Do Huawei and ZTE pose a cyber-espionage risk?

Chinese network equipment manufacturers Huawei and ZTE pose a security threat to the US and should be barred from any mergers or acquisitions in the country, an influential congressional panel has advised.

The report, expected to be released by the US House of Representatives’ Intelligence Committee later on Monday, said that the two firms had failed to demonstrate the absence of Chinese state or military influence in their operations. The firms failed to hand over documents relating to formal relationships or regulatory interaction with Chinese authorities, it said.

“Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems,” said the draft report.  

However, the report also referred to information received from industry sources and current and former employees, which seemed to suggest that Huawei might be guilty of bribery and corruption offences, immigration violations and of using pirated software in its US operations.

Both companies have strenuously denied the allegations made in the report, which follows a year-long probe that has seen executives from both firms called to testify in front of the committee in September.

Huawei spokesman William Plummer gave the Reuters news agency the following statement.

"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 challenges.”

Chinese foreign ministry spokesman Hong Lei urged the United States to "set aside prejudices" when it deals with Huawei and ZTE.

"Chinese telecoms companies have been developing their international business based on market economy principles. Their investment in the United States embodies the mutually beneficial nature of Sino-American economic and trade relations," he said at a briefing in Beijing.

"We hope the U.S. Congress will set aside prejudices and respect the facts, and also do more that is beneficial to Sino-American economic and trade ties, rather than the contrary."

This isn’t the first time the firms have faced difficulties relating to their alleged ties with the Chinese state. This latest development will likely hamper their efforts to move into US mobile and telecoms markets.

ZTE made 3% of its global revenues in the US last year while Huawei generated 4%. The majority of this is tied to mobile phone sales through US carriers like T-Mobile and Verison. It is unclear at this stage whether the suggested ban extends into the mobile handset side of both businesses, or just concerns telecoms equipment.

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