How Chinese Telcos Can Allay Spying FearsTuesday, 9 Oct 2012
By: Dhara Ranasinghe
Senior Writer, CNBC Asia-Pacific
The U.S. expansion plans of Chinese telecom equipment makers Huawei and ZTE received a major setback after U.S. lawmakers urged Americans to stop doing business with them. But experts told CNBC the two telcos can limit the damage from the congressional report by becoming more transparent about their operations.
The firms, according to the report, pose a security threat as they could be influenced by Beijing to use their equipment to spy on certain vital communications.
What they need to do is allay those fears, said China watchers.
“A lack of transparency is the concern. Rightly or wrongly, Huawei and ZTE [0763.HK 11.86 -0.74 (-5.87%) ] have given the impression that they have something to hide,” said Patrick Chovanec, associate professor at Tsinghua University.
“They are not getting the results they hoped for in the U.S. and what they need to show now is whether they are capable of showing transparency to get the conversation (with the U.S.) going again,” he added.
Both Huawei, the world’s second-largest network equipment supplier, and Hong-Kong listed ZTE, have been keen to grow their presence in the U.S.
The U.S. is not the only country that the Shenzhen-based Huawei has had problems with. In March Australia excluded the firm from the bidding process to develop the country’s national broadband network on security concerns, local media reported.
Clearly, the Chinese telecommunications firms need to do more to fix the image they have overseas, analysts said.
“They need to convince people that their business activities are purely commercial in nature and that is a challenge not only for them but also for other Chinese firms looking to move up the value chain,” said Steve Brice, chief investment strategist at Standard Chartered Bank in Singapore.
What might help Huawei’s image is listing its shares publically, because by doing so Huawei would have to divulge information about its ownership structure and this may help allay fears that it is controlled by Beijing, said some experts.
“Maybe we might get some more disclosure on an IPO (initial public offering) and if it (Huawei) lists, we may get more clarity about who owns it,” Chovanec said.
A report in the Wall Street Journal last week said that employee-owned Huawei was mulling a U.S. IPO to improve its transparency and strengthen its position overseas. Huawei, however, has denied these reports, Caixin, a Chinese business news website, reported on Monday.
“Anything that gives people more comfort that Huawei’s activities are purely commercial would be positive, so if that means launching an IPO, that would be a step in the right direction,” said Standard Chartered’s Brice.
Small but Important
While making up a small share of global business, the U.S. market is by no means insignificant to Huawei and ZTE. Huawei’s U.S. sales totaled $1.3 billion last year, a small slice of its global sales of $32.4 billion. ZTE’s U.S. telecom infrastructure equipment sales last year were less than $30 million.
“The U.S. telecom equipment market is the last big opportunity in the telecom gear market. If they continue to be shut out of that market it will put a cap on their growth potential,” Cynthia Meng, managing director and head of technology at Jefferies told CNBC Asia’s “The Call.”
For Frederic Neumann, co-head of Asian economics research at HSBC, the broader issue is cyber security.
“Cyber security is a big issue and CEOs I talk to consistently argue that this has been a drain on their costs and that there is a war going on behind the scenes that is quite costly. And everybody’s at it, it’s not just this one country,” he told CNBC.
- By CNBC's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC
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