A Setback for China's Tech Ambitions in India

Facing increased competition at home and government pressure to expand overseas, Chinese telecom equipment makers have been looking toward India. The country is already the biggest export market for China's two leading phone gear manufacturers, Huawei Technologies and ZTE, and both companies have made India a top priority. "If [Indian] government policies are favorable," ZTE India managing director D.K. Ghosh said on Apr. 14, "we will further scale up our investments."

When it comes to China's Big Two, though, India's policies are hardly favorable. The government has sent letters to Indian phone companies saying they can't buy equipment from Huawei, ZTE, and several other mainland companies due to security risks. In April, researchers reported that Chinese hackers had targeted Indian defense computers. And in December, India banned many Chinese cell phones, also because of security concerns, and imposed anti-dumping duties on transmission gear from Huawei and other vendors. Huawei says it's committed to "the development of the Indian telecoms industry." ZTE says it adheres to Indian law.

The new restrictions don't apply only to the Chinese. An Israeli company and California-based U.T. Starcom (which does most of its manufacturing in China) were hit, too. Yet few analysts doubt that China is the main target of the restrictions. "The Indians are incredibly paranoid about China," says David Zweig, a professor of politics at Hong Kong University of Science & Technology.

The tensions could be a problem for other Chinese tech companies. As India has grown to the world's No. 2 cellular market in recent years, its imports of Chinese handsets have soared. Tencent, China's top instant-messaging service, has invested in Indian Internet startups. And India is the third-largest operation (after China and the U.S.) for Alibaba.com, an online marketplace based in Hangzhou. An Alibaba spokeswoman says the company isn't worried about the restrictions. Tencent declined to comment.

While India's phone companies could buy equipment from Western suppliers, they would pay far more. So carriers are lobbying the government for a change—and hedging their bets, says Sanjeev Aga, managing director at Mumbai-based Idea Cellular. "A lot of companies are finding suppliers in India," Aga says. Any resolution, though, may ultimately require talks between the two governments, says Kunal Bajaj, a partner with market research firm Analysys Mason. "There is going to be quite a bit of posturing between the two countries for some time," he says.

The bottom line: Chinese tech companies had been counting on India for growth, but security concerns have spurred New Delhi to limit imports from China

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