India Restricts Chinese Telecom Firms Citing Security Concerns

The Indian government dealt a blow to Chinese telecom equipment makers this month when it banned operators in India from making any further purchases from two Chinese firms, citing security concerns. China’s two biggest telecom equipment manufacturers, Huawei Technologies and ZTE, have one month to disclose additional ownership details before India’s security agencies make any final decisions. Both companies failed security tests over concerns that spying technology could be embedded in their cellphones, among others.

As the second-largest cellular market, India is a top priority for many of the world’s tech companies. In recent years, Chinese companies such as Huawei  and ZTE have made serious inroads in the Indian telecom market; with equipment that is priced 30 to 40 per cent cheaper than their Western rivals Ericsson, Alcatel- Lucent and Nokia Siemens Networks, they’ve succeeded in capturing a 15 per cent share of the market in a relatively short time. According to Reuters, India is adding about 16 million cellular subscribers a month, and local carriers are expected to buy “billions of dollars in additional network equipment to build out third-generation networks due to be operational later this year.”

However, New Delhi is growing increasingly wary of Chinese companies due to national security concerns, particularly in the telecom industry. The firms are already restricted from supplying equipment in 15 border provinces, mainly in the North East, where India has an ongoing border dispute with China. Recent reports that Chinese hackers stole classified Indian security documents have only added to Indian jitters.

Many in India, including a high-profile cabinet minister, seem to think that Indian security agencies are overreacting to any perceived Chinese threat. They point to the fact that almost 80 percent of the workforce in these companies is Indian and question why Chinese firms are being singled out for scrutiny. While officials insist publicly that the restrictions are not limited to Chinese firms, there seems to be some private consensus that China’s growing military clout and its aggressive cyber-warfare techniques cannot be ignored.

ZTE has said that local carriers have held back $200 million to $300 million worth of orders due to these restrictions; if the ban stays permanent, these companies risk losing their sizable market share despite their heavy investments in India.  With China recently replacing the US as India’s biggest trade partner, some worry that targeting Chinese companies may backfire and increase trade tensions if China decides to retaliate. This argument may be a hard sell since China is far more restrictive of foreign companies within its borders compared to India. For instance, Chinese companies routinely compete, many times successfully, for contracts in India’s infrastructure and oil and gas development projects. On the other hand, in China, state-owned companies are heavily favored over foreign companies; a recent New York Times story reported that foreign companies are increasingly upset with China over its “buy Chinese” measures and its policies that force MNCs to move factories to China.

ZTE and Huawei are betting on the premise that similar moves may satisfy the Indian government. Both have said they are willing to build factories in India to allay Indian security concerns. They are also said be on a charm offensive in New Delhi, some of them by even taking on Indian first names. It remains to be seen if any of this will help sway India’s skeptical decision makers.