China Tech Giant Under Fire

Daily News Article   —   Posted on October 10, 2012

(by Siobhan Gorman, The Wall Street Journal) WASHINGTON – A Chinese telecommunications giant that has been attempting to expand in the U.S. poses a national-security threat and may have violated U.S. laws, according to a congressional investigation.

The year-long investigation by the U.S. House Intelligence Committee concluded the firm, Huawei Technologies Inc., and a second firm, ZTE Inc., pose security risks to the U.S. because their equipment could be used for spying on Americans.

In a report released Monday, the Intelligence Committee recommends that the U.S. block acquisitions or mergers involving the two companies through the Committee on Foreign Investments in the U.S. It also recommends that the U.S. government avoid using equipment from the firms, and that U.S. companies seek alternative vendors for telecommunications equipment.

… American military and intelligence officials have long been warning privately that China poses a cyberespionage threat to U.S. defense systems and companies. …

The report comes as a blow to the two Chinese firms, which have mounted a major lobbying campaign in Washington to allay fears of government influence in their operations. Both companies, which have footholds in the U.S. telecommunications market, have ambitions to expand their share significantly, and both frequently undercut their competitors on price as they seek additional clients in the U.S.

The companies have repeatedly denied they would allow the Chinese government to use their equipment for surveillance, saying it wouldn’t be in their business interests to do so. Both companies also said they cooperated extensively with the committee and have made every effort to respond to requests.

Huawei spokesman William Plummer called national-security concerns “baseless,” saying that “purporting that Huawei is somehow uniquely vulnerable to cyber-mischief ignores technical and commercial realities, recklessly threatens American jobs and innovation, does nothing to protect national security.”

ZTE says that its status as a publicly traded company has ensured that it is transparent about its practices with the public and the intelligence committee. “ZTE has set an unprecedented standard for cooperation by any Chinese company with a congressional investigation,” said David Dai Shu, the company’s director of global public affairs. “ZTE equipment is safe.”

House intelligence committee chairman Mike Rogers (R., Mich.) said of U.S. telecommunications networks: “We simply cannot trust such vital systems to companies with known ties to the Chinese state, a country that is the largest perpetrator of cyberespionage against the U.S.” …

At a daily press briefing on Monday, Chinese Foreign Ministry spokesman Hong Lei said that China’s telecommunications companies “develop their international businesses according to market economy principles. …We hope that the U.S. Congress can reject bias, respect the facts and do more to promote China-U.S. economic relations, rather than the opposite.”

In the report, the committee says it based its findings that Huawei and ZTE pose national-security concerns in part on the companies’ failure to provide sufficient information to allay their concerns.

The panel began its probe in November 2011 because of concern that the Chinese government could turn the networks and equipment sold by the two companies into vehicles for spying inside the U.S.

Concerns about Chinese spying have grown in the past year. U.S. intelligence agencies allege China is the most active and persistent perpetrator of economic espionage against U.S. firms. A string of alleged Chinese cyberspying incidents targeting firms ranging from Google to the computer-security firm RSA have contributed to these worries. China has denied engaging in corporate espionage.

“Neither company was willing to provide sufficient evidence to ameliorate the committee’s concerns,” said a draft of the committee’s report. “The risks associated with Huawei’s and ZTE’s provisions of equipment to U.S. critical infrastructure could undermine core U.S. national security interests.”

The 52-page report, which is unclassified, doesn’t include evidence showing either company’s equipment has been used for spying. But it says some companies in the U.S. “have experienced odd or alerting incidents” involving Huawei or ZTE equipment, although it provides no details. The report said a classified annex includes information that adds to concerns.

The committee report says a major concern is that, as Chinese firms, the companies would be required to comply with any Chinese government request for access to their systems.

Huawei is now the world’s second-largest provider of telecommunications equipment, and it does 70% of its business outside China. … Huawei’s U.S. sales last year were $1.3 billion.

ZTE has a smaller U.S. footprint, primarily through sales of devices like smartphones. Its sales in the U.S were $30 million last year.  Chinese government-owned enterprises own 16% of the company. …

The House Committee states in its report that it focused on the two companies because their Chinese ownership poses the greatest threat to U.S. national security. …

The report said that “[Communist government] party committees” within each company provide “a shadow source of power and influence” for the Communist Party within the companies. Huawei didn’t provide details about its party committee for the report. ZTE provided a list of the 19 members of its party committee, which the report says shows crossover with ZTE’s board of directors and other company interests. …

—Olivia Geng contributed to this article.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved. Reprinted here for educational purposes only. Visit the website at wsj.com.

Questions

1.  After a year long investigation by the U.S. House Intelligence Committee, what conclusion was made about two Chinese companies?  

2.  Why does the Committee say these two companies pose security risks to the U.S.?

3.  After completing its investigation, what three recommendations did the Committee make?

4.  Previous to the Committee’s investigation, who has been issuing warnings about China?  What were they saying about China?

5.  How have the companies responded to the warnings made against them? Be specific.

6.  a) Define cyberespionage as used in the article.
b)  What does Intelligence Committee Chairman Rep. Mike Rogers say about why the U.S. shouldn’t trust the companies?

7.  Why did the House Intelligence committee begin its investigation?

8.  a) Why do you think it took Congress so long to begin an investigation when militaty and intelligence officials have been warning them that China poses a cyberespionage threat to U.S. defense systems and companies?
b)  Do you think the U.S. government should follow the recommendations of the House Intelligence Committee?  Explain your answer.


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Background

About Congressional Committees:

  • Committee membership enables members to develop specialized knowledge of the matters under their jurisdiction.
  • As “little legislatures,” committees monitor on-going governmental operations, identify issues suitable for legislative review, gather and evaluate information; and recommend courses of action to their parent body.
  • There are three types of committees: standing, select or special, and joint committees.
  • Standing committees generally have legislative jurisdiction. (Subcommittees handle specific areas of the committee’s work.)
  • Select and joint committees generally handle oversight or housekeeping responsibilities.
  • The chair of each committee and a majority of its members represent the majority party. The chair primarily controls a committee’s business.
  • There are 21 permanent committees in the House of Representatives, and 20 in the Senate. Four joint committees operate with members from both houses on matters of mutual jurisdiction and oversight.

The House Committee on Intelligence:

The United States House Permanent Select Committee on Intelligence (HPSCI) is a committee of the U.S. House of Representatives, currently chaired by U.S. Congressman Mike Rogers (Michigan). The HPSCI is charged with the oversight of the United States Intelligence Community, which includes the intelligence and intelligence related activities of 17 elements of the U.S. Government, and the Military Intelligence Program. (from intelligence.house.gov/about/history-jurisdiction)

  • What is Huawei? 

    • Chinese company Huawei (pronounced WAH-way) has become the world’s second largest producer of network equipment – the transmitters, base stations and routing gear that connects calls and cellphone traffic.
    • Huawei climbed to the top by selling low-cost gear, quickly surpassing industry stalwarts like Nokia, Siemens, Alcatel, Lucent and Motorola. The competitive pressure forced the industry to consolidate underneath market leader Ericsson. Alcatel bought Lucent, Nokia and Siemens merged their infrastructure businesses, and a hobbled Motorola sold itself to Nokia Siemens.
    • Huawei has faced regular claims that its climb was aided by stolen intellectual property. Cisco sued Huawei in 2003, and people interviewed by the company for jobs said they were quizzed extensively about their work.
    • In 2010, Motorola sued the Chinese company alleging it engaged in an elaborate plot involving former employees and a shell company to steal cellular network technology. Huawei denied the claims, and the companies later settled.
    • Now Huawei is taking on the smartphone market with low-cost phones using Google Inc.’s Android operating system.
    • Though new to the business, Huawei held a 2.6% share of the worldwide mobile phone market at the end of the second quarter, ahead of more established competitors like HTC, Motorola and BlackBerry maker Research In Motion.
    • The phones have found a niche in the U.S. market, where they’re sold by carriers like MetroPCS and Leap that specialize in month to month contracts. (from the wsj article)

    Resources

    Read about the investigation of Huawei and ZTE at the House Intelligence Committee website at:
    intelligence.house.gov/press-release/chairman-rogers-and-ranking-member-ruppersberger-warn-american-companies-doing

    Read the Committee’s entire investigative report (in PDF format) on Huawei and ZTE at:
    intelligence.house.gov/press-release/investigative-report-us-national-security-issues-posed-chinese-telecommunications