Huawei and ZTE hit by US patent probe

China Daily, August 23, 2012

The United States International Trade Commission announced on Tuesday that it had launched a patent probe into Huawei Technologies Co Ltd and ZTE Corp, the latest of a series of blows to Chinese telecom gear makers in the US market. [Photo/China Daily]

The investigation points to certain wireless consumer electronics devices and components, according to a statement posted on the USITC website. Twenty-four companies, from both the US and overseas, are involved in the "Section 337 investigation", it said.

In addition to Huawei and ZTE, some of the world's leading consumer electronics companies, including Nintendo Co Ltd of Japan and Amazon.com Inc of the US, also appeared on the list.

The products at issue are consumer electronic devices with wireless capabilities, such as electronic tablets, smartphones, e-readers, mobile hotspots, broadband wireless modems and handheld game consoles, the statement said.

The investigation is based on a complaint filed by three California-based manufacturers on July 24. The three companies call on the commission to "issue an exclusion order and cease and desist orders" on the wireless devices in question.

Huawei and ZTE did not respond to requests for interviews from China Daily on Wednesday.

Chen Jihong, a licensed lawyer at the Beijing-based Zhong Lun Law Firm, said if the order is followed, it could have a severe impact on Chinese telecom companies, since they would no longer be allowed to sell certain devices in the US.

"The exclusion order could do far more damage than anti-dumping regulations," Chen said.

The US authorities have conducted a series of investigations and issued prohibitions on Huawei and ZTE in recent years. Founded in Shenzhen, Guangdong province, in the 1980s, Huawei and ZTE have become telecom gear suppliers competing in the world's top league, rivaling Telefon AB LM Ericsson, Alcatel-Lucent and Nokia Siemens Networks.

But the two companies have experienced a bumpy road in tackling the US market. "Chinese telecom companies are barred from selling network equipment to major US carriers, due to political and security concerns," said Yang Haifeng, a telecom expert who is also chief editor of Communications World Weekly.

Huawei had been barred from acquiring two companies over the past five years by the US government. And last year, the US Department of Commerce blocked it from getting involved in the building of a national wireless emergency communications network.

In July, Reuters reported a US website disclosed that the FBI had opened a criminal investigation into ZTE's business in Iran. ZTE is also under investigation by the US House of Representatives' Intelligence Committee over whether its equipment represents a threat to national security.

Now the "Section 337 investigation" may pose a big challenge to Huawei and ZTE, which rely heavily on terminal business in the US market, analysts said.

Since Huawei and ZTE encountered setbacks in the network infrastructure market, they have found other ways to grow their business in the US. Both companies started to promote mobile phone and enterprise IT solutions in recent years, and experienced strong growth momentum in the US market.

"The US is one of the world's biggest consumer electronics markets, and terminal businesses have gradually played a more important role for ZTE and Huawei," said Yang. If the two companies do receive exclusion orders, the blow may affect their annual revenue growth rates, he added. Because of the sluggish investment by global telecom carriers, the world's network infrastructure providers are experiencing tough times this year.

ZTE said on Wednesday that its first-half net profit reached 245 million yuan ($38.5 million), well below the 769 million yuan reported a year earlier.

Tu Xinquan, assistant dean of the China Institute for WTO Studies at University of International Business and Economics, said since the USITC is yet to make any decision on the investigation, the Chinese companies should try to prove that they do not violate patent rights.

"The investigation is pressing Chinese companies to reach an agreement with those US companies. In the long run, they should pay more attention to innovation in order to gain an advantage," Tu said.