By Jim Wolf
WASHINGTON, Oct 8 (Reuters) - U.S. telecommunicationsoperators should not do business with China's top telecom gearmakers because potential Chinese state influence on thecompanies poses a security threat, the U.S. House ofRepresentatives Intelligence Committee said in a report onMonday.
The report follows an 11-month investigation by thecommittee into Huawei Technologies Co Ltd and ZTE Corp. The companies have been fighting anuphill battle to overcome U.S. lawmakers' suspicions and expandin the United States after becoming key players in the worldwidemarket.
The House Intelligence Committee's concerns are bound to setback the companies' U.S. prospects and may also lead to strainsin ties between the United States and China, the world's twobiggest economies.
Committee Chairman Rogers, at a press conference to releasethe report, said the panel was stopping short of urging a U.S.boycott of mobile phones and other handheld devices made byHuawei and ZTE.
The panel's warning pertains only to devices that involveprocessing of data on a large scale, Rogers said in reply to aquestion.
Employee-owned Huawei is the world's second-biggest maker ofrouters, switches and other telecommunications equipment afterSweden's Ericsson . ZTE ranks fifth.
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The committee warning comes as Huawei considers a possibleinitial public offering, sources said, as part of an effort toovercome suspicions that have all but blocked its U.S. efforts,including business tie-ins.
Huawei spokesman William Plummer rejected the committee'sallegations in a statement emailed to Reuters.
"Baseless suggestions otherwise or purporting that Huawei issomehow uniquely vulnerable to cyber mischief ignore technicaland commercial realities, recklessly threaten American jobs andinnovation, do nothing to protect national security, and shouldbe exposed as dangerous political distractions from legitimatepublic-private initiatives to address what are global andindustry-wide cyber challenges," he said.
For its part, ZTE released a copy of a letter it sent to thecommittee last month, stating it "profoundly disagrees" withallegations that it is directed or controlled by the Chinesegovernment.
"ZTE should not be a focus of this investigation to theexclusion of the much larger Western vendors," it said.
ZTE's Hong Kong-listed shares fell as much as 3.4 percentearly on Monday.
It was not immediately clear whether the committee warningwould curb mobile phone sales that Huawei and ZTE do withcustomers such as Verizon and Sprint .
The panel's report faulted both companies for failing tofully satisfy the committee's requests for documents to allayits security concerns, including detailed information aboutformal relationships or regulatory interaction with Chineseauthorities.
U.S. companies weighing purchases from Huawei should "findanother vendor if you care about your intellectual property; ifyou care about your consumers' privacy and you care about thenational security of the United States of America," Rogers saidin comments broadcast Sunday night on the CBS News program "60Minutes."
The panel said it had received credible allegations fromunnamed current and former Huawei employees suggesting Huaweimay be guilty of bribery and corruption, discriminatory behaviorand copyright infringement.
Such allegations will be referred to the Justice Departmentand Department of Homeland Security for investigation, the panelsaid.
"U.S. network providers and system developers are stronglyencouraged to seek other vendors for their projects," it said.
It cited what it called long-term security risks supposedlylinked with the companies' equipment and services. It did notprovide any hard evidence to back up its concerns, at least notin the unclassified version of the report.
A classified annex provides "significantly more informationadding to the committee's concerns," the report said. "Theinformation cannot be shared publicly without risking U.S.national security."
Based on classified and unclassified information, Huawei andZTE, which are both based in Shenzhen, China, "cannot be trustedto be free of foreign state influence and thus pose a securitythreat to the United States and to our systems," it said.
Huawei and ZTE are rapidly becoming "dominant globalplayers" in the telecommunications market, the report said. Itnoted that telecoms are intertwined with computerized controlsfor electric power grids; banking and finance systems; gas, oiland water systems and rail and shipping.
ZTE's US telecom infrastructure equipment sales last yearwere less than $30 million.
In contrast, two of the larger Western vendors alone hadcombined U.S. sales that topped $14 billion, ZTE told thecommittee, an apparent reference to Espoo, Finland-based NokiaSiemens Networks NOKI.UL and Paris-based Alcatel Lucent.
"It seems self-evident that the universe of companiesexamined by the Committee is so small as to omit most of theequipment actually employed in the U.S. telecom infrastructuresystem," ZTE said in a Sept. 25 letter to the panel.
"MEANS, OPPORTUNITY, MOTIVE"
Huawei and ZTE may not be the only companies that present arisk to U.S. infrastructure, the committee's report said, butthey are the two largest Chinese-founded, Chinese-ownedcompanies seeking to market critical network equipment in theUnited States. Beijing has the "means, opportunity and motive"to use them to its own ends, it added.
Top executives of both told a committee hearing on Sept. 13that their companies would never bow to a hypothetical Chinesegovernment effort to exploit their products for espionage,saying such a move would be corporate suicide.
"Huawei has not and will not jeopardize our globalcommercial success nor the integrity of our customers' networksfor any third party, government or otherwise," senior vicepresident Charles Ding testified at the time.
The committee is calling on an interagency government groupthat reviews national security implications of foreigninvestments to block acquisitions, takeovers or mergersinvolving Huawei and ZTE.
In addition, it said Congress should give thoroughconsideration to legislation seeking to expand the role of theinteragency group, known as the Committee on Foreign Investmentsin the United States, to include purchasing agreements.
U.S. intelligence officials have publicly denounced China asthe world's most active perpetrator of economic espionageagainst the United States.
Huawei has marketed its network equipment in the UnitedStates since last year. It has sold to a range of small- tomedium-sized carriers nationwide, particularly in ruralareas. It has marketed mobile phones through a broader range ofU.S. carriers for the last four years.
(Reporting By Jim Wolf; editing by John Wallace)
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Keywords: USA CHINA/HUAWEI ZTE