Chinese Telecoms on West's Blacklist

TAIPEI (TheStreet) -- How 1950s is this?

The United States says China's two top telecom firms pose a security risk to America. Members of Congress fear the huge companies might spy for the Chinese government if allowed to do work on U.S. soil.

Last week the U.S. House Intelligence Committee recommended barring China's Huawei Technology and ZTE from contracts or mergers in the United States. A few days later, Canada cited a national security exemption that could block the same from local communications system work. Australia had said in March it would bar Huawei from bidding for work on the country's broadband.

The two Chinese companies suspected of uncomfortably close ties to the Communist regime or its military accuse their Western conspiracy theorists of thinking in the past, i.e. the Cold War, and being full of it today.

But any ban, regardless of its logic, leaves a void. The elimination of Huawei or ZTE from Western markets invites debate about which telecom firms, including a couple in China that weren't blacklisted, might get the jobs.

Lingering on the suspected fellow travellers for a minute, actual business impacts on Huawei and ZTE should be minimal as the two depend now on fat business from runaway domestic infrastructure growth and steady network deals in emerging markets.

Huawei, with its telecom work already used in 140 countries, says it serves more than a third of the world's population and saw 2011 sales revenue of 203.9 billion yuan. ZTE also claims deals in 140 countries, plus the rank of China's largest listed telecoms equipment company.

Slaps against them in the West sting mainly for reputation reasons, as both had been hoping to scale into the developed world. No company, especially publicly traded Chinese ones with international vision, wants to be seen serving home-court political interests.

Huawei says the House committee "failed to provide clear information or evidence" and charges its report, written over 11 months, with supporting a predetermined outcome. "The report released by the Committee...employs many rumors and speculations to prove non-existent accusations," Huawei charges on its Web site.

ZTE says it was targeted largely because of its scale. The committee's fear that ZTE would be subject to state influence applies to "any company operating in China," it says.

Avoid their stocks until the Cold War unfreezes. Huawei (002502.SZ) shares are hovering near historical lows that are about half their worth two years ago. Since July, ZTE (0763.HK) shares have tested their lowest point since the global financial crisis.

In the United States, the chief prize among the three Western countries citing security concerns, expect local firms to pick up telecom contracts, especially around elections where candidates are under pressure to back local business.

Prime contractor candidates in the United States would be AT&T ( T) and Verizon ( VZ). Share prices of both show a solid performance since 2010.

And what a history: AT&T announced an award in May that it had been named a prime vendor under the U.S. Department of Homeland Security's Tactical Communications Equipment and Services contract, which has an overall value of $3 billion.

Three months later, the venerated American household name said it had scored a U.S. Navy contract to deploy a nationwide call-routing and handling network.Verizon, a massive mobile carrier, opened a 30,000 square-foot facility six years ago for the unique needs, namely security, of its federal government customers.

Other Chinese firms may make some badly needed connections abroad if Huawei and ZTE keep getting zapped.

One tipped to be on the climb again is broadband network builder UTStarcom ( UTSI). Shares of the firm based in California but largely run out of China sank after 2003 following a class-action lawsuit over allegations that it had misled investors. The suit was settled in 2010, and last year new management sought to improve shareholder value by buying back $20 million of its own stock. It said this month the buyback was 65% complete.

Comba Telecom Systems (2342.HK), could grab wireless systems business overseas after growing since 1997 to 30 offices in China and 10 overseas. Prices in the company that's part of MSCI's China Small Cap Index ( ECNS) have rebounded since mid-August after falling over most of the year to date due -- a problem that its 2012 interim report says arose from a delay in capital spending by mobile operators.

Clearly, any mega-projects in the United States would improve the business of either. But the U.S. politicians worried about Huawei and ZTE may extend their Cold War suspicions to other would-be conspirators in China, particularly as these politicians try to sound tough on Beijing despite its capital importance as a trade partner.

"If Huawei and ZTE, two Chinese telecom equipment firms that are private, globalized and based far from the corridors of power in Beijing are excluded from these markets, there is no Chinese telecom equipment firm that will be welcome," says Wolf Group Asia CEO David Wolf. The management consultancy in Beijing counts telecom firms among its clients.

"What it makes me wonder is whether Swedish, French and German firms aren't next on the list," Wolf says.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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