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The House Intelligence committee isn't going so far as to say the Chinese government is trying to turn us into a nation of Manchurian Candidates by using Chinese-made smartphones. What it is saying, after a yearlong investigation, is that two Chinese telecommunications equipment makers, Huawei Technologies and ZTE, may, under the direction of the Chinese government, make the equipment they sell purposely vulnerable to cyber-security leaks.
"We simply cannot trust such vital systems to companies with known ties to the Chinese state, a country that is the largest perpetrator of cyber espionage against the U.S.," said committee chairman Mike Rogers (R-Mich.).
A Huawei spokesman called the allegations "baseless," and a ZTE executive said "ZTE equipment is safe."
National security or just plain protectionism?
"Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services," the report says.
That warning has probably come too late when it comes to wireless handsets. ZTE already sells smartphones to Sprint Nextel (NYSE: S ) and Leap Wireless' (Nasdaq: LEAP ) Cricket brand. Huawei also sells to Cricket, and both companies sell their phones to MetroPCS (NYSE: PCS ) .
Does that mean that they should give up access to less expensive smartphones from those Chinese companies? And, if so, would that lessen their abilities to compete against the duopoly of wireless carriers in the U.S., AT&T (NYSE: T ) and Verizon (NYSE: VZ ) ?
Knock, knock, let me in
Huawei has been trying unsuccessfully for years to get into the U.S. networking market. In 2008, the Treasury Department, citing security reasons, put the kibosh on Huawei's proposal to buy software maker 3Com. In February 2011, an inter-agency committee persuaded the White House and Pentagon to pressure Huawei to pull out of a deal to purchase the assets of computing company 3Leaf Systems.
In 2010, Bloombergreported that Huawei's attempts to buy software company 2Wire and the wireless equipment unit of Motorola were undermined by doubts of Huawei getting government approval for the sales. A U.K. company that came in with a lower bid bought 2Wire.
And last October, the U.S. government blocked the company's attempt to bid on a 4G LTE wireless emergency services network for first responders. The reason, a Commerce Department spokesman told The Daily Beast, was "due to U.S. government national-security concerns."
ZTE had been talking to the major U.S. carriers regarding doing more infrastructure business but is still restricted from supplying them with networking equipment. The company was on the verge of just giving up on the U.S. market last October when ZTE chairman Hou Weigui considered the political hurdles just too high and said the company wasn't going to try and clear them.
But the lure of the U.S. market was too strong, and only a month later the company changed its tune. "Although we have been blocked by the U.S. government, we just can't give up breaking into the U.S. market because its size is huge and per-capita spending is high," said ZTE Richard Ye to Dow Jones Newswires then.
Will the committee's report change anything?
This new report, on its own, cannot determine whether the Chinese companies have broken U.S. laws, but the committee's charges will be passed on to the Department of Homeland Security and the Department of Justice.
But the charges of potential cyber espionage may just be an excuse to try and curtail Huawei's and ZTE's increasing influence in the telecommunications market and what is seen by the competition as buying market share by undercutting them in price.