[h=3]By JURO OSAWA[/h]HONG KONG—A damning U.S. Congressional report represents one of the biggest threats to plans by China's Huawei Technologies Co. and ZTE Corp. to expand into developed markets, not only by tainting public perceptions of the companies but also potentially prompting further investigations into their businesses, analysts say.
The U.S. is one of few major markets where Huawei, the world's second-largest telecommunications equipment supplier after Sweden's Ericsson, hasn't been able to expand. Whether Huawei can penetrate the critical U.S. market—a major market for Ericsson and Nokia Siemens Networks—will determine the rate of the Chinese technology giant's overall growth.
In a report, the U.S. House intelligence committee says that Huawei and Chinese telecom equipment supplier ZTE Corp. pose security risks and that the U.S. government should avoid using the two companies' equipment.
The report comes at a time when Huawei is struggling to establish its credentials in the U.S. Political rhetoric against Beijing is intensifying as the U.S. presidential election nears and as China gains clout in global affairs. China has become a key issue in the race between Democratic presidential incumbent Barack Obama and Republican candidate Mitt Romney, both of whom have spoken out vociferously against what they say are unfair trade practices and currency manipulation by Beijing. Mr. Romney has berated Mr. Obama for not taking a harder line against China.
In response Huawei said it "has not seen the committee report so has no familiarity with such allegations…The security and integrity of our products are world proven. Those are the facts, political agendas aside."
ZTE also defended its equipment. "ZTE's equipment is evaluated by an independent U.S. threat-assessment laboratory with oversight by U.S. government agencies."
ZTE shares fell 6% to close Monday at 12.6 Hong Kong dollars (US$1.63) on the Hong Kong exchange.
Also on Monday, ZTE said that Cisco Systems Inc. severed a strategic cooperation agreement because of U.S. allegations the Chinese company sold equipment to Iran. Cisco notified ZTE several days ago that it would end a strategic partnership agreement with the Shenzhen-based company that dated to about 2005 and included resale of equipment produced by the U.S. company, a ZTE spokesman said Monday.
The spokesman, David Dai Shu (surname: Mr. Dai), said he wasn't aware of specific reasons cited by Cisco but that "we know it's related to Iran" and U.S. government scrutiny of Chinese business deals there.
Mr. Dai also supplied a ZTE corporate statement: "ZTE is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed."
Cisco couldn't immediately be reached for comment. Cancellation of the strategic cooperation agreement was reported Monday by Reuters.
For Huawei, the result of the U.S. committee's probe "limits [its] growth potential over the next few years," said Jefferies analyst Cynthia Meng.
"It will be difficult for U.S. telecom operators and other U.S. companies to choose Huawei or ZTE" as their suppliers, she said.
The U.S. House intelligence committee had been investigating Huawei and ZTE over the past year over concerns among some Washington lawmakers that their equipment could be used for spying on Americans.
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. The investments they make in the U.S. show the win-win aspect of China-U.S. trade relations."
Mr. Hong added, "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."
The worst-case scenario for Huawei and ZTE would be the U.S. committee's report prompting similar investigations by European governments based on concerns about security risks, said Barclays analyst Jones Ku. "I wouldn't rule out the possibility of an investigation in Europe," said Mr. Ku, who covers Hong Kong-listed ZTE but not Huawei, which is a private company.
The U.S. market is also important for Huawei's efforts to expand beyond the telecom sector. As the overall growth slows in the telecom-equipment market, the company is investing more in so-called enterprise infrastructure businesses such as communication systems, data centers and other technology services for corporate clients, taking on powerful rivals such as Cisco Systems Inc. of the U.S.
Huawei entered the U.S. market in 2001, and it now has 13 offices across the country with about 1,800 employees. According to the company, its current U.S. clients include telecom operators such as MetroPCS Communications Inc. and Clearwire Corp.
But its U.S. sales, which stood at $1.3 billion last year, accounted for just 4% of Huawei's overall revenue of about $32 billion. By contrast, Europe accounted for 13% of the company's revenue.
—James T. Areddy in Shanghai and Olivia Geng in Beijing contributed to this article.Write to Juro Osawa at [email protected]
The U.S. is one of few major markets where Huawei, the world's second-largest telecommunications equipment supplier after Sweden's Ericsson, hasn't been able to expand. Whether Huawei can penetrate the critical U.S. market—a major market for Ericsson and Nokia Siemens Networks—will determine the rate of the Chinese technology giant's overall growth.
In a report, the U.S. House intelligence committee says that Huawei and Chinese telecom equipment supplier ZTE Corp. pose security risks and that the U.S. government should avoid using the two companies' equipment.
The report comes at a time when Huawei is struggling to establish its credentials in the U.S. Political rhetoric against Beijing is intensifying as the U.S. presidential election nears and as China gains clout in global affairs. China has become a key issue in the race between Democratic presidential incumbent Barack Obama and Republican candidate Mitt Romney, both of whom have spoken out vociferously against what they say are unfair trade practices and currency manipulation by Beijing. Mr. Romney has berated Mr. Obama for not taking a harder line against China.
In response Huawei said it "has not seen the committee report so has no familiarity with such allegations…The security and integrity of our products are world proven. Those are the facts, political agendas aside."
ZTE also defended its equipment. "ZTE's equipment is evaluated by an independent U.S. threat-assessment laboratory with oversight by U.S. government agencies."
ZTE shares fell 6% to close Monday at 12.6 Hong Kong dollars (US$1.63) on the Hong Kong exchange.
Also on Monday, ZTE said that Cisco Systems Inc. severed a strategic cooperation agreement because of U.S. allegations the Chinese company sold equipment to Iran. Cisco notified ZTE several days ago that it would end a strategic partnership agreement with the Shenzhen-based company that dated to about 2005 and included resale of equipment produced by the U.S. company, a ZTE spokesman said Monday.
The spokesman, David Dai Shu (surname: Mr. Dai), said he wasn't aware of specific reasons cited by Cisco but that "we know it's related to Iran" and U.S. government scrutiny of Chinese business deals there.
Mr. Dai also supplied a ZTE corporate statement: "ZTE is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed."
Cisco couldn't immediately be reached for comment. Cancellation of the strategic cooperation agreement was reported Monday by Reuters.
For Huawei, the result of the U.S. committee's probe "limits [its] growth potential over the next few years," said Jefferies analyst Cynthia Meng.
"It will be difficult for U.S. telecom operators and other U.S. companies to choose Huawei or ZTE" as their suppliers, she said.
The U.S. House intelligence committee had been investigating Huawei and ZTE over the past year over concerns among some Washington lawmakers that their equipment could be used for spying on Americans.
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. The investments they make in the U.S. show the win-win aspect of China-U.S. trade relations."
Mr. Hong added, "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."
The worst-case scenario for Huawei and ZTE would be the U.S. committee's report prompting similar investigations by European governments based on concerns about security risks, said Barclays analyst Jones Ku. "I wouldn't rule out the possibility of an investigation in Europe," said Mr. Ku, who covers Hong Kong-listed ZTE but not Huawei, which is a private company.
The U.S. market is also important for Huawei's efforts to expand beyond the telecom sector. As the overall growth slows in the telecom-equipment market, the company is investing more in so-called enterprise infrastructure businesses such as communication systems, data centers and other technology services for corporate clients, taking on powerful rivals such as Cisco Systems Inc. of the U.S.
Huawei entered the U.S. market in 2001, and it now has 13 offices across the country with about 1,800 employees. According to the company, its current U.S. clients include telecom operators such as MetroPCS Communications Inc. and Clearwire Corp.
But its U.S. sales, which stood at $1.3 billion last year, accounted for just 4% of Huawei's overall revenue of about $32 billion. By contrast, Europe accounted for 13% of the company's revenue.
—James T. Areddy in Shanghai and Olivia Geng in Beijing contributed to this article.Write to Juro Osawa at [email protected]