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Panel suggests Chinese OEMs like ZTE and Huawei could face pressure to steal U.S. financial secrets

Could your router or smartphone be used to spy on you and betray your nation?  That's the allegation the U.S. House of Representatives' Intelligence Committee made in a draft report [PDF] released Monday.

I. Chinese Phonemakers Could be Spying on You For the PLA

In the wake of an attack on the White House by Chinese hackers, potentially working for the Chinese government, cybersecurity tensions are high between the U.S. and China.  Unsurprisingly, the new report focuses on the Chinese cybersecurity threat to American customers and businesses.

The report singles out two top Chinese equipment manufacturers -- ZTE Corp. (SHE:000063) and Huawei Technologies Comp. (SHE:002502) -- suggesting that U.S. lawmakers take the unusual step of banning the Chinese companies' products from the market.
Congress Buillding wide
Congress accuses Chinese phonemakers of blocking its probe into their potential cyberespionage ties, and suggest a ban. [Image Source: U.S. Congress]

Globally, ZTE is the fourth largest maker of mobile phones, while Huawei is sixth.  In the routers, switches, and telecommunications market, Huawei is the world's second largest company in revenue, while ZTE ranks fifth.  Both companies are looking to expand their sales base in the U.S.

But according to Congress, the companies could face pressure from the Chinese government to include subtle hardware or software constructs to spy on U.S. communications.  That could allow the theft of valuable information that could hurt U.S. companies financially or leak sensitive defense secrets.

II. ZTE, Huawei Blast "Baseless" "Political Distractions"

Both companies firmly denied the cyber-spying allegations.

William Plummer, a Washington- based spokesman for the Huawei, told Reuters, "Baseless suggestions otherwise or purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenge."

China cell phone
Chinese cell phone makers promise they're not spying on U.S. citizens.
[Image Source: Chinadangvu]

ZTE released a statement highlighting that it was not owned by China's ruling Communist Party.  It writes, "ZTE is committed to provide maximum cybersecurity through transparent, comprehensive, and continuous standards-based assessments of ZTE software, firmware, and hardware."

Chinese government officials were also quick to deny they were applying pressure on their domestic electronics firms to spy on the U.S.  Commented Foreign Ministry spokesman Hong Lei, "Chinese telecommunications companies have conducted their international operations based on market-economy principles.  Their investments in the U.S. reflect the mutual benefits brought about by U.S.-China trade relations."

III. Huawei, Founded by ex-PLA Officer, is Client of PLA's Cyberwar Unit

But there is some compelling evidence that Huawei may have a close relationship with cyberwar units inside China's "Peoples Liberation Army" (PLA).  A source gave a document tying Huawei to an "elite cyber-warfare unit" in the PLA, which the company was contracted to provide "special network services" to.  Huawei's founder and chief executive Ren Zhengfei is a former PLA officer.

Ren Zhengfei
Ren Zhengfei, founder and CEO of Huawei, is a former PLA officer. [Image Source: CFP]

Previously, U.S. regulators had blocked Huawei/ZTE acquisitions of domestic communications equipment manufacturers on similar grounds.  Huawei attempted to acquire 3Com Corp. in 2008 for $2.2B USD, but the deal was blocked on security concerns.  Instead, Hewlett-Packard Comp. (HPQ) ended up scooping up the company for $2.7B USD.  Likewise the 2011 sale of sale of patents from 3Leaf Systems Inc. was unwound on similar security concerns. 

But until now there had been no suggestion to directly ban ZTE or Huawei from the commercial communications market or the consumer electronics market.  But that is precisely the unprecedented recommendation the panel -- led by Rep. Mike Rogers (R-MI) -- is making.

While the companies strongly deny its claims, the panel complains that both companies failed to cooperate fully with the investigation and tried to dishonestly disguise their relationships with the Chinese government.

Sources: U.S. House Intelligence Committee, Reuters [Yahoo! News]

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RE: Spying on average Americans... why?
By Motoman on 10/8/2012 12:16:55 PM , Rating: 2
For 99% of the population, sure, the information is probably useless.

But then they find that one guy...

By AMDftw on 10/8/2012 12:32:34 PM , Rating: 2
I chuckled at this, because it so true.

RE: Spying on average Americans... why?
By tayb on 10/8/2012 1:00:22 PM , Rating: 2
So institute this policy on government employees. A total ban on this stuff is ridiculous and it will surely result in retaliation against American companies.

By The Raven on 10/8/2012 1:41:45 PM , Rating: 2
Yeah, have any of you ever heard of finding a needle in a haystack? But just in case, go ahead and start throwing in words like "classified launch sequence" and "DOD password database" in your daily communications to throw them off.

Also you can put things in there like "we will fire nukes at China if we ever find them spying on us with our phones" just to mess with their heads.

Have you guys ever heard of codewords? lol

RE: Spying on average Americans... why?
By Reclaimer77 on 10/8/2012 2:16:42 PM , Rating: 3
Tayb I'm willing to bet you never even heard of these Chinese OEM's before today, admit it.

But by all means, act like it's the end of the world if us "fat American's" look out for own interests and embargo goods from these shady OEM's.

And retaliation? You must be joking. We're not blocking ALL Chinese goods, hello.

RE: Spying on average Americans... why?
By Ringold on 10/8/2012 10:25:55 PM , Rating: 1
And retaliation? You must be joking. We're not blocking ALL Chinese goods, hello.

Typical spineless lefty. ZTE builds itself on the basis of stolen Cisco IP, and we should be the ones worried about retaliation?

China should be the ones worried that America finally grows a spine again. Companies are screwed no matter what in China. To enter many markets, they're forced to enter partnerships with local firms, which proceed to let the American's do the heavy lifting while they copy and steal and adapt all our expertise. In cases where US companies aren't forced in to bed with a local, they have to be constantly vigilant about hackers, spies, etc.

I wouldn't want to see an outright trade war, but there's definitely huge grievances to be resolved. China either seems to be getting worse about IP theft, or companies just quicker to report it to the media, but either way it's not fair or just.

All of which is slightly different than the security issue, but still.

RE: Spying on average Americans... why?
By aliasfox on 10/9/2012 10:58:56 AM , Rating: 2
I've heard many things on DailyTech, from Apple bashing to Android bashing, from Flying Spaghetti Monsters to Creationism.

But this is the first time I've ever heard anyone call Reclaimer77 a lefty. Ever. He's probably insulted.

By Etsp on 10/9/2012 12:28:02 PM , Rating: 2
As far as he's concerned, to be called left of center is an insult. Of that, I have no doubt in my mind.

As far as calling Reclaimer a lefty, that makes it clear in my mind that for Ringold, "If you don't agree with me, you must be a liberal. If you agree with me, you must be a conservative." Basically, there is no middle ground.

By Reclaimer77 on 10/9/2012 5:15:29 PM , Rating: 1
Ringold was clearly talking about the person I was responding to, pretty sure he wasn't calling me a "lefty", seeing as his entire post was agreeing with me. Did you guys even read it? :)

RE: Spying on average Americans... why?
By Saldrin on 10/8/2012 2:37:47 PM , Rating: 4
We as Americans don't really "make" much anymore besides movies and cheeseburgers. I have a co-worker that actually though the iphone was American made. I doubt there would be much repercussions, if at all. And what abstract things we do produce, China has already copied them and are in full production.

I don't foresee any negative consequences except maybe China getting mad and maybe adding tariffs, extreme consequence is kicking American companies out of their homeland which is a win win for us. I'd love to bring manufacturing back to the US. Anything to stop us from importing goods from China would be a gift!

RE: Spying on average Americans... why?
By Gondor on 10/8/2012 4:05:53 PM , Rating: 2
The manufacturers would simply move on to the next most cost-efficient country (Taiwan, Malaysia, Indonesia, etc.).

Heck, there's an entire continent full of yet-to-be-exploited people just waiting to be tapped (it just so happens that arms manufacturers are making a killing there at the time being so there's really no hurry to stop the weapon sales and usher those people into mass production age just yet).

By Ringold on 10/8/2012 10:15:03 PM , Rating: 3

That, and high labor costs just, if nothing else, mean mass lay-offs over the long run as factories cut costs by adopting automation, robotics.

Common misconception that US manufacturing has shrunk. It's almost as huge as it ever was, it just does vastly more with vastly fewer employees.

Warning: The above link will cause severe cognitive dissonance in a brainwashed liberal brain.

“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads

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