EL SEGUNDO – Concerns are rising in the US and India over perceived security risks associated with using Chinese-made telecommunications equipment, potentially slowing global sales growth for China’s major gear makers, says iSuppli Corp.

A group of US senators last week asked the Obama administration to review a bid from China’s Huawei Technologies to supply telecommunications gear to Sprint Nextel, citing concerns over espionage. Meanwhile, Huawei and fellow Chinese equipment maker ZTE reported that the Indian government started blocking purchase orders placed with them in mid-February.

The stakes are enormous, says the research firm, with the combined global market for wired and wireless infrastructure telecommunications gear expected to exceed $65 billion in 2010, and rise to more than $83 billion in 2014.

“India’s move to obstruct the orders from the Chinese telecommunications has kicked off a sequence of events that resulted in billions of dollars of lost revenue for global telecom market vendors and significant project delays for India’s telecom service providers,” said Lee Ratliff, senior analyst for broadband and the digital home at iSuppli. “India’s concern stems from suspicions that foreign-made equipment – particularly Chinese gear – represents a significant security risk given the possibility that sensitive information could be transmitted to foreign governments through firmware back doors.”

India started requiring all equipment purchase orders to be reviewed by the government for approval before allowing authorization, according to iSuppli. While Western vendors experienced severe delays in the approval process, purchase orders with Chinese vendors were rejected outright. Nonetheless, India has never acknowledged that a ban existed, and says simply that orders were put on “indefinite hold” while being investigated.

By the end of June, a total of 450 orders amounting to more than $2 billion had been put on hold as a result of the security clearance process, said India’s Economic Times. Of these, 27 had been approved – all with Western vendors such as Alcatel-Lucent, Ericsson and Nokia Siemens Networks.

In May, India’s state-run telephone company BSNL announced that Huawei and ZTE would be excluded from bidding on a $500 million GSM expansion project, most likely to avoid delays because of the security clearance process. The decision came despite the fact that BSNL had chosen Huawei as a GSM vendor for a project earlier in the year that had since then been cancelled, iSuppli indicated.

Even before the recent concerns expressed by the senators, the Chinese telecommunications gear makers have faced obstacles when doing business in the US.

“Huawei and ZTE rank among the top telecom equipment vendors globally, but neither has been able to crack the US market despite more than a decade of effort,” Ratliff said. “Lingering concerns over security have reportedly led the US government to ban transmission of its sensitive data over networks using Chinese equipment. A 2008 Pentagon report to Congress highlighted Huawei’s links to the Chinese government, furthering concerns. Huawei’s efforts to buy its way into the US market through acquisitions of 3COM, 2Wire, and Motorola’s wireless unit have all been scuttled due to concerns of a US government veto.

“Fair or not, Huawei’s opaque ownership and structure, as well as its CEO’s well-known ties to the People’s Liberation Army and the Communist party, are likely to handicap the company in India, the United States and other countries – at least until Huawei becomes considerably more transparent and consciously distances itself from Beijing.

“The key elements that have made Chinese vendors successful – inexpensive labor, a home-field advantage in China’s hot telecom market, and access to an almost unlimited line of credit though government banks – are unlikely to disappear anytime soon,” Ratliff said. “However, the vendors face serious opposition in several of the largest markets left to penetrate. Having already picked the low-hanging fruit, these companies may find it more difficult to grow in the future than they have in the past. And each pause on the way to growth for the Chinese companies is an opportunity instead for Western vendors to get back on their feet and adjust to the new competition.”

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