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After Congress' report, what next for China's tech firms?

House intelligence report on China tech is sure to impact relations, analysts say

October 11, 2012 06:00 AM ET

Computerworld - WASHINGTON -- There's a new television show, "Revolution," which looks at what happens to society after every piece of complex technology, including power generation, stops working. The reasons for this outage aren't explained.

Maybe it's China's fault. After years of allegedly building backdoors into equipment, something implanted by China went awry and accidentally turned off everything everywhere.

The prelude for this plotline was written by the U.S. House intelligence committee in its report Monday about Chinese telecommunications vendors Huawei Technologies and ZTE. The committee is telling private sector firms -- in a big headline on its website -- to "use another vendor" as it warns of "long-term security risks."

At the minimum, analysts believe the House intelligence report will bring more scrutiny to joint efforts and agreements by U.S. and China technology companies, but trade problems can't be ruled out either.

What is certain is that China is embedded in U.S. technology supply chains as it works to build its own competitive capacity. Huawei illustrates this, with more than $32 billion in revenue last year, with about 70% of its revenue coming from outside China, it said in testimony delivered last month to the House intelligence committee.

Lenovo, which bought IBM's PC division in 2005, may have just surpassed Hewlett-Packard as the world's top PC maker, Gartner says.

There are many firms in China that provide code development through its offshore outsourcing services, assemble and manufacturer everything from components to complete systems, including printers, PCs and servers for multinational firms.

U.S. firms, including Huawei rival Cisco, all have major R&D facilities in China.

To avoid serious problems, Gartner analyst Neil McDonald said tech firms will have to do more to ensure trust. Companies will have to offer more transparency about their operations, management, and source code and allow a full evaluation. Without it, "the lack of trust continues to grow and it continues to fragment," he said.

The House committee accused Huawei of not fully cooperating with its probe, particularly its relationship with the Chinese government, something the company disputes.

The trust issue isn't new and is something McDonald examined in a recent report on supply chains. Supply chains are easy targets and increasingly complex. "Hardware vendors are increasingly outsourcing not just manufacturing, but also design to OEM suppliers and contractors located in Asia and India. In some cases, established Asian suppliers are outsourcing to emerging economies, such as Brazil, Vietnam and Indonesia," the report said.

While this House intelligence report is ostensibly about two telecommunication firms, it includes broad assertions about the increasing sophistication and intensity of China's intelligence gathering efforts. It describes an "ongoing onslaught" of network intrusions originating in China.

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