NEW YORK ( TheStreet) -- The damning House Intelligence Committee's report on Chinese network-gear companies Huawei and ZTE may spell good news for rivals Cisco (CSCO - Get Report) and Juniper (JNPR - Get Report), say analysts. But Washington's stance could pose challenges for U.S. firms targeting the lucrative Chinese market.
The 52-page report advocated blocking acquisitions, takeovers or mergers involving Huawei and ZTE, citing the "threat to U.S. national security interests." The committee also said U.S. government systems and contractors should exclude Huawei and ZTE equipment.
"China has the means, opportunity, and motive to use telecommunications companies for malicious purposes," it added.
A Cisco spokesman declined to comment on the report when contacted by TheStreet, although he confirmed that the tech bellwether no longer has an equipment-sales relationship with ZTE. The two companies had a longstanding partnership, although this was reportedly ended by Cisco after allegations that ZTE violated U.S. sanctions by selling its network gear to Iran.Analysts say the report bodes well for Cisco and Juniper, at least on this side of the Pacific. "The report is certainly damaging to Huawei and ZTE's aspirations in the U.S.," noted Scott Dennehy, senior analyst at Technology Business Research, in an email. "Cisco and Juniper will benefit -- in addition to making it that much more challenging for Huawei to land U.S. telecom-provider customers, this will extend to the enterprise market as well." Dennehy added that Huawei has been "very aggressive" in targeting the U.S. enterprise market, focusing on channel partners as its main entry point. "The report will make U.S.-based channel partners much more hesitant to resell Huawei equipment," he wrote. Perceived as a cheaper alternative to the likes of Cisco, the Chinese equipment makers have been pushing into the U.S. Huawei, for example, opened a 200,000-square-foot R&D facility in Silicon Valley last year. Paul Mansky, managing director of equity research at Cantor Fitzgerald, says Huawei is still relatively "under-represented" in the U.S. market. "Structurally, we don't see this as necessarily changing that pre-existing condition ... rather reinforcing it," he wrote. "However, it does clearly remove the risk (for the foreseeable future) of share gain via consolidation (acquisition) and quite possibly reduces the negative pricing pressure Huawei has exerted on domestic markets, as customers play them off their incumbent suppliers." Clearly, the Chinese firms' stateside plans received a massive setback this week. "Anything that keeps competitors out of the U.S. market is positive for the incumbents," noted Brian White, an analyst at Topeka Capital Markets, in an email. "So far as the Congressional report goes, it certainly could provide benefits to U.S.-based competitors unless ZTE and Huawei are able to forcefully answer and contradict the findings," added Charles King, principal analyst at technology-research firm Pund-IT. King also raised the possibility of other countries and jurisdictions following the U.S. example. "If so, and those findings support the claims of the House Intelligence Committee, the results could be disastrous for ZTE and Huawei, and perhaps other China-based IT firms," he wrote. "Whatever those companies lose, reliable players like Cisco and Juniper will be standing by to pick up." Reuters reported on Wednesday that the European Commission has put a trade case against Huawei and ZTE on hold, noting that the firms' pricing is a more controversial topic in Europe. Huawei and ZTE, for their part, have slammed the House Intelligence Committee's findings. In a statement, Huawei complained that the report "failed to provide clear information or evidence to substantiate the legitimacy of the Committee's concerns." ZTE protested that its equipment is safe and "poses no threat to U.S. telecommunications infrastructure." While the report is widely acknowledged as a win for American networkers, there are concerns about the potential impact on U.S. companies selling their wares in the booming Chinese market. "China could retaliate," noted one analyst, who asked not to be named. "I am worried about the collateral damage -- this may do more harm than good." Chinese consumers have already proved adept at punishing foreign companies. The ongoing territorial dispute between Japan and China, for example, has severely hampered Japanese car manufacturers selling their cars in China. The ripple effect may extend beyond network gear. China overtook the U.S. to become the world's largest PC market in 2011 and is set to become the biggest smartphone market this year, according to tech-research firm IDC. Given that the world's most populous nation is also a major luxury market, a host of companies, from HP (HPQ - Get Report) and Apple (AAPL - Get Report) to Coach (COH - Get Report), could suffer if China opts to play hardball with imported American goods. Cisco shares slipped 2.2% to $18.40 on Wednesday, while Juniper was off 1.1% at $16.40. --Written by James Rogers in New York. Follow @jamesjrogers >To submit a news tip, send an email to: firstname.lastname@example.org.
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