The U.S House Intelligence Committee may be giving a gift to U.S.-based communications equipment providers. Before thinking that the gift is free, it is important to realize that for every action there can be a reaction. A study released by the House Intelligence Committee warns against network and data security might make some changes among companies making spending decisions ahead. House Intelligence Committee Chairman is Mike Rogers and he told CBS’s 60 Minutes that high-tech products from Chinese companies Huawei and ZTE Corp. are posing severe risks for the companies buying and using their communications equipment.
Rogers’ warning was for U.S. companies to go find new equipment if they want to protect their intellectual property and other things like national security and customer privacy. If the report turns out to be true, it could be a huge inadvertent win for companies like Cisco Systems, Inc. (NASDAQ: CSCO), Juniper Networks, Inc. (NYSE: JNPR), Brocade Communications Systems, Inc. (NASDAQ: BRCD), and others. Still, what if China retaliates and says that American technology companies could offer the same risks to China? We ask this because Cisco shares are up only $0.04 and Brocade shares are up only $0.01 after this news. Juniper shares are actually down marginally today. Imagine if these companies find themselves in the middle of a trade war.
The report issued today is called “Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE” goes on to say that China has the means, opportunity, and motive to use telecom companies for malicious purposes. It also said that information from past and current Huawei employees have confirmed the risks and said that Huawei did not fully cooperate with the investigation and was unwilling to explain its relationship with the Chinese government or Chinese Communist party.
If you want some background on the situation, a decade or so back there were Cisco suits and cases against Huawei for knock-off routing and communications equipment. The argument from Cisco employees at that time was that Huawei equipment was such a knock-off that in many cases it was identical down to the key source code in the equipment. Eventually the cases were settled. Today’s issue is entirely different as it is not brought by companies.
Investors have to consider the implications on a long-term basis rather than just one side of a large news story. There is no easy answer here, at least not one without secondary and tertiary issues which have to be brought up.
Huawei made its response statement saying, “The United States is a country ruled by law, where all charges and allegations should be based on solid evidence and facts. The report conducted by the House Permanent Select Committee on Intelligence (the Committee), which took 11 months to complete, failed to provide clear information or evidence to substantiate the legitimacy of the Committee’s concerns.” FULL STATEMENT FROM HUAWEI
JON C. OGG