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Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Home Business Business Home Economy Technology Media Small Business Legal Deals Earnings Social Pulse Business Video The Freeland File Aerospace & Defense Markets Markets Home U.S. Markets European Markets Asian Markets Global Market Data Indices M&A Stocks Bonds Currencies Commodities Futures Funds peHUB World World Home U.S. Brazil China Euro Zone Japan Mexico Russia India Insight World Video Reuters Investigates Decoder Politics Politics Home Election 2012 Campaign Polling Supreme Court Politics Video Tech Technology Home MediaFile Science Tech Video Tech Tonic Social Pulse Opinion Opinion Home Chrystia Freeland John Lloyd Felix Salmon Jack Shafer David Rohde Nader Mousavizadeh Lucy P. 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American Mosaic Site | Explainer Follow Reuters Facebook Twitter RSS YouTube Read Venezuela's Chavez re-elected to extend socialist rule | 2:46am EDT Pressure is on Biden after Obama's lackluster debate performance 07 Oct 2012 Chavez supporters party on anticipated win in Venezuela vote 07 Oct 2012 Tiny, new African dinosaur species unveiled 04 Oct 2012 Obama acknowledges "bumps in the road" after poor debate 12:48am EDT Discussed 247 Romney’s strong debate showing puts Europe on edge 157 Obama and Romney battle over economy at debate 153 Weak U.S. labor market looms ahead of elections Sponsored Links Pictures Reuters Photojournalism Our day's top images, in-depth photo essays and offbeat slices of life. See the best of Reuters photography. See more | Photo caption Battle for Aleppo The battle for Syria's biggest city. Slideshow Looking for work The frontlines of the unemployment crisis. Slideshow China's Huawei, ZTE should be kept from U.S. : draft Congress report Tweet Share this Email Print Related News China says telco gear makers operate according to market rules 3:23am EDT Analysis & Opinion Even one-sided Chinese investment has its benefits How a place like Brazil can be a job creator for the U.S. Related Topics Politics » Tech » Media » China » 1 of 2. A view of the ZTE headquarters in Shenzhen, Guangdong province, in this April 17, 2012 file photo. Credit: Reuters/Tyrone Siu/Files By Jim Wolf and Lee Chyen Yee WASHINGTON/HONG KONG | Mon Oct 8, 2012 3:23am EDT WASHINGTON/HONG KONG (Reuters) - China's top telecoms gear makers should be shut out of the U.S. market because potential Chinese state influence on them poses a security threat, the U.S. House of Representatives' Intelligence Committee said in a draft of a report to be released later on Monday. U.S. intelligence must stay focused on efforts by Huawei Technologies Co Ltd and ZTE Corp to expand in the United States and tell the private sector as much as possible about the purported espionage threat, the panel leaders said, based on their 11-month investigation of the two firms. Employee-owned and unlisted Huawei is the world's second-biggest maker of routers, switches and telecoms equipment by revenue after Sweden's Ericsson. ZTE ranks fifth. In the global mobile phone sector, ZTE is fourth and Huawei sixth. Huawei generated around 4 percent of its group sales from the United States, while ZTE's U.S. revenues made up 2-3 percent of its overall figure. The bulk of both companies' U.S. sales comes from selling handsets through U.S. carriers such as Verizon, Sprint and T-Mobile USA. "The impact will be quite limited if the report is referring just to telecoms equipment, but it's another story if handsets are included as well," said Huang Leping, an analyst at Nomura Securities. "Huawei and ZTE handsets have been consistently gaining market share in the United States." In the U.S. handsets market where Apple Inc and Samsung Electronics dominate, ZTE ranks sixth and Huawei eighth, according to industry figures. "POLITICAL DISTRACTION" The broadside comes as Huawei mulls a possible initial public offering, sources said, as part of its efforts to allay suspicions that have all but blocked its U.S. ambitions, including business tie-ups. Huawei has been looking at the listing issue for years, but there has been little progress due to its complicated share structure and whether a listing would actually help, given that U.S. lawmakers remain suspicious of ZTE even though it's a listed company, analysts said. Huawei spokesman William Plummer rejected the committee's allegations in a statement emailed to Reuters. "Baseless suggestions otherwise or purporting that Huawei is somehow uniquely vulnerable to cyber mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenges," he said. For its part, ZTE released a copy of the letter on Monday it sent to the committee after a hearing in September, stating it "profoundly disagrees" with the claim that it is directed or controlled by the Chinese government. "ZTE should not be a focus of this investigation to the exclusion of the much larger Western vendors," it said. ZTE's Hong Kong-listed shares fell as much as 3.9 percent on Monday, on track for its biggest one-day drop in more than a month, and lagging a 0.5 percent fall on the benchmark index. The U.S. panel's draft report faulted both Huawei and ZTE for failing to satisfy its requests for documents, including detailed information about formal relationships or regulatory interaction with Chinese authorities. U.S. companies thinking about buying from Huawei should "find another vendor if you care about your intellectual property; if you care about your consumers' privacy and you care about the national security of the United States of America," panel chairman Mike Rogers said in comments broadcast late on Sunday on the CBS News program "60 Minutes." Rogers and the committee's top Democrat, C.A. Ruppersberger, have scheduled a 10 a.m. Eastern time (1400 GMT) news conference to release the final, unclassified version of their report. The publication comes a month ahead of U.S. presidential elections where China, and its impact on U.S. jobs, has been a campaign issue. "CREDIBLE ALLEGATIONS" The panel said it received credible allegations from unnamed industry experts and current and former Huawei employees suggesting Huawei, in particular, may be guilty of bribery and corruption, discriminatory behavior and copyright infringement. The committee plans to refer such allegations to the Justice Department and Department of Homeland Security, according to the draft made available to Reuters. "U.S. network providers and system developers are strongly encouraged to seek other vendors for their projects," it said. The document cited what it called long-term security risks supposedly linked with the companies' equipment and services. But it did not provide detailed evidence, at least not in an unclassified version. A classified annex provides "significantly more information adding to the committee's concerns," the draft said. Based on classified and unclassified information, Huawei and ZTE, which are both based in Shenzhen, China, "cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems," the document said. Huawei and ZTE are rapidly becoming "dominant global players" in the telecommunications market, which is intertwined with computerized controls for electric power grids; banking and finance systems; gas, oil and water systems and rail and shipping, it noted. ZTE's U.S. telecoms infrastructure equipment sales last year were less than $30 million. In contrast, two of the larger Western vendors alone had combined U.S. sales that topped $14 billion, ZTE told the committee in its September 25 letter, an apparent reference to Finland-based Nokia Siemens Networks and Paris-based Alcatel Lucent. "It seems self-evident that the universe of companies examined by the Committee is so small as to omit most of the equipment actually employed in the U.S. telecom infrastructure system," the letter said. "MEANS, OPPORTUNITY, MOTIVE" Huawei and ZTE may not be the only companies that present a risk to U.S. infrastructure, the committee's draft report said, but they are the two largest Chinese-founded, Chinese-owned companies seeking to market critical network equipment to the United States. Beijing has the "means, opportunity and motive" to use them to its own ends, it added. Top executives of both told a committee hearing on September 13 that their companies would never bow to a hypothetical Chinese government effort to exploit their products for espionage, equating any such move with corporate suicide. "Huawei has not and will not jeopardize our global commercial success nor the integrity of our customers' networks for any third party, government or otherwise," senior vice president Charles Ding testified at the time. The draft showed that the committee is calling on an inter-agency government group that reviews national security implications of foreign investments to block acquisitions, takeovers or mergers involving Huawei and ZTE. In addition, it said Congress should give thorough consideration to legislation seeking to expand the role of the inter-agency group, known as the Committee on Foreign Investments in the United States, to include purchasing agreements. U.S. intelligence officials have publicly denounced China as the world's most active perpetrator of economic espionage against the United States. Huawei has marketed its network equipment in the United States since last year, and has sold to a range of small- to medium-sized carriers nationwide, particularly in rural areas. The company, founded by CEO Ren Zhengfei 25 years ago after he was laid off by the Chinese army, has marketed mobile phones through a broader range of U.S. carriers for the last four years. U.S. sales totaled $1.3 billion last year, out of overall sales of $32 billion, executives said. (Editing by Bernard Orr, Ken Wills and Ian Geoghegan) Politics Tech Media China Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (4) cyke1 wrote: Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Connect with Reuters Twitter Facebook LinkedIn RSS Podcast Newsletters Mobile About Privacy Policy Terms of Use AdChoices Copyright Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. 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