US report highlights unease about Chinese firms

JOE McDON­ALD

AP Busi­ness Writer

BEIJING — Eager to expand in the United States, China’s biggest tech­nol­ogy com­pa­nies face an Amer­ica anx­ious about threats to jobs and national security.

The lat­est blow: A U.S. report that says tele­com equip­ment mak­ers Huawei Tech­nolo­gies Inc. and ZTE Corp. are poten­tial secu­rity threats that Amer­i­cans should avoid doing busi­ness with.

The report, com­ing amid an Amer­i­can pres­i­den­tial race in which trade ten­sions with Bei­jing are a promi­nent issue, high­lights con­flict­ing U.S. sen­ti­ments toward China, an impor­tant trad­ing part­ner but a poten­tial strate­gic rival. U.S. com­pa­nies see China as both a cru­cial growth mar­ket and a source of com­pe­ti­tion and indus­trial spying.

“A lot of peo­ple in Amer­ica are wor­ried about a dimin­ish­ing role in the world and China being the prime ben­e­fi­ciary and poten­tially one day mov­ing into that top slot,” said Charles May­nard, senior man­ag­ing direc­tor of Busi­ness Devel­op­ment Asia, which advises com­pa­nies on acquisitions.

Leg­is­la­tors are “play­ing to a lot of vot­ers at home who are very con­cerned about that issue,” he said.

The report Mon­day by the House Intel­li­gence Com­mit­tee said U.S. com­pa­nies should avoid doing busi­ness with Huawei and ZTE and rec­om­mended reg­u­la­tors block them from buy­ing U.S. com­pa­nies. It said gov­ern­ment com­puter sys­tems should not include com­po­nents from them because they might pose an espi­onage risk.

China’s gov­ern­ment rejected the report as false and an effort to block Chi­nese com­pa­nies from the U.S. market.

“The Chi­nese side expresses its seri­ous con­cerns and strong oppo­si­tion,” Com­merce Min­istry spokesman Shen Danyang said in a state­ment Tues­day. He called on the United States to “aban­don the prac­tice of dis­crim­i­na­tion against Chi­nese companies.”

The report has no offi­cial force but could dis­cour­age Amer­i­can tele­phone car­ri­ers from deal­ing with Huawei and ZTE, espe­cially when it comes to the big-ticket net­work tech­nol­ogy the Chi­nese com­pa­nies are eager to sell.

Huawei and ZTE, both based in Shen­zhen in south­ern China, near Hong Kong, rejected the accu­sa­tion and com­plained the com­mit­tee failed to pro­vide evi­dence to back it up.

The report “employs many rumors and spec­u­la­tions to prove non-existent accu­sa­tions,” said a Huawei spokesman, Scott Sykes, in an e-mail.

“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,” Sykes said.

ZTE said the inves­ti­ga­tion should be extended to West­ern sup­pli­ers because their equip­ment is man­u­fac­tured in or uses com­po­nents from China.

The United States and other gov­ern­ments wel­come the small but grow­ing flow of Chi­nese invest­ment. Most deals abroad go through with lit­tle trou­ble. But com­pa­nies from China’s government-dominated econ­omy carry unusual polit­i­cal bag­gage that has stymied trans­ac­tions in sen­si­tive areas such as energy and telecommunications.

Last year, Huawei was forced to rescind its pur­chase of a small Cal­i­for­nia com­puter com­pany, 3Leaf Sys­tems, after a U.S. gov­ern­ment secu­rity panel rejected the deal.

Huawei, founded in 1987 by a for­mer Chi­nese mil­i­tary engi­neer, has grown into the world’s biggest sup­plier of net­work gear, com­pet­ing with Nokia Siemens Net­works and Sweden’s Eric­s­son AB.

“They are the first Chi­nese com­pany to present a viable, sus­tain­able com­pet­i­tive threat to what has long been per­ceived as America’s core com­pet­i­tive advan­tage, which is inno­va­tion and high tech­nol­ogy,” said David Wolf, a tech­nol­ogy mar­ket­ing con­sul­tant in Bei­jing. “No mat­ter what firm stepped into that, it would be caught in the barbed wire.”

Huawei, with 140,000 employ­ees, says it made two-thirds of its 204 bil­lion yuan ($32 bil­lion) in sales last year out­side China. The smaller state-owned ZTE says it made just over half its rev­enues abroad. Huawei says it is employee-owned and has denied sug­ges­tions it is con­trolled by the rul­ing Com­mu­nist Party or is a front for the military.

Both com­pa­nies are well-established sup­pli­ers to other devel­op­ing coun­tries and want to expand in lucra­tive U.S. and Euro­pean mar­kets. Huawei sells smart­phones in the United States under its own brand.

Other gov­ern­ments also have ques­tioned Huawei’s suit­abil­ity. Australia’s gov­ern­ment dis­closed in March that Huawei was banned from bid­ding to help build a nation­wide high-speed Inter­net net­work due to con­cern about cyber-attacks traced to China.

Huawei has been hurt by its reluc­tance to release details of who con­trols the com­pany. Such secre­tive­ness is com­mon among major Chi­nese com­pa­nies but unusual in West­ern mar­kets. In con­trast to Amer­i­can CEOs who are expected to act as their com­pa­nies’ pub­lic face, Huawei founder Ren Zhengfei never talks to reporters and rarely appears in public.

Huawei has tried to ease U.S. con­cerns by hir­ing Amer­i­can exec­u­tives and spokes­peo­ple. It has taken reporters on tours of its sprawl­ing, leafy cam­pus in Shen­zhen. In the con­gres­sional inves­ti­ga­tion, it handed over infor­ma­tion about mem­bers of its board of direc­tors and names of employee shareholders.

In Britain, Huawei has set up a test­ing cen­ter where gov­ern­ment tech­ni­cians can exam­ine its equipment.

“They are going to have to move more quickly,” said Wolf. “They need to put their most senior exec­u­tives in front of the Amer­i­can public.”

In other indus­tries, Chi­nese exec­u­tives are reluc­tant to pur­sue deals in the United States if they think they might be sub­jected to the unfa­mil­iar and uncom­fort­able scrutiny of a gov­ern­ment secu­rity review, May­nard said. He said those might apply even to such acqui­si­tions as an auto parts pro­ducer that makes a small por­tion of its sales to the U.S. military.

Last month, Pres­i­dent Barack Obama blocked Chinese-owned Ralls Corp. from own­ing four wind farm projects in Ore­gon near a Navy base where the U.S. mil­i­tary flies unmanned drones. Obama acted after the same gov­ern­ment review panel that rejected Huawei’s acqui­si­tion of 3Leaf said there was no way to address pos­si­ble secu­rity risks.

“This has the poten­tial to cut both ways,” said May­nard. “If you want Amer­i­can com­pa­nies to be wel­come in China, you need to be mak­ing them wel­come in the U.S.”

Posted by AP News on Oct 9 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.