ZTE Device Called American Spurned After China Spy Angst

Photographer: Qilai Shen/Bloomberg

An employee works on a communications equipment assembly line at a ZTE Corp. factory in Shenzhen, Guangdong province, China, on Nov. 17, 2009. ZTE Corp. manufactures and markets networking and telecommunications equipment. Close

An employee works on a communications equipment assembly line at a ZTE Corp. factory in... Read More

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Photographer: Qilai Shen/Bloomberg

An employee works on a communications equipment assembly line at a ZTE Corp. factory in Shenzhen, Guangdong province, China, on Nov. 17, 2009. ZTE Corp. manufactures and markets networking and telecommunications equipment.

The U.S. government stripped a videoconferencing system contract from a Maryland company after a federal agency said the device marketed as American-made is really Chinese.

The technology is produced by Shenzhen-based ZTE Corp. (000063), China’s No. 2 phone-equipment maker. It worked with CyberPoint International LLC, a small business based in Baltimore, to make its videoconferencing device available to U.S. agencies via contract. CyberPoint’s Prescient unit built and installed firewalls in the system, which it said “substantially transformed” the product.

U.S. Customs and Border Protection disagreed, saying the government should treat the products as Chinese, according to a ruling published today in the Federal Register. The decision is the latest impediment to U.S. growth for ZTE, which was effectively blacklisted last year by a congressional committee that said its products may aid Chinese spying.

“It’s somewhat devastating for them,” said Ray Mota, founder of Gilbert, Arizona-based ACG Research, a networking-equipment industry consulting company. “They’ll have to re-strategize on how to approach this market and come up with alternatives.”

The customs agency’s decision followed Bloomberg News stories last month on ZTE’s partnership with Prescient.

‘Promptly Removed’

After the ruling, the videoconferencing equipment was “promptly removed” from offerings on a so-called supply schedule contract, Mafara Hobson, a spokeswoman for the General Services Administration, said in an e-mail.

ZTE’s system, using security made by CyberPoint’s Prescient unit, had been available for sale to U.S. agencies through the GSA contract since last year. No agencies had ordered the product as of today, Hobson said.

ZTE doesn’t plan to give up on its efforts to boost its U.S. sales.

“Over the years, ZTE has invested hundreds of millions of dollars into the U.S.,” David Dai Shu, director of global branding and communications for the company, said in an e-mailed statement. “We are committed to serving the U.S. market and will continue to grow the business.”

Chinese Product

The customs agency’s findings may make it even more difficult for ZTE to expand its U.S. sales, ACG’s Mota said in a phone interview.

A product on a federal contract would have given ZTE “an extra level of credibility” when selling to U.S. businesses, Mota said.

CyberPoint had asked the customs agency, part of the Department of Homeland Security, to rule on the origin of the videoconferencing system several times since May 2012, according to the ruling. Customs officials decided the government should treat the device as Chinese because vital videoconferencing parts, such as the video board and the filter board, came from the Asian country.

“Since the hardware components that impart the essential character to the finished product are of Chinese origin, we find that the country of origin of the server for government procurement purposes is China,” according to the decision.

Cisco Systems

Prescient disagrees with the ruling and hasn’t decided whether it will appeal the findings, Jerry Caponera, CyberPoint’s general manager for global partnerships, said in an e-mailed statement.

“Given the widespread concerns over the security of foreign-made products, we were prepared for this eventuality, but are committed to finding ways to make foreign-made products more secure for the U.S. marketplace,” he said.

Most federal agencies use videoconferencing systems made by San Jose, California-based Polycom (PLCM) Inc. or Cisco Systems Inc. (CSCO), Phil Karcher, an analyst with Forrester Research Inc. (FORR) in Cambridge, Massachusetts, has said.

Cisco and Polycom may benefit from the ruling because it makes it tougher for ZTE to compete with them inside the U.S., ACG’s Mota said. The U.S. networking equipment market is about $51 billion, according to Mota.

ZTE’s efforts to break into that market were hampered by an October 2012 report from the U.S. House Intelligence Committee that said government agencies and contractors should steer clear of products made by ZTE and Huawei Technologies Co., also based in Shenzhen.

Both companies have denied links to espionage and said they aren’t controlled by the Chinese government.

The report warned that 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.” Those weaknesses might allow the government in Beijing to affect U.S. power grids or financial networks, the report said.

To contact the reporter on this story: 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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