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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Interesting point, but
By Mint on 10/9/2012 12:29:42 PM , Rating: 2
it seems to me that it's pretty easy for Apple (or other phonemakers in the US market) to see if anyone installed a trojan with the bootloader using a thorough enough memory test. Maybe congress will demand that phones get tested/flashed on US soil before being shipped.

I wonder if it's possible to install imposter memory chips, for example, with hidden data?

RE: Interesting point, but
By lightfoot on 10/9/2012 1:27:40 PM , Rating: 2

They have already managed to get counterfeit parts into the Pentagon Supply chain, so doing it to an iPhone would be trivial.

RE: Interesting point, but
By Old_Fogie_Late_Bloomer on 10/9/2012 2:15:14 PM , Rating: 1
Hiding stuff in something you engineer is a lot easier than hiding stuff in something that someone else engineered. Even if they somehow snuck something into, say, the iPhone 5, the minute iFixit ripped one apart it would almost certainly be game over...

RE: Interesting point, but
By Motoman on 10/9/2012 3:47:53 PM , Rating: 2
No...iFixit only disassembles the product into it's constituent components to figure out what it costs to make. They're not, say, testing the logic in each chip to see if it ever phones home inappropriately...

RE: Interesting point, but
By NellyFromMA on 10/9/2012 2:45:53 PM , Rating: 4
All I gather from the sum of this article is "relying on foreign countries (particularly antagonistic ones such as China) to manufacture things of great importance to our country's entire infrastructure PROBABLY should be manufactured domestically or with trusted nations where lucrative."

In other words, if you're worried about the Chinese or anyone else spying on your plethora of LANs, perhaps do not operate said LANs with equpiment manufacturerd by culprit parties.

Or, simply 'duh'.

RE: Interesting point, but
By inperfectdarkness on 10/10/2012 3:04:17 AM , Rating: 2
Agreed. In fact, I'd have zero heartburn with banning all chinese-manufactured electronics being sold in the USA--so I'm kinda with ZTE on this.

The USA dominated WWII because of our domestic production capabilities. We've squandered all of that away. The future doesn't bode well.

RE: Interesting point, but
By Trisped on 10/10/2012 2:42:04 AM , Rating: 2
The devices are designed in house, then given to what ever company to manufacture. I work for a company where they had the Chines design and manufacture the product and the thing still doesn't work correctly after 2 years.

The fact is that hardware design is so difficult, that they have very few designers with the experience required to produce American grade components, that they do not have access to the OS code (to incorporate trojens), and do not have specific knowledge about the design aspects of the hardware (outside of what components go where), I doubt that anything could be done to an Apple product without there being noticeable signs. Things like the weight would be off, their would be OS bugs, phantom energy drains. As much as it is true that Apple does not do a great job of testing their software for bugs (like the cellular over WiFi data usage issue) they are quick to dig into and start diagnosing issues reported by their zealous fans.

Android devices might be more susceptible, but the hardware is still built in house. The Chinese manufactures are merely coping the working product.

It is much easier to add spy devices and code while you are building the product then to take a finished product and attempt to inject espionage components.

Of course with Android there is a large vulnerability if the company which did the design is not spot checking the devices to verify that they have the exact OS and software package specified (and the Chinese do not know which ones will be tested so they can send unmodified versions).

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.

Apple References
By ltcommanderdata on 10/9/2012 12:51:56 PM , Rating: 5
I didn't see ZTE actually mentioning Apple in either of the article source links, but I guess name dropping Apple and using a big iPhone picture makes the article more salient.

In any case from a practicality perspective, if the US were to start banning all electronics that contains any components made in China from use in secure applications would there be many/any products left to choose from? I believe the concern is more about the ownership of the parent company (where there may be a question of intent) and where major design occurs (where there is a large opportunity to build in backdoors) rather than just where manufacturing occurs.

RE: Apple References
By NellyFromMA on 10/9/2012 2:48:43 PM , Rating: 2
I mean, I dont think anyone needs to be brought up-to-date with the fact that Apple is the largest American company having its ELECTRONICS goods manufactured and imported from China.

So, is it a rela stretch to think of Apple in this instance...? I mean, I bet the second biggest importer from goods manufactured in China is a distant second...

Should we not make a determination here? Seems straight forward...

No brainer
By augiem on 10/9/2012 1:45:39 PM , Rating: 2
This just shows how disconnected from reality law makers are. If they were worried about this, they should have done something about it 30 years ago! It's too late. EVERYTHING is made there. Every computer and every cell phone in every government office. Blocking a Chinese brand but letting everyone else make their stuff there and sell it here is a thinly veiled attempt at preventing foreign compeition here and nothing more. It's a lie.

This is just like Obama blocking a family-owned wind farm sale to a Chinese company because it's too close to a top secret base. Hmmm... Your base is some super top secret and critical to national security and yet you don't bother claiming enough land around it to make it secure from the outside? And who is to say that American family that owns the farm aren't terrorists spying on the base? It's no security at all if you're going to say we trust Americans simply because they're citizens. It's not about security. It never was. It's purely political and I'm sick of seeing these people get away with their lies.

RE: No brainer
By Ringold on 10/9/2012 9:38:58 PM , Rating: 2
Blocking that windfarm was pure, 100% election season politics. They weren't blocking it on the grounds of it interfering with radar or radio, say, but ownership. Easy enough to verify wind turbines are in fact turbines and not stuffed full of spy gear. The Chinese owner probably just wanted to cash in on some green-energy subsidies, same as anyone else.

But nope, we're a month from an election, and Obama needed a little plug in the weekly news cycle that sounded tough on China. There ya go. America loses a windfarm and sullies our international image to investors, Obama gets maybe 10 extra votes, max. Hooray, politics.

By tng on 10/9/2012 12:18:29 PM , Rating: 2
Easy to see that coming. Only time until this will expand to all of the Foxxcon plants making tons of stuff for the US and European markets.

It's not all China
By crazy1 on 10/10/2012 1:21:51 AM , Rating: 2
Look, China is not the manufacturer of everything. The whole south east pacific has a large electronics manufacturing base (Taiwan, South Korea, Japan, Thailand, Vietnam, etc...). Based on the news, China is our greatest cyber threat. That leaves us with several other options. Apple might have to pay $16 in labor per phone instead of $8 for the Taiwanese to build it. That is only an increase of 3-4% in parts & labor. Apple won't miss that money, especially with $250 billion in liquid assets waiting to be put back into the economy.

I would enjoy a thorough look into the companies that ultimately produce our electronics. There are obvious ethical concerns, controversy over sending jobs overseas, reverse engineering and patent infringement, and now national security concerns.

This makes me wonder why some companies would even sell their products to China, let-alone hand over the plans to let China build it for them.

By fteoath64 on 10/10/2012 1:32:02 AM , Rating: 2
If ZTE and Huawei allowed 30-40% foreign ownership in their companies and a couple of foreign directors in the Board, then it would be easier for any foreign governments to determine proper integrity of the company concerned.
As such (current arrangement/management structure), these companies cannot really convince any foreign government of non-connection to their government (ie secrecy laws to be abided like national security etc). The history is mis-appropriate actions does not give much confidence.

ZTE is deviating from the issue which is not "made in china" issue but companies in china having close government ties without proper disclosure. So either such companies change their structure of operations/management or they will face ban due to security concerned of foreign governments. There is no way around this.

SO I do not understand why these companies wanted to "dance around" the issue rather than solve the issue completely. They can restructure their companies correctly and still do the undisclosed things they had kept secret, just like all US companies do.

By Mark Goode on 10/11/2012 2:36:31 PM , Rating: 2
Mr. Shu is correct when he states that no company operating in China is "free of state influence." But what is missing from the House Intelligence Committee's analysis of Huawei is that their pathway to success was paved by a 15 year partnership with IBM Global Services, a partnership that included management consulting, joint product development, manufacturing, and joint distribution. The AMERICAN supplier and partner of Huawei is IBM, the same firm that manufacturers trusted semiconductors for the intelligence community :-)

This is what I call the Huawei Paradox . . . and until it is solved, we'll be forever "shooting behind the duck." You can read more about the Huawei Paradox here:

Editor please
By futrtrubl on 10/9/12, Rating: -1
"There is a single light of science, and to brighten it anywhere is to brighten it everywhere." -- Isaac Asimov

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