Sept. 19 (Bloomberg) -- Cisco Systems Inc. and Huawei Technologies Co. are losing clout in the world’s fifth-largest telecommunications market as Brazil’s government backs smaller local companies that pledge to block foreign spying.
Officials have intensified conversations with communications hardware makers such as Padtec SA and Datacom, betting they can get greater protection against the possibility of so-called back-door security holes in foreign-made products. While discussions have focused on government-operated networks for now, they open the door for the companies to take a greater role in the networks of Brazil’s publicly traded phone carriers.
Allegations that the U.S. was snooping on its South American ally led Brazilian President Dilma Rousseff this week to cancel a state visit to Washington. The rising tensions are creating opportunities for closely held Padtec and Datacom, which had already established government ties through contracts with state-owned Telecomunicacoes Brasileiras SA.
“Since we use only technology we develop, we believe we can guarantee its security,” Datacom Chief Executive Officer Antonio Carlos Porto said in a phone interview. “If you don’t have control, you’re vulnerable.”
The Brazilian government is strengthening the defenses of the nation’s telecommunications networks following allegations by American journalist Glenn Greenwald that the U.S. National Security Agency spied on Rousseff and on state-owned oil company Petroleo Brasileiro SA. The allegations, which the U.S. says it is reviewing, aired on Brazil’s most-watched TV news magazine, Fantastico.
Brazil is considering a plan to force all phone companies doing business within its borders to use locally made equipment, betting it will have the technology to make the project feasible within three to five years, Communications Minister Paulo Bernardo told Bloomberg News last week. Already, local companies are providing network parts to Brasilia-based Telecomunicacoes Brasileiras, or Telebras, which serves government agencies and private companies and is improving Internet access in remote areas.
“We’re taking every precaution that the construction of the network that serves the government will be totally secure,” said Telebras President Caio Bonilha. “We are using routers and fiber-optic equipment that have all been developed here. This is equipment that was made in accordance with Brazilian law.”
Brazil’s major network equipment providers are San Jose, California-based Cisco; Sunnyvale, California-based Juniper Networks Inc.; Shenzhen, China-based Huawei; and Paris-based Alcatel Lucent, said Joao Paulo Bruder, an analyst at research firm IDC. While Brazil probably won’t ask companies to replace equipment made by those foreign providers, it may require the government and state-run companies such as Petrobras to buy new equipment only produced in Brazil, he said.
“Brazilian industry would certainly benefit, and on the question of security, theoretically it would be more secure,” Bruder said. “But all it would take to spy on the new system would be to break the new code.”
Cisco disputed the idea that Brazil could protect its networks by using domestic manufacturers.
“Networks in Brazil must be connected to networks in the rest of the world,” Felipe Lamus, a Cisco spokesman, said in an e-mail. “Using different standards and protocols would isolate Brazilian networks and reduce the scrutiny of global customers invested in finding and addressing security vulnerabilities.
‘‘Network equipment produced in a particular country would also lack economies of scale. It will cost more and may end up sacrificing innovation.’’
The Brazilian government first contacted Datacom six months ago to discuss tighter security measures, said Porto, the CEO. The conversations ‘‘intensified’’ after news of NSA spying, he said.
Datacom, based in the southern state of Rio Grande do Sul, makes about 200 million reais ($91 million) in annual sales, compared with Cisco’s $49 billion in revenue last year. The Brazilian company has 850 employees, with 350 working on research.
Datacom has 55 million reais worth of contracts with Telebras. The company is also working on two government-funded projects worth 10 million reais each, Porto said.
Padtec, based in Sao Paulo state, produces equipment for fiber-optic networks in Brazil and more than 40 other countries, CEO Jorge Salomao Pereira said in a phone interview. A third of the company’s employees are dedicated to research, Salomao said. He declined to discuss Padtec’s financial figures or the details of its Telebras contract.
In a 2011 report, state-owned bank BNDES identified Padtec and Datacom as holding ‘‘leadership positions” in the industry. In January, BNDES joined IdeiasNet SA and Padtec managers and employees in raising 167 million reais in capital for new products, acquisitions and international expansion. Rio de Janeiro-based IdeiasNet, which owns a 34 percent stake in Padtec, fell 1.5 percent to 1.35 reais at 1:43 p.m. in Sao Paulo.
The Brazilian companies’ fortunes are rising just as Cisco is betting on its future in Brazil. The company opened an innovation center in Rio de Janeiro in August to boost sales and services to government and corporate clients, it said last month. Cisco will continue with its Brazil investment plans, Lamus said.
“Cisco does not monitor communications of private citizens or government organizations anywhere in the world and Cisco does not customize equipment for specific customers to facilitate the surveillance of users,” he said.
Chinese and U.S. citizens accused Cisco of conspiring with China’s government to monitor and torture members of religious group Falun Gong, according to an amended lawsuit filed yesterday. Cisco said it will seek to dismiss the case, calling it meritless.
Huawei also said it remains committed to Latin America’s largest economy.
“We share concerns about the recent revelations of compromised networks and data, and we have sophisticated programs, processes and policies in place to ensure the security and integrity of our operations and products,” the company said in a statement. “We look forward to continuing to work with our Brazilian and worldwide partners and customers.”
Kurt Steinert, an Alcatel spokesman, declined to comment.
“Our products are designed to meet the high security and privacy standards that users require of current and rapidly evolving networks,” Juniper said in an e-mailed statement.
Brazil’s focus on homegrown technology is also guiding its space program. Brazil’s first geostationary satellite, to be launched in 2016, will bring Internet to remote areas and provide secure military communications. Brazil currently uses a satellite operated by Mexico City-based America Movil SAB.
Telebras selected French-Italian aerospace company Thales Alenia Space SAS to build the satellite, a decision Bonilha said was unrelated to spying allegations and partly based on a technology transfer agreement. The $650 million project is run by Visiona, a joint venture between Telebras and Embraer SA, the aircraft maker based in Sao Paulo state.
Sharing technology will let Brazilian companies play a bigger role in building a second satellite planned to launch in 2022 and a third in 2026, according to Leonel Fernando Perondi, director of the Brazilian Space Agency.
“This is a window of opportunity, and we don’t have many of them, so the idea is to not miss this one.” said Bonilha of Telebras. “This satellite will be part of a system of future satellites that will be mostly made in Brazil.”
To contact the reporter on this story: Anna Edgerton in Brasilia at email@example.com