Investigative report on ZTE, Huawei is unprecedented in its accusations

The Permanent Select Committee on Intelligence’s Investigative Report, which was released on Monday, October 8, 2012, is unprecedented in terms of its blatant accusations against ZTE and Huawei and labeling these companies a security threat to the United States. The report accuses these companies of flagrantly acting unlawful, being uncooperative with investigators, stating its close association with the Chinese government and noting its potential involvement in corporate espionage. Basically these two companies are being accused of breaking the law and a subsequent cover-up.

Avoiding the use of Chinese electronics for fear of theft or espionage is not a new concept; a number of three-letter government agencies made the decision to not use Lenovo computers after IBM sold their personal computer business to a Chinese company. Chinese companies continue to buy up U.S. companies and make huge investments in U.S. industry. Accounting firms continue to uncover many instances of fraudulent accounting practices when U.S. companies are sold to Chinese companies. The goal has been to develop more avenues to steal intellectual property. The latest investigative report is a clear indicator that diplomacy has been ineffective and the U.S. government is unwilling to remain silent about the unlawful intentions of the Chinese government.

This investigative report not only challenges the behavior of two Chinese manufacturers but will also be viewed as an affront to the Chinese Communist Party and accuses the Chinese government of something sinister. This report could lead to a trade war and may prompt more cyber-attacks against the U.S. This method of retribution has often been used against the U.S. and other nations when accusations of improprieties have been made against China or asylum has been granted to a Chinese political dissident. The government has obviously decided to take that risk.

If these allegations are true about ZTE and Huawei then it should be very concerning for corporate America and the US government. Google and Facebook appear rather tame compared to the assertions made in this report. ZTE and Huawei’s market share has been increasing dramatically since last year, with ZTE being the number four handset manufacturer in the first quarter of 2012, with a worldwide market share of 4.2%, according to Gartner. In Q1 of 2012, Huawei had a market share of 2.6% worldwide.

More importantly, we must recognize that smartphones are highly effective if they were used to steal intellectual property – even more so than laptops or desktops. A smartphone is typically less secure than a traditional computer, it can be used to track an individual’s movements because it is always on, it holds a greater variety of data than a computer (audio, video, text messages, application data) and it facilitates more ways to communicate (Cellular, WiFi, Bluetooth, Infrared, Near Field Communication).

The propagation of malware through mobile applications (apps) has exploded. Some estimate that 70% of malware found on mobile devices are found on Android devices. Very often a smartphone user will opt to download a black-market game app and unwittingly be downloading malware that will send information from that smartphone to a server in China.

It is critical to understand that these two Chinese handset manufacturers are not the only companies that should remain under suspicion. There are many memory chips, currently being manufactured by Chinese companies, which are inaccessible. This means that these chips may contain code that we will never be able to access, function normally but could be used to steal information and intellectual property. Therefore, the issue of protecting intellectual property goes well beyond the scope of this report and investigation.

Finally, it will be immensely difficult to force companies to ban electronics manufactured by Chinese manufacturers. Policies can be effectively implemented with government agencies and contractors but corporate America will generally choose the cheapest option, putting security as a low priority, which often means purchasing a product from China. The report specifically raises concerns about Chinese inroads into the telecommunications industry and recommends that “Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services.” Ultimately, the majority of intellectual property resides in the private sector. Therefore, Congressional legislation will be required to stall further leaks of intellectual property to China.

Hayes is a professor at Pace University’s Seidenberg School of Computer Science and Information Systems in New York. Hayes has been a consultant on legal cases involving digital evidence. As the Computer Information Systems Program Chair at Pace, Hayes has cultivated partnerships with the United Nations, New York Police Department, and many other respected agencies.

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