States and globally, but also paid no attention to the large amount of facts that we have provided...

The report released by the Committee today employs many rumors and speculations to prove non-existent accusations. This report does not address the challenges faced by the ICT industry. Almost every ICT firm is conducting R&D, software coding and production activities globally; they share the same supply chain, and the challenges on network security is beyond a company or a country. The Committee's report completely ignored this fact. We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the US market...

Huawei is no different from any start-up enterprises in Silicon Valley, and our growth and development relies very much on our entrepreneurial spirit, the commitment and hard work of our employees, as well as our unwavering dedication to innovation. Moving forward, we will continue to do the best we can to provide our customers with safe, convenient, and equal access to information and communications services. For a quick reaction to the report, I asked some of my key China contacts for their thoughts.

Bill Bishop, an independent tech-industry analyst and author of the Sinocism newsletter, says the US government probably knows better than anyone, except perhaps Israel, how to exploit telecommunications gear and networks. "I have no idea if Huawei does what the committee says it does, but given that the US government knows what it can and would do, how can it not assume that a rising strategic competitor with the capability would not do the same?"

Bishop guesses that Huawei's initial response will be to blame Washington DC politics and special interests. "That to me seems a losing strategy, but what else can they do at this point?"

Huawei might find some support for that line of action from Shaun Rein, head of the China Market Research Group. He says there needs to be perspective on the threat posed by Huawei, and that in general the US exaggerates the China threat. "It’s an overreaction by the House," he says. "While security issues are real, they are exaggerated and are creating fear-mongering to get votes. China is an easy target."

The upshot of the continued assault on Huawei and ZTE is that Chinese companies thinking twice about investing in the US. "They prefer to invest in more welcoming climates, like the UK," says Rein.

John Berthelsen, editor of political and economic news website Asia Sentinel, has much stronger feelings about the American condemnation. "It's obviously economic imperialism. It's nonsense," says Berthelsen, an American who is a veteran Asia correspondent, having reported for the Wall Street Journal and then edited Hong Kong's The Standard newspaper before starting Asia Sentinel.

"This is the same kind of nonsense that went on in the 1980s during the 'Endaka' period, when the US was busy blocking Japanese companies from doing business in the US."

Berthelsen says that Huawei is a very good company making very good products. It is a threat to the US, he says, but not a security threat. "It is a threat to American companies that can't compete."

[Full disclosure: Berthelsen is a friend, and I have worked in the past for Asia Sentinel, a bootstrapped operation that loses, rather than makes, money. I own 1 percent of the company, but 1 percent of zero doesn't amount to much.]

The House Intelligence Committee's report comes on the heels of a brow-furrowing "60 Minutes" piece that aired last night and took Huawei to task for not being forthcoming about its ties to China's government. The piece gave a lot of airtime to critics inside the US government and a former CIA official who speculated that Huawei was perhaps up to no good, while challenging a Texas-based spokesman to explain the company's reticence in front of the media.

In August, CNET took an in-depth look at Huawei by visiting its China headquarters and interviewing a senior vice president and board member. It's a very worthwhile read.

Accusations and suspicions so far directed against Huawei have been largely speculative. The case against ZTE, on the other hand, appears stronger. A Reuters report today says Cisco is cutting ties with ZTE because of allegations that the Chinese company had sold banned computer equipment from Cisco and other American companies to Iran's largest telecommunications firm.

[Photo via china.org.cn]