ZTE Quadruples Lobbying After U.S. House Blacklisting

ZTE Corp. (000063) more than quadrupled its spending on lobbying after a House report warned that the telecommunications company’s products may help the Chinese government spy on the U.S.

China’s second-largest phone-equipment maker reported spending $330,000 to lobby Congress in the first six months of this year -- the most since it began lobbying in 2009, Senate records show. That compared with $80,000 during the same period a year earlier, according to company filings.

The increase followed a House Intelligence Committee report that effectively blacklisted ZTE’s products, warning that the Shenzhen-based company’s growth in the U.S. might allow China to disrupt power grids or financial networks.

ZTE is following a well-worn path in bringing in advocates to blunt bad news in Washington, as was the case in the 1990s when Microsoft Corp. (MSFT) ratcheted up its lobbying while facing a Justice Department antitrust suit.

“When a company is under attack, the classic thing is to hire the old Washington hands to plead their case,” said Bill Allison, editorial director of the Sunlight Foundation, a watchdog group in Washington.

ZTE declined to comment on why it increased its lobbying.

The company is looking for a larger share of U.S. networking equipment sales. The market is about $51 billion, according to ACG Research, a Gilbert, Arizona-based industry consulting firm.

Photographer: Simon Dawson/Bloomberg

ZTE Corp., China’s second-largest phone-equipment maker, reported spending $330,000 to lobby Congress in the first six months of this year. Close

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Photographer: Simon Dawson/Bloomberg

ZTE Corp., China’s second-largest phone-equipment maker, reported spending $330,000 to lobby Congress in the first six months of this year.

ZTE’s competitors include San Jose, California-based Cisco Systems Inc. (CSCO); Espoo, Finland-based Nokia Oyj (NOK1V); Paris-based Alcatel-Lucent SA and Stockholm-based Ericsson AB.

Former Congressman

ZTE’s newest lobbyists include former Representative Mike Castle, a Delaware Republican, and Democratic fundraiser Tony Podesta, who owns the No. 3 U.S. lobbying firm in terms of revenue, Senate filings show.

Castle is a partner in the law and lobbying firm DLA Piper LLP, which began providing legal services to ZTE once the House committee announced its investigation in November 2011. In November 2012, a month after the panel released its report, DLA Piper registered to lobby for the company. Castle was first listed as a ZTE lobbyist in the firm’s second-quarter filings.

The former congressman and other DLA Piper representatives visit Capitol Hill to make the case that ZTE’s equipment can be tested by independent laboratories to ensure that it’s secure. Other telecommunications companies that manufacture products in China install equipment that hasn’t been tested, said John Merrigan, co-chairman of DLA Piper’s federal law and policy group.

“ZTE is the only company that can certify that its equipment can be tested and found reliable,” said Merrigan.

Hill Aides

ZTE hired Podesta’s firm April 4, Senate records show. Podesta and seven former congressional aides, including David Adams, a former assistant secretary of state, are registered to lobby for ZTE. Podesta was overseas on vacation and unavailable for comment.

The House committee’s report last October advised U.S. agencies and government contractors to steer clear of both ZTE and Huawei Technologies Co. The report said the companies hadn’t adequately explained their relationships with the Chinese government.

“We said in our report that we’re putting people on notice that if they use these companies’ technology, there’s a chance that the Chinese government may be able to access their information,” Representative C.A. “Dutch” Ruppersberger of Maryland, the Intelligence Committee’s ranking Democrat, said in a phone interview last month.

Malicious Hardware

The report warned that companies such as Huawei and ZTE “provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems.” That might allow the government in Beijing to affect U.S. power grids or financial networks, the report said.

“It appears that under Chinese law, ZTE and Huawei would be obligated to cooperate with any request by the Chinese government to use their systems or access them for malicious purposes under the guise of state security,” the report said.

Huawei officials told the committee that it had misinterpreted the law before the report was published and that the panel “willfully” ignored the company’s clarification, William Plummer, a Huawei spokesman, said in an e-mail today.

Both ZTE and Huawei, also based in Shenzhen, have denied links to espionage and have said that they aren’t controlled by the Chinese government. Plummer said the committee hasn’t been able to prove any inappropriate activity by Huawei.

Lobbying Cycles

Huawei’s lobbying expenses declined to $280,000 in the first six months of 2013 from $820,000 during the same period a year earlier, Senate records show. Huawei had more than quadrupled its lobbying expenditures from January to June in 2012, in the midst of the House committee probe, from the same period in 2011.

The decrease in Huawei’s lobbying spending this year doesn’t mean the company has lost interest in the U.S. market, Plummer said. “Everything is cyclical,” he said.

ZTE reported $80,000 in lobbying expenses between January and June 2012. During the first six months of 2011, ZTE’s outside firms said they were paid $100,000. The company itself didn’t file any reports for that period.

ZTE Sales

ZTE’s products include smartphones, tablets, videoconferencing devices, and equipment for high-speed Internet networks. While the company doesn’t separately report its U.S. sales, it had revenue of 84.2 billion yuan ($13.8 billion) last year, according to its annual report. About 7 percent of that revenue came from the U.S. market, Cynthia Meng, a Hong Kong-based analyst with Jefferies Group LLC, has said. Most of ZTE’s U.S. sales are from smartphones, feature phones and wireless routers, she said.

Government spying concerns have hurt the companies’ efforts to expand business in the U.S. Huawei was barred in 2011 by the U.S. Commerce Department from participating in a nationwide emergency network.

A month after the House committee announced its probe, Cheng Lixin, president and chief executive officer of ZTE U.S.A., said the company was “less optimistic” about doing business here.

“We have certain limitations because we are a Chinese company,” Cheng said in a December 2011 interview. “Because of national-security concerns, we are not allowed to bid” on some telecommunications projects.

Restricted Use

This year, SoftBank Corp., (9984) based in Tokyo, gave assurances that it would limit the use of Huawei equipment before winning federal approval to acquire Overland Park, Kansas-based Sprint Corp. (S), the No. 3 U.S. wireless company.

Matthew Nicholson, a SoftBank spokesman, declined to comment whether there were similar restrictions concerning ZTE.

President Barack Obama signed a law in March limiting some federal agencies’ ability to purchase information technology devices from companies with ties to the Chinese government.

ZTE hasn’t given up on expanding U.S. sales. In 2011, it approached a unit of a Baltimore-based cybersecurity company, CyberPoint International LLC, asking for help in improving its U.S. sales, according to Jerry Caponera, CyberPoint’s general manager for global partnerships.

CyberPoint’s Prescient unit assessed a videoconferencing device made by ZTE, documented its flaws, and built and installed its own hardware and software-based firewall to block potentially unauthorized access.

GSA Contract

That product, which carries both ZTE’s and Prescient’s names, is available for sale to U.S. government agencies through a contract with the General Services Administration, which coordinates orders for federal offices.

Mafara Hobson, a GSA spokeswoman, said this month the agency wasn’t aware of any orders of the device. The GSA contract doesn’t guarantee that any agency will buy the videoconferencing equipment -- just that the companies can market their products.

“I don’t see this changing the marketplace for ZTE,” said Trey Hodgkins, a senior vice president for TechAmerica, a Washington-based trade group that represents companies such as Verizon Communications Inc. (VZ), AT&T Inc. (T) and CenturyLink Inc. (CTL)

“There is intelligence out there that hasn’t been shared with industry that is being almost universally accepted by the government,” he said. “There’s a belief that products produced by these companies that were called out are off-limits in almost any and all situations.”

To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net; Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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