The Daily Ticker Blog

Two Chinese Firms Threaten US Security: Congress

Morgan Korn

Lawmakers are warning U.S. companies not to do business with two of the world's largest telecommunications equipment makers. The U.S. House of Representatives Intelligence Committee released a report Monday after an 11-month investigation about the business practices of Huawei Technologies and ZTE Corp, Chinese firms that develop and sell telecom communications equipment like routers, handsets and switches. The report recommends that Huawei and ZTE be excluded from expanding their businesses in the U.S. because of cyber espionage risk and connections to the Chinese government.

Committee members said neither Huawei nor ZTE provided ample documents or detailed information to "ameliorate the committee's concerns" about their formal relationships and interaction with Chinese authorities. The investigation determined that Huawei and ZTE present risks to critical U.S. infrastructure that "could undermine core U.S. national-security interests" and therefore the U.S. "should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies."

"China has the means, opportunity and motive to use telecommunications companies for malicious purposes, " the report said. "Industry giants like Huawei and ZTE provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems. Even if the company's leadership refused such a request, Chinese intelligence services need only recruit working-level technicians or managers in these companies. Further, it appears that under Chinese law, ZTE and Huawei would be obligated to cooperate with any request by the Chinese government to use their systems or access them for malicious purposes under the guise of state security."

Huawei and ZTE executives have denied charges that Chinese government officials have influenced business deals or meddled in daily operations.

"Baseless suggestions, otherwise or purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challengers," Huawei spokesperson William Plummer told Reuters.

China's Foreign Ministry Spokesman Hong Lei responded to the accusations in an interview with BBC News. "Chinese telecoms companies have been developing their international business based on market economy principles," Lei said.

The U.S. government has become increasingly concerned over Chinese influence in U.S. markets and both President Barack Obama and Republican presidential nominee Mitt Romney have vowed to take a tougher stance against Beijing on currency and trade policies. The Obama administration recently rejected a bid by Chinese firm Ralls Corp. to build four wind farm projects near an Oregon-based naval facility, the first foreign investment to be barred in the U.S. in 22 years.

Related: China Threatens To Sue Obama Over Wind Farm Shutdown 

The attacks lodged against Huawei by the U.S. government are not new. The telecom gear maker was awarded a $5 billion contract two years ago to build Sprint's new 4G wireless network. The deal was later canceled after the U.S. Secretary of Commerce called Sprint's CEO and urged the wireless carrier to reconsider its decision. In an interview with 60 Minutes, Mike Rogers, the chairman of the House Permanent Select Committee on Intelligence, said the government has a responsibility to block questionable business transactions that could jeopardize national security and expose government secrets.

"If I were an American company today … and you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you are about your consumers' privacy, and you care about the national security of the United States of America," Rogers said.

International firms Siemens , Ericsson and Alcatel-Lucent are Huawei's top competitors in the telecommunications equipment space as well as California-based Cisco Systems . The U.S. was the first to invent and dominate the global communications network, according to the 60 Minutes report, but firms like Huawei saw an opening in the industry and exploited it. As The Daily Ticker's Aaron Task and Henry Blodget discuss in the accompanying video, the House Intelligence report on Chinese espionage threats could result in a new furor to buy "Made in America" goods.

More from The Daily Ticker

U.S. Files WTO Complaint Against China: Is Detroit Really at a Disadvantage?

China's "Race for Resources": Dambisa Moyo Sees Commodity Conflicts and Scarcity Ahead

Don't Count Out China: 'Hard-Landing' Fears Overblown, Tuck's D'Aveni Says