The anxiety over importing Chinese telecom network equipment, considered a potential threat to national security, continues. But with the issue of an embargo on Chinese imports escalating into an international political problem, the government is deliberating a long-term strategy to resolve the situation. To this end, it has decided to undertake audit and security checks of all Chinese-made telecom equipment installed on the existing networks of service providers, before allowing any fresh imports from China.

At a recent meeting with officials of Chinese telecom equipment producers ZTE and Huawei (the companies most impacted), the Ministry of Home Affairs (MHA) asked the companies for further clarifications and additional information before giving its approval to the use of their equipment in India. The meeting was described as a “positive” one.

The MHA has, since 2005, been pointing to the fact that foreign telecom equipment vendors, especially Chinese vendors, have the capability to install spyware and malware that can monitor voice and data traffic and disable networks. The ministry’s argument became even more compelling when, in early 2010, there was a spate of incidents in which Chinese hackers accessed sensitive data on government websites. Security concerns snowballed and from February this year, most orders from Chinese firms were put on hold.

India maintains that there is no blanket ban on the import of telecom equipment from China. Though they have not received any formal communication from the Indian government regarding the restrictions, the two Chinese equipment makers say that they have not passed India’s security tests. In fact, the Ministry of Communications has not cleared a single contract that Huawei and ZTE have signed with Indian operators such as Tata Communications, Bharti Airtel, Bharat Sanchar Nigam Limited, Idea Cellular, Spice, Vodafone Essar, Aircel and Uninor in the past few months.

Severely impacted by India’s boycott, Huawei and ZTE are scrambling to allay national security fears. They are willing to provide the necessary documents and clarifications, giving details of the company’s ownership, certification of all equipment and details of their equipment supply to other countries as well.

ZTE and Huawei were both set up by entrepreneurs previously belonging to China’s state-run enterprises. This could be a possible source of mistrust for India because Huawei, though privately held, is believed to have links with China’s People’s Liberation Army. ZTE, meanwhile, is now a publicly traded company with shares listed in both Shanghai and Hong Kong. This, of course, has been denied by Huawei, which says that the company is entirely owned by its employees. It has also offered to reveal the source code for its telecommunications systems to Indian security agencies.

In fact, Chinese vendors are leaving no stone unturned to dispel the testy caution of the Indian security agencies. This includes restructuring their operations in a manner such that the chairman and directors are Indian residents. Huawei has even undertaken a drive where its employees are called by Indian names. For instance, Chen Tian Siang, a top consultant with Huawei India, introduces himself as Chetan Chen, while Liu Fang, a senior executive in the networks division is known as Deepika Fang. According to company officials, the reason for doing so is that Indians find it difficult to pronounce Chinese names and assuming Indian names can help. It also makes Chinese executives more culturally acceptable, not just to their Indian colleagues but also to their clients and business associates.

Recently, both the Chinese companies announced their intention of setting up factories in India. As ZTE’s India head, D.K. Ghosh puts it, “We are having meetings. Talks are on. We have appealed to the government. We have put forward our thoughts. Let’s see what the outcome is.”

For Huawei and ZTE, India is an important market. The country accounts for about $1 billion of ZTE’s annual sales, or about 10 per cent of its total, while Huawei says it recorded about $1.5 billion in contract sales in the market last year, about 5 per cent of its total.

Besides, with 3G and Wi-Max services due to become operational later this year, the companies see a huge potential in additional network equipment requirement.
These companies have carved a niche for themselves in the international market, selling network equipment at a much lower cost than their peers. However, with the ongoing impasse in India, the other major suppliers -­ Ericsson, Nokia Siemens Networks, Alcatel-Lucent and Motorola will stand to gain.

Taking up their case, the Chinese government stepped in, urging the Indian government to remove restrictions on the import of its telecom equipment. It has also asked India to provide a “fair” business environment for Chinese firms.

These companies already know that the border areas and certain other parts of the country will be restricted areas for them, but they feel they should have a level playing field in the other sectors. Chinese commerce ministry spokesman Yao Jian reportedly stated at a press conference, “We hope the policies India introduces will treat companies from all countries, including China and those in the West, equally. They should not discriminate against Chinese companies. India should create a foreign investment policy environment that is open, fair and transparent.”

Meanwhile, the standoff is not only impacting Chinese vendors but is also adversely affecting Indian telecom operators. The government, in December 2009, amended the unified access service licence (UASL) and stipulated that security clearances need to be obtained before the placement of purchase orders for procuring telecom equipment or software, in view of national security concerns. Delays in obtaining clearances for essential equipment have been negatively affecting network quality and customer services of most operators, particularly those of CDMA operators that have largely deployed networks procured from Chinese vendors.

Bringing this to light, Tata Teleservices Limited (TTSL) wrote to the Department of Telecommunications (DoT), stating, “As a Tata company, it goes without saying that we are committed to protecting national security and hence, we seek your guidance as to what is wrong with these equipment or vendors and what needs to be done by us or by these vendors to remain compliant with the requirements of national security.”

The TTSL note also brought up the issue of “equipment being provided by some of the European vendors, which is manufactured in China. In that case what should the policy be? Besides, there are many equipment, which have nothing to do with network espionage, malware, etc., but even such equipment have been rejected because these are from Chinese vendors.” TTSL has, therefore, urged DoT to provide speedy clearance for such products. New telecom operators too are worried that they will have to pay a much higher price for sourcing equipment from other international vendors, which will push up their network costs significantly.

The deadlock, it is hoped, will be broken through negotiation and dialogue. Given the implications for companies on both sides, an early resolution would be in the best interest of business.
Shampa Bahadur