There are rising concerns in the United States and India over perceived security risks associated with using telecommunications equipment made in China, potentially slowing global sales growth for Chinas major gear makers, according to china market research experts iSuppli Corp.
Citing concerns over espionage, a group of U.S. senators last week asked the Obama administration to review a bid from Chinas Huawei Technologies to supply telecommunications gear to Sprint Nextel. Meanwhile, Huawei and fellow Chinese equipment maker ZTE reported that the Indian government has started blocking purchase orders placed with them in mid-February.
According to iSupplis market intelligence; the stakes are enormous as the combined global market for wired and wireless infrastructure telecommunications gear expected to amount to exceed $65 billion in 2010, and rise to more than $83 billion in 2014.
Obstacles in India
Indias move to obstruct the orders from the Chinese telecommunications has kicked off a sequence of events that resulted in billions of dollars of lost revenue for global telecom market vendors and significant project delays for Indias telecom service providers, said Lee Ratliff, Senior Analyst (Broadband & Digital Home) at iSuppli. Indias concern stems from suspicions that foreign-made equipment particularly Chinese gear represents a significant security risk given the possibility that sensitive information could be transmitted to foreign governments through firmware back doors.
As pieced together from accounts given by numerous service providers and equipment vendors, India started requiring all equipment purchase orders to be reviewed by the government for approval before allowing authorization. While Western vendors experienced severe delays in the approval process, Chinese vendors purchase orders were rejected outright. However, India has never acknowledged that a ban existed, and says simply that orders were put on indefinite hold while being investigated.
Indias Economic Times said that, until June end, a total of 450 orders amounting to more than $2 billion had been put on hold due to the security clearance process. Of these, 27 had been approved all with Western vendors like Alcatel-Lucent, Ericsson and Nokia Siemens Networks.
In May, Indias state-run telephone company BSNL announced that Huawei and ZTE would be excluded from bidding on a $500 million GSM expansion project. This was mostly to avoid delays because of the security clearance process. The decision came despite the fact that BSNL had chosen Huawei as a GSM vendor for a project earlier in the year that had since then been cancelled, telecom market research from iSuppli indicated.
Road block in U.S.
Chinese telecommunications gear makers have been facing obstacles when doing business in the United States even before the recent concerns expressed by the senators.
Huawei and ZTE rank among the top telecom equipment vendors globally, but neither has been able to crack the U.S. market despite more than a decade of effort, Lee Ratliff said.
Lingering concerns over security have reportedly led the U.S. government to ban transmission of its sensitive data over networks using Chinese equipment. A 2008 Pentagon report to Congress highlighted Huaweis links to the Chinese government, furthering concerns. Huaweis efforts to buy its way into the U.S. market through acquisitions of 3COM, 2Wire, and Motorolas wireless unit have all been scuttled due to concerns of a U.S. government veto.
Fair or not, Huaweis opaque ownership and structure, as well as its CEOs well-known ties to the Peoples Liberation Army and the Communist party, are likely to handicap the company in India, the United States and other countries at least until Huawei becomes considerably more transparent and consciously distances itself from Beijing.
Growth Inhibitor
The key elements that have made Chinese vendors successful inexpensive labor, a home-field advantage in Chinas hot telecom market, and access to an almost unlimited line of credit though government banks are unlikely to disappear any time soon, Lee Ratliff said.
However, the vendors face serious opposition in several of the largest markets left to penetrate. Having already picked the low-hanging fruit, these companies may find it more difficult to grow in the future than they have in the past. And each pause on the way to growth for the Chinese companies is an opportunity instead for Western vendors to get back on their feet and adjust to the new competition.