Print 22 comment(s) - last by Mark Goode.. on Oct 11 at 2:36 PM

ZTE claims transparency, yet an FBI investigation revealed it was funneling U.S. parts to iran

In a tersely worded response, ZTE Corp. (SHE:000063) lashed out at a U.S. House of Representatives' Intelligence Committee draft report [PDF] which called for a ban on the Chinese electronics firm's telecommunications equipment and smartphones.

I. ZTE Asks Congress to Target Apple, et al. Too

David Dai Shu, ZTE’s director of global public affairs, comments, "It is noteworthy that, after a year-long investigation, the Committee rests its conclusions on a finding that ZTE may not be ‘free of state influence.’ This finding would apply to any company operating in China. The Committee has not challenged ZTE’s fitness to serve the US market based on any pattern of unethical or illegal behavior."

ZTE describes itself as "China’s most transparent, independent, globally focused, publicly traded telecom company", arguing it "set an unprecedented standard for cooperation by any Chinese company with a US congressional inquiry."

Mr. Dai Shu adds, "ZTE recognizes and fully respects the Committee’s obligation to protect US national security.  ZTE believes the Committee focused its examination too narrowly on vendor locations not on equipment security. The Committee omitted the Western vendors and their Chinese manufacturing partners, which provide most of the US equipment now in use. The Committee also overlooked the opportunity to advance universal application of the Trusted Delivery Model which protects critical telecom networks on a vendor-neutral basis."

ZTE points out that the iPhone and other "U.S." devices are also made in China, and, in theory, equally at risk.  It says if its products should be banned, so should Apple, et al.'s.

He argues, "Particularly given the severity of the Committee’s recommendations, ZTE recommends that the Committee’s investigation be extended to include every company making equipment in China, including the Western vendors. That is the only way to truly protect US equipment and US national security. National security experts agree that a Trusted Delivery Model will strengthen national security. In fact, major US carriers are increasingly requiring Trusted Delivery Model in their contracts."

Indeed, it does seem a bit odd in the grand scheme of things that ZTE and Huawei Technologies Comp. (SHE:002502) were scrutinized so closely and are facing sales bans, while other companies like Apple, Inc. (AAPL) -- who contract their device manufacturing to Chinese electronics manufacturers -- received no scrutiny.

ZTE does make a compelling argument.  If the panel is arguing that large Chinese manufacturers can be coerced by the Chinese government to including hidden spying features in their products, why couldn't Foxconn -- Hon Hai Precision Industry Co Ltd.'s (TPE:2317) massive Chinese manufacturing subsidiary -- put the same kind of spying features inside iPhones or other U.S.-designed smartphones.

II. ZTE's Iran Secrets

However, ZTE may not be quite as transparent as it says.  The company is in a difficult spot as it insists on doing business both with the U.S. and Iran.  But U.S. trade laws tightly regulate what U.S. made products can be sent to nations viewed as hostile -- and that includes Iran.

The U.S. Federal Bureau of Investigations is currently conducting a criminal probe into whether ZTE sold U.S.-made Cisco Systems, Inc. (CSCO) telecommunications equipment to Iran.  Reuters reports that a July 2011 ZTE parts list clearly lists several Cisco switches as being transferred to Telecommunication Co of Iran (TCI) -- a criminal violation of U.S. trade laws.

The probe is still shaking down, and it may lead to charges for some of ZTE's U.S. employees.  In the wake of the Iran incident, Cisco cut ties with ZTE.

ZTE is accused of funneling electronics to Iran. [Image Source: Reuters]

The Iran controversy adds a tricky wrinkle to the ZTE debate.  ZTE certainly does seem to have behaved less-than-honestly, according to reports, trying to obfuscate the fact that it was funneling (intentionally or unintentionally) small quantities of U.S. telecommunications components to Iran.  

On the one hand, the Iran controversy and the question of Chinese spying are two separate issues.  On the other hand, the Iran controversy could be indicative of general opportunism and dishonesty at ZTE, which could lead to the kind of spying Congress is concerned about.  As former U.S. President George W. Bush says, "There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again."

Sources: ZTE on BusinessWire, Reuters

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By Florinator on 10/9/2012 2:36:35 PM , Rating: 2
As if this were a surprise to anyone, intellectual property theft is rampant in China.

I have a friend who works for 3M and he said they are very reluctant to hand over any blueprints to their Chinese manufacturers, because standard modus operandi is for them to take those plans to deal with the competition.

I happen to believe the problem is actually much worse than it is outlined in the official report. There are manufacturing capabilities for certain components and products that are only available in China (LCD screens, solar panels, etc). We couldn't build an LCD TV in the USA today even if we wanted to (forget the cost).

I wonder what's going to happen when China stops needing the West to buy its products anymore...

RE: Crybaby
By NellyFromMA on 10/9/2012 2:50:51 PM , Rating: 1
It's more likely America will no longer need China to manufacture before China doesn't need America to purchase it.

It's not like China is known for its quality manufacturing, just that its cheap.

And it's cheap because its artifically kept that way, and when prices rise so to will the value prospect hence negating the one thing that keeps us hooked on Chinese imports to begin with.

Just my two cents on that one.

RE: Crybaby
By Florinator on 10/9/2012 3:07:41 PM , Rating: 3
The problem is not that we're building up our manufacturing capabilities while using the Chinese to supply the "cheap stuff"... quite the contrary, we're getting rid of any manufacturing capabilities, so by the time they don't need us to buy the crap from them, we won't have anything left to pick up the slack.

It takes years if not decades to build up a manufacturing base!

RE: Crybaby
By FITCamaro on 10/9/2012 4:48:30 PM , Rating: 1
Why build anything here when you're taxed out the butt for doing so. Not to mention all the environmental regulations.

RE: Crybaby
By Ringold on 10/9/2012 9:22:28 PM , Rating: 2
On the one hand:

On the other, do we make all the cheaper components and refined materials that go in to our higher value-added manufacturing? No.

Then again, from a free market perspective there's no reason why we should, but there's also the geopolitical logic of why we'd give hostile states the keys to the shop, so to speak.

So I think I agree with you generally.. Freer trade, but intelligently so. We should also worry about sourcing military hardware from Europe; one wrong move the pacifists don't agree with, and we could find parts of our supply chain disappear.

RE: Crybaby
By NellyFromMA on 10/10/2012 8:42:40 AM , Rating: 2
I'm not really saying the problem is that we are both building up domestic manufacturering while using the chinese.

In fact, if ever we are to transition away from Chinese manufacturering dominance for American imports, one would thing we'd have to do that.

however, the reality of the situation is people aren't going to like paying magnitudes higher prices for good they hadn't had to before.

They want it all and so bringing all manufacturing back to the states simply isn't realistic because it defeats the point in many respects.

"Google fired a shot heard 'round the world, and now a second American company has answered the call to defend the rights of the Chinese people." -- Rep. Christopher H. Smith (R-N.J.)

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