updated 02:39 pm EDT, Thu August 30, 2012
ZTE, Huawei links to Chinese government probed
China's ZTE has agreed to participate in US congressional inquiries into the companies alleged ties to the Chinese government and any potential espionage threats arising from those ties. ZTE, along with Huawei, is under investigation by the House of Representatives Permanent Select Committee on Intelligence over subsidies the company receives from the Chinese government, as well as any potential threats to the American telecommunications infrastructure arising from ZTE's relations with assorted Chinese governmental entities. Sources familiar with the congressional proceedings tell Reuters that the hearings could begin as early as the second week of September, though negotiations are still ongoing as to which ZTE executives will appear before the committee.
The House Committee has invited Hou Weigui, chairman of ZTE, and Ken Hu, deputy chairman of Huawei, to testify before the committee on their companies' relationships with Chinese authorities. The two chairmen are unlikely to make the trip to Washington, as is Cheng Lixin, chief executive of ZTE's US unit; the company is more likely to send an upper level executive in charge of overseas markets.
At issue is the closeness of ZTE to China's ruling Communist Party, its ministry of defense, and its ministry of state security. A state-owned enterprise, Zhongzingzin, holds about 30 percent of ZTE's shares, making the Chinese government the largest owner of the company.
Regulators both in the United States and the European Union believe ZTE and Huawei have received improper subsidies and favorable treatment from the Chinese government. Regulators contend that these subsidies, along with easy access to cheap real estate, allow the two Chinese companies to sell their products below cost on foreign markets. Congressional representatives believe these low-cost devices represent a potential national security threat, or at least a sizable opening for telecommunications espionage.
US officials skeptical of ZTE's motives found those fears supported in part when the company admitted earlier this year that its Score smartphone model -- and perhaps other models -- contained a hardwired backdoor exploit allowing anyone with knowledge of its hardwired password to take control of the handset. ZTE maintains that the feature was meant only to push software updates, though security experts contend there are much less suspicious ways to accomplish that.
ZTE claims that it is being as forthcoming and transparent with US government officials as possible and will cooperate with regulators. A statement from the company said that ZTE will look to demonstrate to the US Congress its "unique ability" to provide cyber security solutions both for congress and the executive branch.
Huawei has not released any statement on the hearings beyond affirming its commitment to responsible openness, transparency, and dialogue.
The hearings come at a particularly troublesome time for ZTE, as the company is attempting to improve its brand, with the eventual goal of smartphone sales on par with Apple and Samsung. ZTE is currently the fifth-largest smartphone maker in the world, and higher-powered units like its Flash handset are indicative of its efforts to raise its image. The company also faces probes from the US Department of Commerce and the FBI over alleged sales of embargoed technology to Iran.