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Shadowy Chinese Telecoms Slammed by 60 Minutes, House Intelligence Committee

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Congressman: "I would find another vendor if you care about your intellectual property, if you care about your consumers' privacy and you care about the national security of the United States of America."

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MINYANVILLE ORIGINAL Last night, Steve Kroft of 60 Minutes explored the connections between the Chinese government, the Communist party, military, and Huawei Technology Co. (SHE:002502), a Chinese company that is now the largest manufacturer of telecom equipment in the world. (Minyanville did its own investigation last month; see Chinese Military Tied to Telecoms, Says Former Intelligence Agent.)

Huawei (in addition to ZTE Corp. (HKG:0763), also a major player in China's telecom industry) is "aggressively pursuing a foothold in the United States, hoping to build the next generation of digital networks here," explained Kroft, and it has "prompted an outcry in Washington, and a year-long investigation by the House Intelligence Committee that has raised concerns about national security, Chinese espionage, and Huawei's murky connections to the Chinese government."

Steve Kroft: Do we trust the Chinese?

Rep. Mike Rogers: If I were an American company today, and I'll tell you this as the chairman of the House Permanent Select Committee on Intelligence, and you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers' privacy, and you care about the national security of the United States of America.

And here's Jim Lewis, who followed Huawei as a State Department and Commerce Department employee on the lookout for "foreign technologies that might pose a threat to national security":

This is a strategic industry. And it's like aircraft or space launch, or computers, IT. It's a strategic industry in the sense that an opponent can gain serious advantage, can gain serious benefit from being able to exploit the telecommunications network.

Moments ago, at a press conference held by Rep. Rogers, Chairman of the House Intelligence Committee, and Rep. Dutch Ruppersberger, the Committee's Ranking Member, the "Investigative Report on the US National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE" was released [PDF]. It "warns of the heightened threat of cyber espionage and predatory disruption or destruction of US networks if telecommunications networks are built by companies with known ties to the Chinese state, a country known to aggressively steal valuable trade secrets and other sensitive data from American companies."

Chairman Rogers:

We have to be certain that Chinese telecommunication companies working in the United States can be trusted with access to our critical infrastructure. Any bug, beacon, or backdoor put into our critical systems could allow for a catastrophic and devastating domino effect of failures throughout our networks. As this report shows, we have serious concerns about Huawei and ZTE, and their connection to the Communist government of China. China is known to be the major perpetrator of cyber espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation. American businesses should use other vendors.

"In sum," the report contends, "the Committee finds that the companies failed to provide evidence that would satisfy any fair and full investigation. Although this alone does not prove wrongdoing, it factors into the Committee's conclusions below. Further, this report contains a classified annex, which also adds to the Committee's concerns about the risk to the United States. The investigation concludes that the risks associated with Huawei's and ZTE's provision of equipment to US critical infrastructure could undermine core US national-security interests."

In addition, the report says "the Committee received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating United States laws. These allegations describe a company that has not followed United States legal obligations or international standards of business behavior. The Committee will be referring these allegations to Executive Branch agencies for further review, including possible investigation."

Confirmation of What We Already Knew

We took a look at Huawei and ZTE after company executives testified on Capitol Hill before the House Intelligence Committee in what we described as "an attempt to assuage US lawmakers' concerns over the telecom companies' continued attempts to capture an increasing share of the US market."

Rep. Ruppersberger voiced his disappointment with "the lack of direct answers" and "vague responses" to the previous questioning of Huawei and ZTE.

"We are here today to give them another opportunity to thoroughly and accurately answer our questions," Ruppersberger said.

The men representing the two firms -- Huawei corporate senior vice president Charles Ding and ZTE senior vice president Zhu Jinyun -- spent several hours making the case for obtaining increased access to the US market.

"We have been hindered by unsubstantiated, non-specific concerns that Huawei poses a security threat," Ding testified.

"Huawei is an independent private employee-owned company. Neither the Chinese government nor the People's Liberation Army has an ownership interest in our company, or any influence on daily operations, investment decisions, profit distributions, or staffing," he told the Committee.

Not according to Michel Juneau-Katsuya, a former senior intelligence officer who served as Asia-Pacific Bureau Chief for the Canadian Security Intelligence Service, who told me last month that "it cannot exist any other way."

"The Chinese are masters at hiding their true intentions and they have been practicing it since Sun Tzu wrote The Art of War 2,000 years ago," Juneau-Katsuya, who is the founder and CEO of The Northgate Group, a security consulting concern in Ottawa, told me. "What we saw was a masquerade, a smokescreen to make us believe these companies are not linked to the Chinese government."

Indeed, the military may not get involved in Huawei's day-to-day business, though it appears that American officials have been well aware of numerous ties for years.

From an October 2009 report by the US-China Economic and Security Review Commission, a body created in 2000 with a legislative mandate to "monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China":
  • Huawei is a well-established supplier of specialized telecommunications equipment, training, and related technology to the PLA that has -- along with others such as Zhongxing, and Datang -- received direct funding for R&D on C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) systems capabilities. All of these firms originated as state research institutes and continue to receive preferential funding and support from the PLA.
  • ZTE Corp., another one of China's large telecommunications manufacturers, and Huawei, also provide certification training and related engineering training to PLA personnel assigned to communications and IW related positions, according to provincial level Communist Party military newspapers.
Three years later, a March 2012 report shored up the commission's previous findings (emphasis theirs):

Huawei's involvement with PLA research and development either directly as a vendor or indirectly as a research collaborator with various PLA affiliated organizations or universities all weaken claims by Huawei's leadership that it maintains no ties with the Chinese government or the military. The combination of recent infusions of cash, regular appearances at PLA defense industry events, and working relationship with various government research institutes on projects with dual use applications suggests that an ongoing relationship between Huawei and the Chinese military and Chinese political leadership may exist.

This would appear to contradict Charles Ding's testimony that "Huawei does not engage in customized R&D or production for military purposes." Or maybe it's all a big misunderstanding, as Zhu Jinyun proffered, calling the fears of back doors in ZTE's telecom equipment "not fact-based," pointing out that American companies, including Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOG), operate in much the same fashion.

"What they have been calling back doors are actually software bugs and those are the types of bugs you find in all high tech companies," Zhu said. "I want to emphasize that a bug is not a back door."

It Is Not Like Any State We Have an Understanding of in the Western World

Michel Juneau-Katsuya maintains that the structure of modern Chinese society makes state control -- or at the least, involvement -- a near certainty.

"China is not like any state we have an understanding of in the Western world," Juneau-Katsuya told me. "In China, you will not be put in charge of a company as important as Huawei without having been a loyal servant of the state and having demonstrated that on a constant basis for years and years and years."

He described the corporate class as those who "were either people in power in the government, are the children of people who are or were in power, or are those with close relationships to people in power. These are the people with power now in the private sector."

These people, as Cisco (NASDAQ:CSCO) CEO John Chambers said in April, don't always "play by the rules." And Juneau-Katsuya says the strategic access companies like Huawei and ZTE can provide is far too important to leave to a run-of-the-mill executive.

"Do you think the Chinese government would let that slip away, a company that is embedded in peoples' communications all around the world?" he asked. "You're going to keep your distance from that? I don't think so."

Philosophically, Juneau-Katsuya says, the Chinese cannot "simply abandon the ideological conflict" that has been entrenched since the Communists took power in 1949.

"It has translated into a business culture that keeps the ideology very much alive, and institutions must remain loyal to the government or they will lose control." Juneau-Katsuya told me. "You have generation after generation after generation of people indoctrinated into thinking a certain way. Not to fall into the overly simplistic position I hear coming from far-right Republicans, but we need to recognize that society will mold the way people think. And here's the thing: The first guy who warned us about this was called Marx."

On 60 Minutes last night, Chris Johnson, the CIA's former top analyst on China, confirmed much of what Juneau-Katsuya said -- and more.

Chris Johnson: You know, at the end of the day, the Communist Party controls the entire economy. They ultimately decide who the winners and losers are. The ultimate leverage that they have over these type of companies is that they can, you know, launch a corruption investigation against the chairman, for example.

Steve Kroft: If the Chinese government told Huawei that they wanted them to spy on the US telecommunication system, and extract information, could Huawei say no?

Chris Johnson: It'd be very difficult for them, given the nature of their system.

In fact, Johnson said that "the only entity privy to the inner-workings of Huawei is a Communist Party Committee, which has offices inside the company's headquarters."

Yes, the National Security Agency has set up surveillance rooms inside AT&T (NYSE:T) data centers. That said, would China ever allow AT&T to build its next-generation national communications network?

Obfuscation? Evasion? Or Just a Simple Series of Misunderstandings?

During his testimony on Capitol Hill, ZTE's Zhu Jinyun was asked the following question:

Given all that ZTE is doing to promote cyber security, the Committee's inquiry whether ZTE may pose a threat to critical US telecom infrastructure is very disturbing for us, as you must expect. The Committee's central question has been: Would ZTE grant China's government access to ZTE telecom infrastructure equipment for a cyber attack?

The answer:

"Mr. Chairman, let me answer emphatically: No! China's government has never made such a request. We expect the Chinese government never to make such a request of ZTE. If such a request were made, ZTE would be bound by US law."

How this would apply in practice is debatable. However, when the House Intelligence Committee requested various documents related to the current investigation, ZTE "flatly refused," claiming that supplying that information would violate China's state-secrets laws.

"It is very strange the internal corporate documents of purportedly private sector firms are considered classified secrets in China," retorted Rep. Rogers. "This alone gives us a reason to question their independence."

All of these doubts and fears have real-world implications for Chinese telecoms. In March, the Australian government blocked Huawei from bidding on a $38 billion broadband infrastructure initiative, citing security concerns. And in July, the FBI began an investigation into illegal exports of banned technology -- a surveillance system capable of monitoring the citizenry's communications -- to Iran, by ZTE.

Of course, the connection between Chinese telecoms like Huawei and ZTE and the central government could also all be one gigantic misunderstanding.

In Huawei's case, Huawei's American government-relations representative, Bill Plummer, told Fortune magazine last year that the mix-up goes back to 2001, when an article in the Wall Street Journal referenced "another Chinese company with a similar name which was in fact headed by a PLA officer and may have sold optical communications gear to Iraq under Saddam Hussein."

"There was some confusion there," Plummer said. "Huawei has never delivered any military technologies at any time."

Last night, Plummer complained to Steve Kroft that he and Huawei needed to "clean up 10 years of misinformation and innuendo." He described Huawei as "a company that has experienced a history of not fully balanced treatment by the media." This, he says, has "created a sense of wariness."

After today's report, it is now our turn to be wary.

Follow Justin Rohrlich on Twitter: @chickenalaking
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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