Business Watch: US spying claims have far-reaching implications

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Dominic White says the stories around fears involving spying and intrigue will have a major impact on how the handset sector plays out over the next 10 years

In case you were in any doubt that telecoms is a politically sensitive industry, just look at the trouble being caused by the rise of Chinese handset and equipment maker Huawei.

It’s a story worth following, not just because it involves fears about spying and intrigue, but because it will have a major impact on how the telco kit and possibly the handset markets play out over the next decade.

Founded two decades ago with just $4,000 of seed capital by former People’s Liberation Army soldier Ren Zhengfei, the company’s success to date has been stunning.

It now turns over more than $28 billion a year, supplies kit to 45 of the world’s 50 biggest telcos, including Vodafone and BT Group, and is vying with Ericsson to claim the top spot in telecoms equipment globally.

In handsets its ambitions are suddenly huge, and they are worrying to the likes of Apple and Samsung.

For many years Huawei was only a white-label supplier but now it’s taking the brand global.

It made its biggest ever noise at this year’s Mobile World Congress in Barcelona. Having launched the world’s thinnest smartphone a month earlier in Vegas at CES, it launched the world’s fastest smartphone – both were under the Huawei moniker.

The gadgets got rave reviews and analysts at CCS Insight said they showed the business throwing off its cheap and cheerful image and becoming a serious contender in smartphones.

Even more concerning for its rivals, a Huawei executive revealed that it aimed to ship 60 million smartphones globally this year, up from 20 million last year and just three million a year earlier.

It’s the kind of growth most companies dream of and, remarkably, if it hits that target it would put the Chinese company close to market leader Apple.

It is all part of Ren’s plot to transform Huawei into a global household name.

But those ambitions could now be frustrated if the powers-that-be in some Western economies have their way.

This month a US congressional intelligence committee report concluded that Huawei and smaller Chinese rival ZTE pose a threat to US national security and should be restricted from doing business there.

The House of Representatives Intelligence Committee earlier this month accused both companies of leaving the US open to espionage and cyber attack.

Xenophobia?
It’s the latest twist since the US began blocking the firm from acquiring assets there in 2008.

Huawei has launched several PR counterattacks, and said US concerns were “unsubstantiated” after a decision to stop it from building a national emergency communications network.

Supporters of the firm say the spying fears over its equipment arm amount to xenophobia. Ren left the army in 1982 and his links are distant, they add.

And whereas most big companies in China are state-controlled, Huawei is private and refers to itself as a collective. Ren holds only one per cent of the equity, with the remainder shared among its staff.

But that hasn’t stopped Australia’s government blacklisting the company from taking part in its multibillion-dollar high-speed broadband project.

And now it has emerged that the company is being investigated by British MPs over a controversial £2.5 billion deal with BT Group to roll out super-fast broadband to two-thirds of UK homes and offices by 2015.

It has been reported that the inquiry was sparked by concerns raised by spymasters over the growth in cyber attacks emanating from China.

BT has been doing business with Huawei for seven years and Prime Minister David Cameron personally endorsed Huawei’s business in the UK last month when he met Ren.

It’s hard to say how seriously such claims about espionage should be taken because by their very nature, any fears spymasters have are kept secret.

What is clear is that Huawei has done its upmost to assuage any such fears in its project with BT, and that it is a trusted and valued supplier to the biggest names in the industry.

It also does a very good price by all accounts thanks to its relatively low overheads in China.

But its corporate structure remains relatively opaque and it needs to catch up with Western corporate governance quickly if it is to win over its doubters on government circles.

If some full-blown protectionist trade rows were to break out, the firm’s ambitions could be dented – in blunt or subtle ways.

Of course, the handset business is less likely to be affected because its sales are mainly to consumers but it’s impossible to say what any impact would be.

By the same token Western businesses could see their own plans frustrated in China.

It’s a fascinating test of the globalised economy’s ability to cope with deep-rooted cultural and political suspicions. And telco bosses are gripped by it.

Huawei has no listed share price so the impact of the US congressional report was not immediately tangible.

ZTE troubles
The same was not true of ZTE Corp, which is also being probed over the sale of certain US computer equipment to Iran.

Shares in ZTE, which has said it is cooperating with US authorities, fell by 15.8 per cent on Monday after the company said it expected to plunge into the red to the tune of $303 million-$319 million for the third quarter.

Unlike Huawei, ZTE is not in the top league in equipment, which means it has been hit hard by the tougher market.

So it has decided to spend more resources to its handsets and tablets business in North America and Europe.

The terminals division is less exposed to security concerns. But ZTE’s handsets tend to be low margin phones, which has not helped its cause either.

The company’s rapid rise is currently being mirrored by an alarming decline in fortunes.

The same is true of Taiwanese handset maker HTC whose third-quarter revenues were barely half of what they were in the same period in 2011.

It’s another of the companies that risks being squeezed out as Apple and Samsung (and possibly Huawei) continue their smartphone domination.

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