Friday, October 12th, 2012 - Ovum
It’s election season again in the US. Unemployment is high, the trade deficit with China is still huge, China appears to grow more powerful daily, and some Chinese companies ignore the rules. Whether Huawei and ZTE have anything to hide or not, they had a tough audience from day 1 with this Committee. We suggested as much in our June 2012 report, “Huawei Sets Its Sights on the Device and Enterprise Markets.” In this report, we laid out how Huawei could achieve its goal of becoming a US$100bn company by 2020. We also raised politics as a major obstacle:

“The merits of all the various suspicions about Huawei are no longer so important. They exist. They will probably get stronger as China develops and comes into conflict more directly, economically and otherwise, with western countries… As long as uncertainty persists and Huawei's competitors have incentive to stir up more of it, Huawei's global expansion will be impacted by politics. Even as it globalizes, it remains a Chinese company, and that carries with it both benefits and some baggage.”

The Intelligence Committee’s report raises a number of security issues – some new, some old. Whether protectionism motivated the report or not is irrelevant at this point. Many people are legitimately concerned about certain Chinese business practices and relationships. Most governments support private firms to some degree, but the degree of support in China has been of a different nature. It’s hard to argue that Huawei and ZTE have not benefited from vendor financing, subsidies and tax breaks – just as manufacturers from Korea and Japan have in recent decades. The US-Japan trade wars of the 1980s were anything but friendly, and those disputes involved stated allies.

With geopolitics as it is, Chinese vendors should not be surprised at opposition. To achieve broader acceptance in the US, ultimately Huawei and ZTE will have to do more to address the issues of corporate governance, national security, and state relationships. PR and marketing alone will be insufficient – real change and transparency will have to emerge. On US market entry, for now, Huawei and ZTE will have to hope the security issue fades away significantly in a few months. If it doesn’t, at some point Huawei and/or ZTE might be smart to consider whether the US market is worth the effort.

---ENDS---

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Huawei, ZTE, Matt Walker

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