Huawei’s South Korea Project Draws U.S. Scrutiny

Photographer: Kiyoshi Ota/Bloomberg

Attendees walk past an advertisement for a Huawei Technologies Co. smartphone at the CEATEC Japan 2013 exhibition in Chiba City, Japan. Close

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Photographer: Kiyoshi Ota/Bloomberg

Attendees walk past an advertisement for a Huawei Technologies Co. smartphone at the CEATEC Japan 2013 exhibition in Chiba City, Japan.

Huawei Technologies Co., China’s largest maker of phone network equipment, said there is no basis for U.S. scrutiny of its contract to supply broadband equipment for a project in South Korea.

“Our gear is world-proven and trusted, connecting almost one-third of the world’s population,” Scott Sykes, a spokesman for Shenzhen-based Huawei, said in an e-mail today. “The motivations of those that might groundlessly purport otherwise are puzzling.”

U.S. Senator Dianne Feinstein, chairman of the Select Committee on Intelligence, and Senator Robert Menendez, who leads the Committee on Foreign Relations, sent a letter last week to Defense Secretary Chuck Hagel, Secretary of State John Kerry and James Clapper, the director of national intelligence. The lawmakers expressed concern that Huawei’s involvement creates risks for the U.S.-South Korea alliance, including for U.S. troops based on the peninsula.

“Maintaining the integrity of telecommunications infrastructure is critical to the operational effectiveness of this important security alliance,” the two senators wrote on Nov. 27 in the letter obtained by Bloomberg News. “Reports that Huawei has been selected to develop and/or supply the Republic of Korea’s advanced LTE telecommunications backbone raise serious questions and potential security concerns.”

Korean Network

U.S. officials privately have expressed to counterparts in Seoul the same concerns voiced by Feinstein and Menendez, to little effect so far, said a U.S. intelligence official on condition of anonymity because he wasn’t authorized to speak to the news media.

A 2012 report prepared by the U.S. House intelligence committee said Huawei and competitor ZTE Corp. (000063) provide opportunities for Chinese intelligence services to tamper with U.S. telecommunications networks for spying.

Regional news outlets reported last month that Huawei was chosen to provide equipment using the long-term evolution standard for the wireless project by LG Uplus Corp. (032640), a subsidiary of Seoul-based LG Corp. (003550), to build a 2.6 gigahertz broadband LTE network.

The value of the Huawei contract has yet to be determined, Kim Sang Yup, a spokesman for LG Uplus, said in a phone interview today. LG Uplus hasn’t considered ending the contract with Huawei because of the U.S. concerns, Kim said.

“All we get from Huawei is their network equipment,” Kim said. “Other network-related maintenance and operations will be handled solely by us and through our domestic partners, so Huawei will have no access to our network operations as soon as the equipment is handed over.”

Biden Visit

Shares of LG Uplus fell 4.8 percent to close at 10,000 won in Seoul. ZTE rose 3.4 percent to HK$17.56 in Hong Kong. Huawei is closely held.

The senators’ letter was sent days before Vice President Joe Biden left on a trip this week to Asia that takes him to Japan, China and South Korea. While the letter wasn’t timed to Biden’s trip, a person familiar with it said the matter could come up in his meetings with Chinese and South Korean officials. The administration hasn’t responded to the letter, said the person, who asked for anonymity to discuss private communications.

“We are very interested to receive your assessment of the potential threats and security concerns that Huawei’s involvement in this plan represents, both for the Republic of Korea and for our alliance, and any discussions the U.S. Government has had with the Republic of Korea about the importance of network integrity as it relates to this decision,” the senators wrote.

Closer Ties

South Korea and China are forging closer economic ties, in part because of their common antipathy to Japan, which invaded and occupied both countries during World War II, said the U.S. intelligence official.

Huawei’s relationship with the Chinese government and the cybersecurity risks posed to the U.S. caused the company to end plans to expand into the U.S. market.

Huawei and Bain Capital Partners LLC dropped a bid to buy computer equipment maker 3Com Corp. in 2008 after the Committee on Foreign Investment in the U.S., or CFIUS, opposed the transaction. CFIUS reviews acquisitions of domestic companies by non-U.S. entities.

In 2011, Huawei unwound the purchase of patents from a computer-services company, 3Leaf Systems Inc., after U.S. objections.

‘Remain Vigilant’

Huawei’s chief executive officer, Ren Zhengfei, recently said in an interview with the French news website Les Echos that the company will stop looking for new business in the U.S., declaring that “it’s not worth it” if the company gets entangled in U.S.-China relations, according to a Chinese transcript of the interview translated by Foreign Policy magazine.

The congressional study said the U.S. should block acquisitions or mergers by Huawei and ZTE, and said government contractors shouldn’t use their equipment. U.S. intelligence agencies should “remain vigilant and focused on this threat,” the report recommended.

“We do not have the confidence that these two companies with their ties to the Chinese government can be trusted with infrastructure of such critical importance,” said Representative Mike Rogers, a Michigan Republican and chairman of the House intelligence committee.

To contact Bloomberg News staff for this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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