U.S. Panel Says Chinese Technology Giants Pose Security Threat

The panel said in a report that U.S. regulators should block mergers and acquisitions in this country by Huawei Technologies Ltd. and ZTE Corp, among the world's leading suppliers of telecommunications gear and mobile phones.

Reflecting U.S. concern over cyber-attacks traced to China, the report also recommends that U.S. government computer systems not include any components from the two firms because that could pose an espionage risk.

"China is known to be the major perpetrator of cyber-espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation. American businesses should use other vendors," the committee's chairman, Rep. Mike Rogers, R-Mich, told a news conference. He said the Chinese companies could not be trusted with access to computer networks that support everything from power grids to finance systems.

The recommendations are the result of a yearlong probe, including a congressional hearing last month in which senior Chinese executives of both companies denied posing a security threat and being under Beijing's influence.

Rogers said they are clearly tied to the Chinese government, and that allowing Huawei and ZTE to provide network equipment and services in America risks confidential consumer information and undermines core national security interests. He said the committee was not concerned about the sales of handsets that make up the bulk of their U.S. businesses, but rather network infrastructure where they have made fewer inroads.

William Plummer, vice president for external affairs for Huawei, said his company, a private entity founded by a former Chinese military engineer, was being victimized because of U.S. government concerns about China's government.

"Huawei is Huawei, Huawei is not China," he told reporters. "My company should not be held hostage to someone's political agenda."

Ahead of the report's release, China's foreign ministry said investment by telecommunications companies is mutually beneficial. "We hope the U.S. will do more to benefit the interests of the two countries, not the opposite," spokesman Hong Lei said at a regular briefing in Beijing Monday.

The panel's recommendations, however, will likely hamper Huawei and ZTE's ambitions to expand their businesses in America. Their products are used in scores of countries, including in the West.

The bipartisan report could also become fodder for a presidential campaign in which the candidates have been competing in their readiness to clamp down on Chinese trade violations. Republican Mitt Romney, in particular, has made it a key point to get tougher on China by designating it a currency manipulator and fighting abuses such as intellectual property theft.

Rogers said its release had nothing to do with politics, and was motivated by the need to alert U.S. companies of the risks. The committee's top Democrat, C.A. Dutch Ruppersberger, said U.S. companies should proceed with "their eyes wide open." He cited an estimate from the U.S. Cyber Command that more than $300 billion in U.S. trade secrets was stolen last year.

The committee says it received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating U.S. laws. The allegations include immigration violations and an alleged "pattern and practice" of Huawei using pirated software in its U.S. facilities.

Rogers said that information of alleged bribery by Huawei to gain a contract in the U.S. would be forwarded Tuesday to the FBI, and he was confident it would lead to an investigation. The committee also planned to forward information on allegations of "beaconing" from Huawei equipment to China — that is the unauthorized transfer of information from a computer network.

Huawei, founded in 1987 has grown rapidly to become the world's second largest supplier of telecommunications network gear, operating in more than 140 countries. ZTE Corp, which is partly state-owned, is the world's fourth largest mobile phone manufacturer, with 90,000 employees worldwide.