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Chinese Telecom Firm Finds Warmer Welcome in Europe

Eric Pfanner | The New York Times
Thursday, 11 Oct 2012 | 1:07 AM ET

A month ago, as a United States Congressional committee prepared to warn American telecommunications networks against doing business with two Chinese suppliers, the founder of one of those companies, Huawei, posed for photos with Prime Minister David Cameron of Britain in front of the fireplace at 10 Downing Street in London.

Declaring that Britain was "open for business, " Mr. Cameron announced that Ren Zhengfei, the chief executive of Huawei, had agreed to expand the company's already sizable operations in Britain with a $2 billion investment, including the creation of 700 jobs over the next five years.

"The British government values the important relationship with China, " Mr. Cameron said at the time. "Both countries have much to offer each other and the business environment we are creating in the U.K. allows us to maximize this potential."

The reception given to Mr. Ren and his company in Britain, and across much of Europe and the rest of the world, differs strikingly from the suspicion that has met Huawei and another Chinese equipment provider, ZTE, in Washington. On Monday, the House Intelligence Committee branded the companies as security threats, raising the possibility that their gear could be used to spy on American interests if used in United States telecommunications networks.

Huawei has rejected the allegations as "little more than an exercise in China-bashing and misguided protectionism."

As the second largest supplier of telecommunications network equipment, after Ericsson of Sweden, Huawei generated only 4 percent of its $32.4 billion in 2011 revenue in the United States. By contrast, Europe accounted for nearly 12 percent of that total, and it is increasing fast; European sales rose by 26 percent last year, more than twice the company's worldwide growth rate.

Huawei counts as its customers many of the biggest telecommunications companies in Europe, including BT and Vodafone of Britain, Telefónica of Spain and Everything Everywhere, a partnership between France Télécom and Deutsche Telekom. The company's equipment is in high demand, analysts say, as these companies work to roll out next-generation wireless broadband networks.

"Europe is almost like a second home market for us, " said Roland Sladek, a spokesman for Huawei.

ZTE's European telecommunications clients include KPN of the Netherlands. In Sweden, Ericsson's home turf, it is working with Hutchison Whampoa of Hong Kong on a high-speed wireless network.

The United States and Britain tend to cooperate closely on security issues, but Britain said it had no plans to change its relationship with the Chinese company after the House committee's recommendations.

"We have put in place robust procedures that satisfy our security exports, " said Derek Smith, a spokesman for the Cabinet Office in London. "We recognize, of course, that no systems can be completely invulnerable, but by working together we can mitigate some of the risks."

In an effort to alleviate concerns, Huawei two years ago set up a Cyber Security Evaluation Center in Banbury, England. There, its engineers work alongside officials of GCHQ, a British spy agency, to vet Huawei equipment for use in Britain.

BT uses Huawei equipment in sidewalk boxes where local telephone lines are fed into the company's network, and it considers Huawei a "trusted equipment supplier, " the company said in a statement.

"We find them to be good value and high quality — that's why they have been chosen as a supplier in a fiercely competitive international market, " BT added.

The company declined to comment on whether it had received any requests from American officials to stop doing business with Huawei. Mr. Smith, at the Cabinet Office, said he was unaware of any such pressure.

"We don't see this as an issue that affects our relationship, " he said.

The House committee said Huawei and ZTE had offered to set up review systems to address American concerns, such as the possibility of "back doors" that would allow Chinese government officials to tap into American telecommunications traffic. But the committee's report says that unlike in Britain, the companies offered only to let outside security contractors, rather than government officials, do the monitoring.

"Unfortunately, there are concerns that such efforts, if taken in the United States, will fall short of addressing security concerns, given the breadth and scale of the U.S. telecommunications market, " the report says.

Huawei says it is the second-biggest Chinese investor in Europe — after Zhejiang Geely, which owns the Swedish carmaker Volvo — and the biggest Chinese employer in the region, with 7, 300 workers. Executives say additional investments in Europe will be announced in a few weeks, and that the company's plans will be unaffected by the developments in the United States.

The company wants to make Europe a focus of its efforts to expand its smartphone business, which has been smaller than its network infrastructure division. In the coming weeks, Huawei plans to introduce new handsets to compete with devices like the Apple iPhone.

Even in Europe, however, there are some worrying signs for Huawei and ZTE. While the Chinese companies have tried to portray the report by the Intelligence Committee of the U.S. House of Representatives as being out of step with what is happening in the rest of the world, similar concerns have been raised elsewhere.

In March, the government of Australia blocked Huawei from supplying equipment for a national broadband network that the country is building. This week, after the Congressional report in the Washington, Canadian officials indicated that they were inclined to exclude Huawei from participating in the construction of a secure government communications system.

In July, a French senator, Jean-Marie Bockel, presented a report calling on the government to ban the use of routers and other equipment from Huawei and ZTE in French telecommunications networks. Mr. Bockel, a former high-ranking official in the Defense Ministry, cited similar concerns to those raised by the House committee.

"I am not at all against Huawei developing its business in Europe, " Mr. Bockel said by telephone. "But on the subject of security, I am in full agreement with the Americans. We should not be naïve."

Mr. Bockel's report has been submitted to the Defense Ministry, though the government of President François Hollande has not taken action on it. The French cybersecurity agency declined to comment.

Meanwhile, trade officials at the European Commission in Brussels are scrutinizing the operations of Huawei and ZTE, amid allegations — denied by the companies — that they may have received unfair subsidies or engaged in so-called dumping of telecommunications gear.

The commission has received no complaints from European rivals of the Chinese companies, which would be the normal prerequisite for an anti-dumping or anti-subsidy case. Analysts say, however, that this could be for fear of reprisals; European telecommunications suppliers like Ericsson, Nokia and Alcatel-Lucent do not want to be shut out of the fast-growing Chinese market.

Karel De Gucht, the European Union trade commissioner, is considering opening a formal investigation against the companies on the commission's own initiative, though he has given no timetable for such action.

"Mr. De Gucht continues to actively gather evidence so as to be ready to launch the case as and when required, " said a senior European Union official, who insisted on anonymity because of the preliminary nature of the proceedings.

Despite these possible challenges for Huawei and ZTE, both companies say Europe remains a much friendlier place for them to do business than the United States.

"Compared with the U.S. market, the European market is much more open and much more transparent, " said David Dai Shu, a spokesman for ZTE.

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