Huawei, ZTE Suffer New Image Setback 华为和中兴改善形象的努力受挫

By newsdoug on June 12, 2012

Nothing seems to be going right these days for Chinese telecoms equipment superstars Huawei and ZTE (HKEx: 763; Shenzhen: 000063), whose new convictions for corruption in Algeria certainly won’t help their bids for greater acceptance from western governments suspicious about their ties to Beijing and broader business practices. Media are reporting that 2 employees, one each from Huawei and ZTE, have both been found guilty of corruption in a trial in Algeria and were sentenced to 10 years in prison. (English article) The pair were both also fined the equivalent of $65,000 for their involvement in a bribery scandal as they sought to gain advantage in selling networking equipment to the country’s main telco, Algerie Telecom. The 2 were tried in absentia, which indicates they conveniently got to leave the country before the charges were filed and won’t have to spend any time in an Algerian prison, avoiding any diplomatic blow-ups between Beijing and the North African country. But from an image perspective, this kind of conviction is the last thing that either Huawei or ZTE needs as both try for greater access to lucrative western markets that they have been largely shut out of for the last 2 years for a range of reasons. One of the biggest of concerns has been security, with the US particularly worried about potential ties between the 2 companies and Beijing, which could allow Beijing to use their equipment for spying. Those concerns have killed a number of high-profile bids for both companies in the last year, including Australia’s banning of Huawei in March from bidding to help build a new high-speed broadband network in that country (previous post); and ZTE’s exclusion last year from helping US wireless carrier Sprint (NYSE: S) to build its 4G network. (previous post) The Europe Union has also raised its own concerns even more recently, with media reporting last month that the EU had launched an investigation against both Huawei and ZTE over allegations that both receive unfair support from Beijing through low-cost loans, export rebates and other government incentives to boost the companies’ overseas sales. (previous post) The developments have taken their toll on both Huawei and ZTE, which have both seen their growth slow sharply over the last year as each faced obstacles in not only the west, but also in India, one of their other major growth markets, where a domestic corruption scandal has brought spending on new wireless networks to a virtual halt. All those woes and the resulting slowdown helped to fuel a recent string of domestic media reports that Huawei was making major “adjustments” to its workforce after years of breakneck growth. Huawei later denied any rumors of large-scale layoffs, even though it didn’t rule out such moves in the future. (previous post) This latest corruption conviction is unrelated to the earlier concerns over security and unfair competition, and I would suspect that Huawei and ZTE aren’t the only companies guilty of this kind of behavior in developing markets. In fact, French-American rival Alcatel Lucent (Paris: ALUA) was caught up in similar bribery allegations in China several years ago, and executives at major western firms often complain privately that rules by their home governments forbidding them from engaging in bribery and other gift buying often put them at a competitive disadvantage when doing business in emerging markets where such practices are common. Still, these latest convictions won’t do much to help recent campaigns by both Huawei and ZTE designed to show western business and government leaders that they behave like their big US and European rivals. Accordingly, I wouldn’t be at all surprised to see US and European politicians add corruption to their growing list of concerns about these 2 companies, meaning it could be even longer before they manage to make their next big deals in major western markets.

Bottom line: New corruption convictions against Huawei and ZTE employees in Algeria mark the latest setback in their campaigns to clean up their image in western markets.

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