Chinese telephone-equipment makers Huawei Technologies Co. and ZTE Corp. (000063) aren't fully cooperating with a congressional probe into whether their U.S. expansions would increase the risk of cyber-attacks and spying through networks, lawmakers said.
"The companies refused to provide full and transparent answers to our questions, apparently because to turn over internal corporate documents would potentially violate China's state-secret laws," Representative Mike Rogers, chairman of the House Intelligence Committee, said at a hearing today where the companies stated their case for wider entry into the U.S. market.
"This alone gives us a reason to question their independence," he said.
Former U.S. national intelligence director Mike McConnell has called China "the most prolific" nation trying to steal U.S. intellectual property.
"Huawei and ZTE (763) provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components," Rogers said. The companies' equipment includes vulnerabilities that "appear to be there by design," he said.
The companies, which each sent an executive to testify, insisted they aren't under government control.
It would be "immensely foolish" for Huawei to risk involvement in espionage, Charles Ding, corporate senior vice president for Huawei, said in testimony. Ding said today was the first time a major Chinese corporation had testified before Congress.
Emphatic 'No'
It was "literally impossible" for Huawei to fully respond within a three-week deadline to a June 12 committee request for documents, and some requests were for sensitive information no company would voluntarily produce, Ding said.
"Would ZTE grant China's government access to ZTE telecom infrastructure equipment for a cyber attack?" Zhu Jinyun, the company's senior vice president for North America and Europe, said in testimony. "Let me answer emphatically: No!"
Hacking and illicit programming in China and Russia are jeopardizing an estimated $398 billion in U.S. research spending, according to a November report by the National Counterintelligence Executive, which is responsible for countering foreign spying on the U.S. government.
'Crucial Hearing'
"This is a crucial hearing for both companies," Stewart Baker, a partner at Steptoe & Johnson LLP and former official in the U.S. Homeland Security Department, said in an e-mail. "This is their chance to make their case. If they blow it, they won't get another chance for five years."
Closely held Huawei and ZTE, traded in Hong Kong, faced questions from the committee about whether they get funding from the Chinese government or have connections with Chinese government officials.
"If it seems you are carrying a heavy burden here today, you are, though it may be a bigger burden than you know," said Representative Adam Schiff, a California Democrat. "The bigger burden being, to show that you have independence from the Chinese government."
No Chinese company has been able to demonstrate that, Schiff said.
"We have been hindered by unsubstantiated, non-specific concerns that Huawei poses a security threat," Ding said in his testimony. Huawei is owned by its employees and the Chinese government "has no influence over Huawei's daily operations, investment decisions, profit distributions, or staffing," he said.
'No Backdoors'
"There are no backdoors in any of Huawei's equipment," Ding said in reply to a question from Rogers, who asked about reports of gear that tracks traffic and sends data to China. "Huawei would never do that," Ding said.
ZTE isn't state-owned or government-controlled, Zhu said in testimony today. According to the U.S.-China Economic and Security Review Commission, an independent body that advises Congress, government-affiliated entities appear to retain a majority share of ZTE's stock.
"We are concerned about the allegations that products from Huawei and ZTE are being subsidized by the Chinese government so these companies can offer bargain basement prices to unsuspecting consumers," said Representative C.A. "Dutch" Ruppersberger, of Maryland, the top Democrat on the panel.
"You have to tell your Chinese government to stop cyber- attacking our businesses," Ruppersberger said.
The committee has posed questions and hasn't received detailed answers from both companies, Ruppersberger said. The panel will issue a report within two to three weeks, he said.
Huawei Founder
Ren Zhengfei founded Huawei in 1987 after leaving the Chinese military, and built it into the world's largest maker of equipment for phone networks after Sweden's Ericsson AB.
Ren's military record and his selection to the 12th National Congress of the Communist Party of China in 1982 have been cited by U.S. lawmakers as reasons Huawei may pose a security threat. Ren hasn't maintained any ties with the military since his retirement and the government and military hold no stake in Huawei, according to the company.
Huawei had about $1.3 billion in U.S. revenue last year, up from $760 million in 2010, William Plummer, a U.S.-based spokesman for Huawei, said in an interview. About $1.2 billion of U.S. revenue came in sales of gear such as smartphones and tablets, Plummer said.
ZTE doesn't break out U.S. sales.
About 70 percent of Huawei's $32 billion in revenue comes from outside China, Ding said in his testimony.
Overseas Investment
On Sept. 11, Huawei said it plans to invest $2 billion in the U.K. as it almost doubles its workforce in the country. Huawei, which provides cloud- and business-computing services in addition to selling smartphones and tablets, last year won its first major wireless network order in the U.K.
"The U.K. is an open market, which welcomes overseas investment," Ren, the Huawei chief, said in the Sept. 11 statement. British Prime Minister David Cameron said the investment by Huawei shows "the U.K. is open for business," according to the statement.
In the U.S., Huawei has faced skepticism. In 2010, then- Commerce Secretary Gary Locke, now U.S. ambassador to China, said he called Sprint Nextel Corp. Chief Executive Officer Dan Hesse to express "deep concern" about Huawei's participation in bids for a network upgrade. Sprint awarded the contract worth as much as $5 billion to companies from France, Sweden and South Korea.
Huawei and Bain Capital Partners LLC dropped a bid to buy computer-equipment maker 3Com Corp. in 2008 after U.S. officials opposed the transaction. Last year, Huawei unwound the purchase of patents from a computer-services company, 3Leaf Systems Inc., after U.S. objections.
'National Interests'
Huawei has hired six lobbying firms in Washington and quadrupled lobbying spending, to $820,000 in the first six months of this year, according to U.S. Senate records.
In March, the Australian government announced Huawei was banned from bidding on a national broadband network, because of "national interests."
Huawei has struck agreements with U.S. companies including mobile providers Clearwire Corp. and Leap Wireless International Inc. and software-security company Symantec Corp., the security review commission said in a report last year. Huawei in November bought Symantec's share of the joint venture.
Huawei and ZTE in testimony said they favor independent audits of technology vendors' hardware and software as a way to ensure that devices and networks are secure.
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