What China and America need to do about Huawei and ZTE

October 12, 2012
Obsession
technology
October 12, 2012
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Mike Rogers, C.A. "Dutch" Ruppersberger
Here’s some advice that Mike Rogers, chairman of the House Intelligence Committee, may not like(AP Photo/J. Scott Applewhite)

The fallout continues after a US congressional committee called China’s telecommunication firms Huawei and ZTE threats to national security. The House Intelligence Committee, after completing an eleven-month investigation, said on Oct. 8 that the two companies are close to the Chinese government, which could use them to spy on US citizens or infiltrate vital American infrastructure.

Whether their claims stand or this is a case of simple China-bashing in an US election year, the stakes are high. Huawei, the bigger of the two and the world’s second-largest telecom, could see its business elsewhere affected. The British parliament’s intelligence and security committee is investigating Huawei’s relationship with British Telecom (BT) and the European Commission is building an anti-dumping or anti-subsidy case against Huawei and ZTE that is on hold temporarily. For America, retaliation for pressuring US companies to stop doing business with Huawei or ZTE could hurt one of the world’s most important trade relationships.

This is what some people think each side should do:

America should prove its claims before risking international trade violations

Dan Ikenson, a Forbes contributor, writes:

Before taking protectionist, WTO-illegal actions – such as banning transactions with certain foreign companies or even “recommending” forgoing such transactions – that would likely cause US companies to lose business in China, the onus is on policymakers, the intelligence committees, and those otherwise in the know to demonstrate that there is a real threat from these companies and that they – US policymakers – are not simply trying to advance the fortunes of their own constituent companies through a particularly insidious brand of industrial policy.

Ikenson also says the Intelligence Committee’s report suggests that some US telecom carriers were warned by policymakers that purchasing equipment from Huawei or ZTE would disqualify them from participating in the massive government procurement market for telecom services. If true, that could give China grounds for a WTO complaint based on grounds of discriminatory treatment, he says—which would be ironic, given frequent American complaints about how China favors its own industries.

Huawei and ZTE should do business in the US but with safeguards

John Gapper, a columnist for the Financial Times, argues (paywall):

The best thing for US consumers would be to admit Huawei and ZTE with safeguards. In the UK, Huawei’s equipment is examined by former staff of GCHQ, the UK intelligence service, before being used by BT. The US and Australia, which has barred Huawei from a planned network, could go further.

The US might require Huawei to list in London or New York to illuminate who owns the company; submit technology to the NSA; and separate its US division like a defence group. It could even demand the dissolution of its Communist party committee. What it cannot do is recreate the past.

The US shouldn’t ban any foreign company; that only invites retaliation

US author and libertarian pundit Patrick Dorinson says in an interview:

There’s an old cowboy named Confucius … he said at one point before you embark on a journey of revenge or retaliation be sure to dig two graves – one for yourself and one for the guy you’re going after… This back and forth with the Chinese isn’t going to get us anywhere. What we need to do is strengthen America’s cyber security, sleep with one hand on your 45 and one eye open… the idea that you’re going to retaliate and ban something is crazy. They’re going to do something to us.

Huawei should list on a Western stock and become more transparent

Huawei has been considering listing publicly, which would require the company to disclose more to US investors. In the aftermath of the Intelligence Committee’s report some say an IPO is even more necessary. Alexander Liddington-Cox of Business Spectator writes

In truth, Huawei is less a victim of a protectionist report, but of its own fumbling attempts at transparency… But the company really needs to think about genuine governance reform and transparency measures if it wants to participate meaningfully in the western world.

And Paula Dwyer for Bloomberg says

The committee surprisingly invited the companies to list their shares on a Western stock exchange. A listing would require them to be more transparent with financial data and cyber-security processes. It would also require them to comply with Western legal standards and to obey intellectual property laws. The companies should take the committee up on its offer.

On the other hand, writes John Foley at Reuters, ZTE is publicly listed and still under suspicion, throwing doubt on this course of action for Huawei:

What more can Huawei do? A mooted initial public offering would be largely cosmetic – the company already discloses its financial performance, and ZTE’s public listing hasn’t shielded it from criticism. Alternatively Huawei could beef up its board, currently stuffed with long-serving company insiders. With two-thirds of the company’s revenues coming from outside China, there’s a strong case for adding directors with serious international clout.

Don’t do anything; Huawei and ZTE can only hope for the best

The Wall Street Journal’s Tom Orlik writes

The US currently accounts for just 4% of Huawei’s revenue, most of it from selling smartphones. For ZTE, Europe, the US and Australia make up less than one fifth of sales and profit. So it’s more future growth prospects, not current revenue, that will be affected by the chillier political climate … A lockout from the big, innovative, US market is not good news. But the Chinese companies will hope that for customers around the world, the bottom line continues to be more important than the political line.

Business will go on as usual for now, but Huawei and ZTE should watch out

Thus warns John McKenna for the the Motley Fool blog. He points out that both firms are partners with US companies like Comcast, helping it build its IP multimedia system, and Ericcson. ZTE has solid partnerships with AT&T and MetroPCS. He says that

While these deals are expected to continue, depending on how much weight American companies put in Washington’s recommendations, it is becoming evident that the negative review is going to hurt Huawei and ZTE for investors, and may increase scrutiny over the American companies that deal with these two companies.

To borrow from Dorinson’s allusion to ancient Chinese philosophers: Confucius also said that not dealing with reality and calling things what they are results in social chaos. The telecoms industry is global, and Chinese manufacturers have become a crucial part of its supply chain. Most telecoms in the US and around the world source to some extent from Chinese firms, who make and sell the equipment more cheaply. A ban would mean not just retaliation from China, which sees Huawei as a national treasure, but could hurt the competitiveness of the industry as a whole if other countries follow suit.

The best course of action is for the US to call for greater scrutiny in the telecom industry. Huawei, long suspected of stealing intellectual property to fuel its rise, and ZTE, accused of violating sanctions and selling spy gear to Iran, need to become more transparent. They should be given the incentives to do so.

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