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US report highlights unease about Chinese firms

By Joe Mcdonald

Associated Press

Published: Tuesday, Oct. 9 2012 6:10 a.m. MDT

In this Monday, Oct. 8, 2012 photo, a salesperson stands at counters selling mobile phones produced by ZTE Corp. at an appliance store in Wuhan, in central China's Hubei province. Eager to expand in the United States, China's biggest technology companies face American anxiety about security and rising Chinese competition. (AP Photo) CHINA OUT

The Associated Press

BEIJING — Eager to expand in the United States, China's biggest technology companies face an America anxious about threats to jobs and national security.

The latest blow: A U.S. report that says telecom equipment makers Huawei Technologies Inc. and ZTE Corp. are potential security threats that Americans should avoid doing business with.

The report, coming amid an American presidential race in which trade tensions with Beijing are a prominent issue, highlights conflicting U.S. sentiments toward China, an important trading partner but a potential strategic rival. U.S. companies see China as both a crucial growth market and a source of competition and industrial spying.

"A lot of people in America are worried about a diminishing role in the world and China being the prime beneficiary and potentially one day moving into that top slot," said Charles Maynard, senior managing director of Business Development Asia, which advises companies on acquisitions.

Legislators are "playing to a lot of voters at home who are very concerned about that issue," he said.

The report Monday by the House Intelligence Committee said U.S. companies should avoid doing business with Huawei and ZTE and recommended regulators block them from buying U.S. companies. It said government computer systems should not include components from them because they might pose an espionage risk.

The report has no official force but could discourage American telephone carriers from dealing with Huawei and ZTE, especially when it comes to the big-ticket network technology the Chinese companies are eager to sell.

Huawei and ZTE, both based in Shenzhen in southern China, near Hong Kong, rejected the accusation and complained the committee failed to provide evidence to back it up.

The report "employs many rumors and speculations to prove non-existent accusations," said a Huawei spokesman, Scott Sykes, in an e-mail.

"We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the US market," Sykes said.

ZTE said the investigation should be extended to Western suppliers because their equipment is manufactured in or uses components from China.

The United States and other governments welcome the small but growing flow of Chinese investment. Most deals abroad go through with little trouble. But companies from China's government-dominated economy carry unusual political baggage that has stymied transactions in sensitive areas such as energy and telecommunications.

Last year, Huawei was forced to rescind its purchase of a small California computer company, 3Leaf Systems, after a U.S. government security panel rejected the deal.

Huawei, founded in 1987 by a former Chinese military engineer, has grown into the world's biggest supplier of network gear, competing with Nokia Siemens Networks and Sweden's Ericsson AB.

"They are the first Chinese company to present a viable, sustainable competitive threat to what has long been perceived as America's core competitive advantage, which is innovation and high technology," said David Wolf, a technology marketing consultant in Beijing. "No matter what firm stepped into that, it would be caught in the barbed wire."

Huawei, with 140,000 employees, says it made two-thirds of its 204 billion yuan ($32 billion) in sales last year outside China. The smaller state-owned ZTE says it made just over half its revenues abroad. Huawei says it is employee-owned and has denied suggestions it is controlled by the ruling Communist Party or is a front for the military.

Both companies are well-established suppliers to other developing countries and want to expand in lucrative U.S. and European markets. Huawei sells smartphones in the United States under its own brand.

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