The world is well aware of the competitive disadvantages and trade distortion tactics it faces when dealing with the Chinese regime’s market. Citing a number of reports by China experts, the media has made it quite clear that basically all Chinese enterprises are beholden to China’s regime in one way or another, and thus all of China’s foreign competitors are at a disadvantage.
The media, academia, and think tanks have written about China’s violations of World Trade Organization agreements, as well as the regime’s mercantilist strategies, unprecedented subsidy program, forced labor, currency manipulation, intellectual property rights piracy, and theft of trade secrets.
By providing unfair subsidies to auto part makers, Beijing is “illegally restricting the exports of crucial raw materials that foreign parts makers need to stay competitive,” the Wall St. Cheat Sheet website reported at the beginning of this year. But, at this time, the dispute is not about the trade violations that threaten 1.6 million U.S. jobs in the auto industry at a time when thousands of American’s are unemployed.
The conflict is due to the Chinese regime taking espionage a step higher. Apparently, the regime ordered its exporters to provide ways and means to commit industrial espionage and electronic sabotage of “critical infrastructures in the United States and in other industrialized countries,” according to a July report by F. Michael Maloof, staff writer for WND/G2Bulletin and former senior security policy analyst in the U.S. Department of Defense, on the WND Money website.
The Maloof report suggests that two Chinese companies, Huawei Technologies Co. Ltd. and ZTE Corp., incorporate parts into wireless networks, which allow the Chinese regime to obtain trade secrets, national security, and other confidential information without those being monitored finding out about it.
“A report put out in March by the congressional U.S.-China Economic and Security Review Commission also had warned that Huawei and ZTE were examples of high technology companies the Chinese government could use to enter remotely into telecommunications systems and computers linked to them to gain undetected access to sensitive data,” Maloof states in his report.
China experts suggest that the latest dispute highlights the tightrope companies and governments walk on when producing products in China or when including Chinese vendors in their supply chain.
“Naturally, every business environment has certain risks. But for many companies, the operational risks in China are the most complex of all,” a September 2010 entry on the Industry Week website suggests.
Assessing Full Risk Impossible
On Oct. 8, an alert went out from members of the U.S. Intelligence Committee in the form of an announcement titled “Chairman Rogers and Ranking Member Ruppersberger Warn American Companies Doing Business with Huawei and ZTE to ‘use another vendor.’”
The committee released a report the same day, telling U.S. regulators to stop mergers and acquisitions involving the aforementioned Chinese firms.
The decision by the committee to go public with a report and press releases was based on significant concerns that any equipment produced by Huawei and ZTE conceivably could be manipulated by the Chinese state to gain national security and company proprietary information.
Representatives from both companies appeared before the Committee on Intelligence. Yet, after hours of questioning and request for more detailed information, nothing was provided that alleviated the concerns of the committee members.
Congressman Frank R. Wolf issued the following statement on his website on Oct. 8: “Huawei and ZTE’s relationship with the Chinese Peoples’ Liberation Army is too opaque to allow them to command and control U.S. telecom networks. Their obstruction of the Committee’s investigation further demonstrates that they are not trusted partners for the U.S. government and business community.”
Additionally, information was turned over to the Intelligence Committee by industry experts and former Huawei employees, which pointed to a breach of U.S. law and abuse of international business standards. The committee did not delve into said information, but turned it over to relevant U.S. government agencies for further investigation.
“U.S. government systems, particularly sensitive systems, should not include Huawei or ZTE equipment, including component parts. Similarly, government contractors—particularly those working on contracts for sensitive U.S. programs—should exclude ZTE or Huawei equipment in their systems,” the Intelligence Committee report recommends.
Chinese Firms’ Business Dealings Restricted
“The U.S. government has blocked numerous contracts and acquisition deals between American companies and Chinese equipment makers, usually in an indirect manner,” states Lee Ratliff, analyst at market intelligence firm IHS iSuppli, in an Oct. 8 press release.
Ratliff suggests that despite having spent money and time to develop the relationship, a great number of U.S. companies are hesitant to use Huawei or ZTE in their supply chain, as any deal could fall through because of U.S. government objection.
Concerns about espionage and cyber-attacks are not only voiced in the United States, but also by the Indian government, which blocked purchases from Huawei and ZTE beginning in 2010.
Overall, the report from the Committee on Intelligence “could deal a further setback to Huawei’s and ZTE’s efforts to penetrate the American market in the future,” the IHS iSuppli release suggests.
Earnings Not at Risk
“Huawei and ZTE are unlikely to see their sales decline despite the U.S. government’s action,” according to the IHS iSuppli release.
The U.S. government’s recommended ban on purchases from the two companies won’t hurt sales of the two Chinese state-owned companies, as they have been awarded a large number of contracts from European companies.
Trailing behind Nokia Siemens Networks B.V. ($10 billion), based in Finland, and Sweden-based Telefonaktiebolaget LM Ericsson ($9.7 billion), Huawei ranked third among wireless infrastructure equipment suppliers in 2010, but jumped to first place by the end of third quarter 2011 at $8.9 billion.
“Huawei during the first nine months of 2011 became the world’s largest supplier,” according to the IHS iSuppli release.
Choices Are Limited
“This is a market that Nortel and Lucent used to dominate, and I think the U.S. tech industry should be embarrassed by the way it let this market rapidly slip away,” an Oct. 10 article on the NetworkWorld website states.
There are very few communication equipment manufacturers for products that are needed to build a 4G wireless network worldwide, and none is an American company. The companies are Huawei, ZTE, Ericsson, and Alcatel-Lucent (based in France).
American company “Cisco, through its acquisition of Starent, [a company based in Massachusetts] is the closest, but there are some holes in its portfolio,” according to the NetworkWorld article.
The problem with using Cisco in the supply chain for U.S. products is the close business relationships with the Chinese regime. “Cisco has hundreds of ‘network academies’ that train thousands of network engineers in China every year,” the NetworkWorld article states.
“Cisco’s investment in China has totaled 8.5 billion U.S. dollars since 2002. In 2007, it announced to invest 16 billion dollars in China, mainly for R&D as well as education purchase,” said an article on the official website for Hubei Province in China.
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