A congressional committee recently published the results of an 11-month investigation of the two highly controversial Chinese vendors ZTE and Huawei. The results of the probe have been widely disseminated in the media, including a front-page story in the Wall St Journal and a 15-minute piece on 60 minutes.
Congress alleges that both ZTE and Huawei pose a risk to U.S. national security because the network equipment could have secret back doors that allow China to spy on the U.S. In the report, the committee recommends that the U.S. block any merger and acquisition activity involving Huawei and ZTE and recommends that U.S. companies avoid using telecommunications equipment from the two Chinese vendors.
Just as a point of clarification, the committee focused primarily on the communications equipment used for service providers to build out 4G wireless networks, for which there are no viable U-S.-based options. Cisco, through its acquisition of Starent, is the closest, but there are some holes in its portfolio. So the wireless operators’ choices are really limited to ZTE, Huawei, Ericsson and Alcatel-Lucent, which are all foreign companies. 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. Even for wire-line business, the only two U.S. companies that have a significant telco footprint are Cisco and Juniper, meaning the U.S. operators are forced to look elsewhere for competitive offerings.
The report from the committee, led by Republican Mike Rogers, could be a significant blow to both Huawei and ZTE, which have been trying to expand their presence in the U.S. markets. The irony here is that in early 2011 Huawei published and open letter to the U.S. government refuting any security concerns and even requesting a full investigation into its own business.
The part of the report that doesn’t jive with me the most is that the investigation revealed no smoking gun and doesn’t necessarily prove the allegations. It cites “significant gaps” in the information available on current operations and the history of the company. The report also states that Huawei and ZTE were willing to provide enough information to “ameliorate the Committee’s concerns.” So it’s drawing conclusions off of innuendo and opinion. Sounds like an analyst report!
If you want to take a radical view of the report, it almost insinuates that ZTE and Huawei were founded and built a beachhead of business with the sole purpose of allowing the Chinese government to spy on the U.S. So this would make Huawei and ZTE mere pawns of the Chinese government, consisting of billions of dollars in R&D and thousands of employees to secretly spy on the U.S.
Frankly, I think that this notion is very far fetched, bordering on ridiculous. If someone wants to claim that there is better technology, that’s fine, but let that be fought out in the labs. Let POs decide instead of PR. Also, if there are concerns about a secret back door, then turn the equipment over to a government agency or a collection of the best engineers from the network operators to test the infrastructure.
Also, if we extrapolate this, where would it stop? Should Cisco, Juniper or anyone else ever refrain from using Chinese components? Cisco has hundreds of “network academies” that train thousands of network engineers in China every year. Should Cisco start ignoring these Chinese employees, if we’re to believe the Chinese government might have secretly trained them?
As President Obama says far too often, let me be clear, the globalization of technology has been great for everyone. Since establishing a presence in the U.S., Huawei has become a great partner to the American high-tech industry. Huawei uses American R&D, chips, boards etc., and the company claims to have spent more than $30 billion with US companies in the last decade.
On the flip side, Huawei allowed U.S. companies to have access to lower-cost engineers and create “around the clock” collaboration. In fact, Cisco’s second largest location is now in Bangalore, where it used to RTP, allowing Cisco to be a 24-hour-a-day operation. Have ZTE and Huawei caused pricing pressure? Absolutely, but the better companies adjust. I ‘ve spoken with Cisco about this at length, and it’s one of the reasons the company had to start selling into emerging market countries at the government level. Cisco faced a challenge and changed its go-to-market model, and it’s been the better for it.
Now, I’m not saying Huawei and ZTE aren’t without their faults. The single data point regarding improper business practices happened in 2003, when the company was caught ripping off Cisco source code on some enterprise-grade routers. However, that was almost 10 years ago, and things have changed. Huawei back then was primarily cheap, knock-off technology; today it makes state-of-the-art stuff and can compete with anyone, given a fair shot.
The one area that I know frustrated the investigators and press is the inaccessibility of Huawei executives in China. Culturally, Asian companies operate much differently than those in the U.S. Here, it’s commonplace to badger CEOs with questions and comments in public. In Asia, you just don’t do that. So, the one piece of advice I would give both ZTE and Huawei is that if they want to compete in the U.S., they will need change the way you deal with U.S. media, and make accessible people that might have been previously inaccessible.
Again, I’m not trying to be a Huawei apologist. I’m just saying we should be reasonable and let the market evolve on competition, not on governments forcing companies to buy equipment from a limited number of vendors.
Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice. Kerravala provides research and advice to the following constituents: End user IT and network managers, vendors of IT hardware, software and services and the financial community looking to invest in the companies that he covers.
Kerravala does research through a mix of end user and channel interviews, surveys of IT buyers, investor interviews as well as briefings from the IT vendor community. This gives Kerravala a 360 degree view of the technologies he covers from buyers of technology, investors, resellers and manufacturers.
Kerravala uses the traditional on line and email distribution channel for the research but heavily augments opinion and insight through social media including LinkedIn, Facebook, Twitter and Blogs. Kerravala is also heavily quoted in business press and the technology press and is a regular speaker at events such as Interop and Enterprise Connect.
Kerravala remains associated with Yankee Group through the company's affiliate program.
Prior to ZK Research, Zeus Kerravala spent 10 years as an analyst at Yankee Group. He joined Yankee Group in March of 2001 as a Director and left Yankee Group as a Senior Vice President and Distinguished Research Fellow, the firms most senior research analyst. Before Yankee Group, Kerravala had a number of technical roles including a senior technical position at Greenwich Technology Partners (GTP) where he worked with Johna Til Johnson, the founder of Nemertes Research. Prior to GTP, Kerravala had numerous internal IT positions including VP of IT and Deputy CIO of Ferris, Baker Watts and Senior Project Manager at Alex. Brown and Sons, Incorporated.
Kerravala holds a Bachelor of Science in Physics and Mathematics from the University of Victoria in British Columbia, Canada.