Cisco cuts ties to ZTE; Huawei's data center business in trouble

Chinese telecom giants Huawei and ZTE (Shenzhen: 000063.SZ) are already feeling the heat in the U.S. market even as the U.S. House Intelligence Committee prepares to release a report that allegedly damns the two as security risks that U.S. businesses should avoid.

Cisco (Nasdaq: CSCO) has reportedly ended its seven-year sales relationship with ZTE after an internal probe of stories published by Reuters that Chinese telecom vendor had sold U.S. tech products, including those built by Cisco, to Iran in violation of U.S. law. The stories also fueled investigations by the U.S. Commerce Department, the U.S. House of Representatives and the FBI into allegations that the general counsel at ZTE's Texas-based subsidiary "plotted a cover-up, including possibly shredding documents," a Fox Business story said.

While Cisco CEO John Chambers recently declined to discuss details of the company's investigation, he did say that Cisco doesn't "tolerate any direct or indirect" sales of its equipment to embargoed countries "and when that occurs, we step up and deal with it very firmly so I think you can assume that you will not see that happen again," the Fox News story said.

ZTE, to an extent, posed the split as a potential breakdown in communications between the two companies, with ZTE spokesman David Dai Shu saying the vendor "is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed."

The company actually took the offensive in a letter addressed to the committee that stated: "ZTE should not be a focus of this investigation to the exclusion of the much larger Western vendors," according to Reuters story.

Also being addressed in the wake of the Chinese firms' troubles is the U.S. data center market where "Huawei is a relatively small player," according to a CNET story, which said that elsewhere in the world "where China isn't viewed as a security threat," Huawei is doing much better and poses a threat to Cisco from a business perspective.

The U.S. market, as such, may not be such a big deal except that Huawei is looking at an IPO. In that market, the company is under U.S. government fire and being positioned as a potential business pariah.

"If I were an American company today … and you are looking at Huawei, I would 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," U.S. Rep. Mike Rogers (R-Mich.), chairman of the U.S. House Permanent Select Committee on Intelligence, reportedly said on "60 Minutes."

For more:
- Fox Business carried this story
- and CNET has this report
- Reuters has this story

Related articles:
International intrigue: Congress sees ZTE, Huawei as U.S. security threats
China's ZTE eyes quadrupling of enterprise communications revenues
Report: Huawei mulling IPO
Troubled ZTE denies it's going to cut jobs

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