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Will the Congressional Report on Huawei and ZTE Change the Telecom Landscape?

Is the House Intelligence committee seeing tele-communists under our beds when it warns that Chinese telecom equipment makers Huawei and ZTE have been coerced by the Chinese government to infiltrate our telecommunications infrastructure and send back to China our deepest secrets?

This is what committee chairman Mike Rogers (R-Mich.) told CBS News' Steve Kroft on 60 Minutes: "If I were an American company today ... looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers' privacy, and you care about the national security of the United States of America."

Whether his remarks are justified by real cyber-security concerns or by just plain protectionism, his committee's recently released report on Huawei and ZTE would likely have an effect on the global telecom equipment marketplace.

Huawei has been trying to get more than a foothold in the U.S. market since at least 2004, when it entered into a joint venture with the then-struggling network equipment maker 3Com (3Com was eventually bought by Hewlett-Packard (NYSE: HPQ  ) . But government suspicions have kept Huawei from getting much traction.

In 2010, Sprint Nextel (NYSE: S  ) was persuaded by the Commerce Department to not contract out any part of its Network Vision project to either Huawei or ZTE. And more recently the Commerce Department blocked Huawei from bidding on a 4G LTE wireless emergency-services network for "national security concerns." Huawei managed to pull in only 4% ($1.3 billion) of its 2011 revenue from the U.S., according to The Wall Street Journal.

Compared to Huawei, ZTE's U.S. take was small potatoes, only $30 million in 2011. But ZTE has already lost some of that U.S. revenue stream. Earlier this week, Cisco Systems (Nasdaq: CSCO  )  cancelled a seven-year sales agreement with ZTE over allegations of the Chinese company selling equipment to Iran.

According to The Guardian, which spoke to a former Cisco executive, the company originally entered into the partnership with ZTE as a means to become more price-competitive with Huawei in emerging markets. Where things went wrong, even before the Iran allegations surfaced, was ZTE's push "to bring things to market in the U.S. with our help. We really didn't want them to do that," said the executive.

Trying to plug the dyke with a sieve?
An irony here, one probably not lost on the Chinese companies, is that many of the companies that may be in line to profit from a U.S. ban on Huawei and ZTE equipment actually outsource some of their lower-level components to Chinese suppliers, such as the Shenzhen-based megasupplier, Foxconn, which makes Apple's (Nasdaq: AAPL  ) iPhone.

Alcatel-Lucent (NYSE: ALU  ) , the main optical and wireless networking competition for Huawei and ZTE, is said to get a majority of its components from Chinese companies. And Cisco, according to Zeus Kerravala, an analyst with the Yankee Group, is not above getting some of its supplies from Foxconn. "Ever major U.S. networking company gets components from China," he told Forbes.

End run?
About 18 months ago, Bloomberg reported on speculation that either Huawei or ZTE were ready to make a takeover bid on Alcatel-Lucent. That never happened, because, as was pointed out by one analyst to Bloomberg, since the companies have the same technologies, what would be the point?

Now, however, as a means to get around the real possibility of being banned from selling directly to the U.S. infrastructure marketplace, buying Alcatel-Lucent may have a more compelling allure.

Probably a better way to ensure proper cyber-security is to ban any networking equipment from coming into the country -- no matter where it's made -- until it can be thoroughly tested for "backdoors" and such, a suggestion actually put forth by ZTE.

Meanwhile, with the relatively small amount of direct infrastructure business that Huawei and ZTE now do in the U.S., even if those companies are totally banned here, I don't think the marketplace here will be drastically affected. However, I don't think such a ban will do much to move American business forward in China.

We'll have to wait a bit to see what kind of effect the congressional report will have on Cisco. But this once high-flying tech darling is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in our premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as their story changes. Click here now to read more.


Dan Radovsky has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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