Congress to Investigate Chinese Telecom Vendors

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A congressional committee has formally announced it will begin investigations into potential security threats posed by Chinese telecom equipment vendors Huawei and ZTE. A statement from the U.S. House Permanent Select Committee on Intelligence said the committee will "review the extent to which these companies provide the Chinese government an opportunity for greater foreign espionage."

Committee Chairman and former FBI special agent Mike Rogers (R-Mich.) wrote: "I stand by my caution to the American business community about engaging Huawei technology until we can fully determine their motives." Rogers called Huawei "the 800-pound gorilla in the room," but added that other companies will also be included in the investigation.

The committee's ranking member, Dutch Ruppersberger (D-Md.) threw his weight behind Rogers. "We already know the Chinese are aggressively hacking into our nation's networks ... and stealing secrets worth millions of dollars in intellectual property from American companies."

Ruppersberger argues that the hardware the Chinese companies install could be compromised, allowing the Chinese government to exploit security holes in the equipment in what would otherwise be a secure communications network.

Try, try again
Huawei has been trying for years to get into the U.S. networking market. Its most recent attempt was shut down by the Commerce Department, which blocked the company's effort to bid on a 4G LTE wireless emergency-services network. A Commerce spokesman told The Daily Beast that Huawei was banned for "national security concerns."

And last year the Obama administration pressured Sprint Nextel (NYS: S) to forgo its plans to expand its 4G network with Huawei equipment. This came after eight senators sent a letter to the White House declaring that "Huawei's position as a supplier of Sprint Nextel could create substantial risk for U.S. companies and undermine U.S. national security."

ZTE also has been restricted from supplying U.S. companies with networking equipment, even though it already offers cell phones through AT&T (NYS: T) and Verizon (NYS: VZ) , as well as Sprint. Earlier this month, the company announced that next year it will even offer a tablet computer in the United States.

Response
The companies find this blackballing unwarranted. A ZTE representative wrote Bloomberg yesterday that the company "is wholly committed to transparency and will cooperate in addressing any questions regarding our business."

Huawei also responded, with its spokesperson writing: "The integrity of our solutions has been proven worldwide."

The Chinese Foreign Ministry even entered the ring, holding a briefing in Beijing today. Its spokesperson told reporters that China hopes the U.S. won't "politicize" an economic exchange that brings employment to Americans.

But Texas wants you anyway
Huawei employees 1,500 people in the U.S. and has been headquartered in Plano, Texas, since 2001. Last year, Texas Gov. Rick Perry showed up at the company's ribbon-cutting ceremony for its new headquarters building in Plano. Perry cited Huawei's "strong, worldwide reputation as an innovator of quality telecommunications technology, with facilities spread across the globe." It seems not every politician is against having Huawei here.

Both Chinese companies, especially Huawei, have been aggressive in their attempts to dominate whatever market they enter, and they badly want to enter the U.S. marketplace. Huawei executive James Lai said this week at a Morgan Stanley meeting in Spain that his company would do "whatever it takes" to get some of the U.S. wireless business.

Of course, any U.S. ban on Huawei and ZTE, or any other Chinese networking companies, would end up being good fortune for their competitors. Ericsson (NAS: ERIC) , Alcatel-Lucent (NYS: ALU) , Cisco (NAS: CSCO) , and Juniper (NAS: JNPR) , to name several, would be the beneficiaries of any embargo.

This congressional investigation should bring to the surface the constant battle that has been going on between these Chinese companies and the forces that oppose their entry. Whether the companies actually do pose a security threat or an economic threat -- or both -- may finally be made clear.

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At the time this article was published Fool contributorDan Radovskyowns shares of AT&T. The Motley Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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