China's ZTE Corp. Has A Plan To Defuse U.S. Espionage Concerns

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　　Politics and business can be a capricious combination, and one pawn in a recent game of international brinksmanship, Chinese telecom vendor ZTE Corporation, is looking for a little fairness when judging the merits of its products and services.

　　It would be folly to suggest that the United States and China were anything like best buds. At best (and this could be a stretch), they're "frenemies" in their political and business relationships. The nations circle warily around each other's interests - while simultaneously depending heavily on the other side for trade and commerce.

　　In the midst of this friction between the two nations lie companies that claim a desire to just do business, but still find themselves cast in the role of villain based on the winds of political change. That's what happend to telecommunications vendor ZTE last fall, when the U.S. House of Representatives Select Committee on Intelligence fingered ZTE, Huawei and a number of other unnamed Chinese companies as creators of potentially dangerous technology.

　　Deconstructing And Rebuilding Trust

　　The October report drafted by the Committee, recommended "…[t]he United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies" as a backdrop to dealing with all Chinese firms in that sector, specifically calling out ZTE and Huawei.

　　Naturally, ZTE and Huawei denied the allegations at the time, and ZTE is now making further moves to clear its name. The Shenzhen-based firm is proposing a concrete plan to assure both private and governmental U.S. buyers that the components it sells and delivers are free of any code that might "phone home" to ZTE and its alleged connections to government intelligence agencies within the People's Republic of China.

　　The plan is known as a trusted delivery mechanism, an industry euphemism for pulling in a trusted third-party to check and monitor hardware and software delivered to a customer. In this case, ZTE wants to use Virginia-basedElectronic Warfare Associates (EWA), a defense and logistics contractor that performs services such as transportation of toxic materials, electronic signal intelligence and incident response.

　　Think "spook-shop" for hire, and you get the idea.

　　Most importantly for ZTE, EWA is a known quantity for U.S. companies and could be enough to give ZTE the extra trust factor it needs to get past the accusations of the House Committee.

　　How It Would Work

　　Peter Ruffo, Director of Government Relations for ZTE USA, explained how the trusted delivery mechanism would work, when used with a hypothetical customer, such as a telecommunications carrier in the U.S.

　　ZTE would ship the materials or code to the carrier, which would then get the products to EWA. Next, EWA would examine the components and source code within the product (be it hardware or software), reporting to the U.S. government, the customer and ZTE of any anomalous code or other problems it might find. Once cleared, the product would be shipped back to the carrier for deployment.

　　The process Ruffo described would be used for new equipment as well as updates to software.

　　Ruffo hopes that this solution will be enough to ease the concerns of the Committee as well as any potential customers that might have been alarmed by the recommendations of the Committee.

　　Uphill Battle Ahead

　　It will be an uphill battle for the company. According to Ruffo, when ZTE worked with members of the Committee throughout 2012 as the House was working on this report, ZTE offered a briefing to the Committee by EWA, which was declined.

　　In a broader sense, the company is facing a U.S. industrial and political environment that has grown increasingly cold to Chinese incursions in the U.S. marketplace. This chilling effect, which Ruffo likened to a similar reaction to Japan's strengthening within U.S. markets in the '80s and early '90s, has put a lot of Chinese companies in the position of having to defend themselves as being something other than puppets of the Chinese government.

　　"There's an assumption that all Chinese companies are the same," Ruffo said, maintaining that is not the case.

　　In reality, Ruffo emphasized, while some companies in China do have close ties to the PRC government, that is not necessarily true for all private entities in mainland China. Ruffo, as one would expect, firmly defended ZTE as an independent private organization, and pointed to the company's efforts to be transparent and work with U.S. partners to create opportunities for profit and jobs in both companies.

　　Tip Of The Iceberg?

　　Ruffo also reiterated a point made by his boss Zhu Jinyun, senior vice president for North America and Europe, when he testified before the Committee in September. Zhu said that if the Committee was worried about espionage from Chinese companies, picking out just ZTE and a few other vendors was short-sighted.

　　"As the Committee undoubtedly understands, virtually all of the telecom equipment now sold in the United States and throughout the world contains components made, in whole or in part, in China. That includes the equipment manufactured and sold by every Western vendor, much of which is made by Chinese joint-venture partners and suppliers," Zhu testified. "We respectfully suggest that the Committee's focus on ZTE, to the exclusion of the Western telecom vendors, addresses the overall issue of risk so narrowly that it omits from the Committee's inquiry the suppliers of the vast majority of equipment used in the U.S. market."

　　It was a point Ruffo made this week too. If you ask me, the wisdom of pointing out that the potential for spying exists within virtually every electronic component sold in the U.S. today could be questioned in a political atmosphere that seems to like nothing more than use China as a convenient punching bag, but that seems to be one of ZTE's main defenses.

　　Overall, ZTE is hoping that the power of the marketplace will get China's companies to be more accepted in the U.S., just as Japan was eventually accepted decades ago. But it recognizes it that's a tough sell in the U.S. these days.

　　"Right now, we'd like it to be more Tom Friedman and less Tom Clancy," Ruffo lamented, comparing the very different approaches by the authors of The World Is Flat and Red Storm Rising.

　　2) Competitor News

　　Washington Post

　　China’s Huawei criticizes US security complaints as trade protectionism, promises transparency

　　Associated Press

　　January 21, 2013

　　BEIJING— Chinese tech giant Huawei on Monday criticized U.S. claims the company might be a security risk as trade protectionism that harms consumers.

　　The comments came as Huawei Technologies Ltd., a maker of network switching gear and smartphones, disclosed details of its 2012 performance in an effort to show transparency and allay security concerns.

　　At a news conference, chief financial officer Cathy Meng expressed frustration about U.S. security complaints. She said Americans pay about twice what Europeans do for third- and fourth-generation mobile phone service and suggested it was due to impediments to competition.

　　“These measures using trade protectionism to interfere with free competition will ultimately harm the benefits of end users and consumers,”Meng said. “As we continue to invest in this industry and work with our customers, our customers and markets generally see the value we create for them.”

　　Outside the United States, Huawei has grown rapidly in developing countries and is increasing sales in Europe, becoming the first Chinese firm to break into the top ranks of global technology companies. It is challenging Sweden’s Ericsson AB for the status of the biggest network gear supplier.

　　Last year’s profit rose 33 percent over 2011 to 15.4 billion yuan ($2.4 billion) on sales of 220.2 billion yuan ($34.9 billion), according to Meng. Still, last year’s profit was less than half 2010’s high of 24.7 billion yuan ($3.9 billion).

　　Huawei is privately held but has released more financial details in recent years in an effort to ease concern about the company.

　　Monday’s news conference was the first of its kind for Huawei and part of an effort to “honor our commitment to transparency,” said Meng, a daughter of Huawei founder Ren Zhengfei. She did not respond directly to a question about possible plans for further disclosures about things such as how key company decisions are made.

　　Huawei was set up in 1987 by Ren, a former Chinese military engineer, to sell imported telecoms equipment and later started to develop its own. The company says it is owned by its employees and denies it is controlled by the communist government or China’s military, but such concerns have hampered its efforts to expand in the United States.

　　In October, a U.S. congressional panel recommended phone carriers avoid doing business with it or its smaller Chinese rival, ZTE Corp. Beijing rejected the report as false and an effort to block Chinese companies from the U.S. market.

　　In Australia, Huawei suffered a setback in 2011 when the government barred it from bidding to work on a national broadband network.

　　The U.S. and Australian actions highlight concern about Beijing’s cyber warfare efforts, a spate of hacking attempts aimed at Western companies and the role of Chinese equipment providers, which are expanding abroad.

　　Huawei issued a pledge last year not to cooperate with spying.

　　Its financial rebound came as ZTE warned Sunday it is likely to report a loss for 2012 of 2.5 billion yuan to 2.9 billion yuan ($400 million to 460 million) due to thinner margins on contracts in Africa, South America, China and elsewhere in Asia.

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