China’s Growth in Telecom Equipment Manufacturing a Threat to U.S. Security, Study Says

Rapid growth in the Chinese telecom equipment manufacturing sector is a threat to U.S. national security because it’s a possible source of cyberattacks on U.S. communications infrastructure, said retired U.S. Army Brig. Gen. John Adams in a report released Wednesday, commissioned by the lobbying and policy group Alliance for American Manufacturing (AAM). The report said U.S. national security and the nation’s defense-industrial base are threatened by an over-reliance on foreign suppliers for “critical defense materials,” including telecom equipment (http://bit.ly/144fqnC). The AAM report follows the release earlier this week of a Defense Department report to Congress that said at least some cyberattacks on U.S. government and civilian computer networks “appear to be attributable directly to the Chinese government and military.” China is waging these attacks to gather information on U.S. defense, diplomatic and economic interests “that support U.S. national defense programs,” the Defense Department said in its report (http://1.usa.gov/13ecTZb). The Defense Department report makes it “all the more urgent” that the U.S. restore domestic production of telecom equipment and other equipment needed for military use, Adams said at a news conference Wednesday.

The U.S. has lost its place as “industry leaders” as telecom companies have moved manufacturing overseas, with companies like Chinese manufacturers Huawei and ZTE who have the “most competitive pricing” replacing them, the AAM report said. Huawei’s share of the global mobile infrastructure market rose from 4.5 percent in 2006 to 15.6 percent in 2010; the company had $32 billion in revenue in 2011 from telecom sales, while market leader Ericsson had $35 billion in revenue, the report said. A similar pattern occurred in mobile phone manufacturing; China’s share of that market rose from 44.7 percent in 2008 to 71.3 percent in 2010, the report said.

The increased Chinese presence in the telecom supply chain is more problematic because U.S. telecom companies outsource production to foreign manufacturers, the AAM report said. Since the Defense Department usually buys its equipment from commercial vendors, it’s therefore exposed to “any issues introduced throughout the geographically dispersed supply chain,” the report said. Malicious hardware or software could be embedded into a product, making it a possible conduit to transmit sensitive information. Although federal agencies and the military protect classified information through encrypted networks, “unclassified yet sensitive” information is transmitted on open networks that would be vulnerable to co-opted hardware or software, the report said. Malicious hardware or software also has the potential to disrupt or disable the Internet by manipulating network routers or switches, particularly by remote manipulation, the report said.

The increased Chinese presence poses a threat because the Chinese companies are “closely connected” with the Chinese government and the People’s Liberation Army, the report said. The House Intelligence Committee raised similar concerns last year as it investigated possible national security risks posed by Huawei and ZTE. The committee said both companies receive significant subsidies from the Chinese government, raising concerns that the companies were selling telecom equipment in the U.S. that could be used to launch cyberattacks and espionage. Both companies continue to deny that the Chinese government has any influence on their business practices. Although a report released in October did not find conclusive proof that Huawei and ZTE were involved in any wrongdoing, the committee still “strongly” recommended that the U.S. government and American companies not do business with either company. The committee also recommended that the Treasury Department’s Committee on Foreign Investments in the U.S. (CFIUS) block either company’s attempts to buy or merge with U.S. companies (CD Oct 10 p3).

The risks posed by Huawei and ZTE are “the tip of the iceberg,” said AAM President Scott Paul. The “strong evidence” that China is engaged in cyberattacks on U.S. interests “leads us to question what you can call a trusted supplier in China today for hardware, given all of the challenges we see in cyberspace,” he said. “We need to begin looking at unwinding some of this.”

The U.S. “runs the risk of losing its capacity to keep up with revolutionary changes in information and communication technology” if Chinese companies continue to grow their market share in the telecom sector, the AAM report said. Although outsourcing of technology reduces costs for U.S. companies and consumers, it also “makes old technology more profitable, and reduces the incentive to switch to newer but more expensive technologies,” the report said. Building up “our own capabilities” is as big an issue as concerns about cyberattacks and espionage, Adams said. “If we concede that battlefield to them, and allow them to develop the advanced technology infrastructure and advanced technology manufacturing, basically we're taking what we know will be a weapon of the future and giving it to our adversary,” he said. “It’s a current threat, but as we let this situation deteriorate more and more and allow the Chinese to build up their superiority in the field of cyberwarfare, we're conceding the future battlefield to them."

The AAM report recommended Treasury refine CFIUS’s mission and authority to give it clearer guidelines on when a technology investment or exchange “constitutes a threat to national security.” The current guidelines are unclear, possibly giving the appearance that the U.S. is politicizing its trade policy, particularly toward China, the report said. The U.S. needs to “reassure China that these decisions truly are based in national security concerns rather than to gain an unfair economic advantage,” the report said.

The report also recommended implementing and enforcing controls at each transaction point in the supply chain. The Defense Department should “request access to, and the right to inspect, any firmware or software needed for the hardware to function,” the report said. The U.S. should also work with international agencies and governments to secure the global IT system, the report said. Congress should consider enacting a package of tax breaks and other incentives to reverse declines in the U.S. telecom manufacturing industry, the report said, saying “aggressive action and targeted intervention are needed” to revive the sector. The report also recommended restoring the historic partnership between academic institutions, federal agencies and the private sector to “foster innovation and stimulate the ongoing commitment to design, manufacture and assemble” telecom equipment in the U.S.

Sen. Chris Murphy, D-Conn., said the report is an indication that it is time to “put teeth back” into the Buy American Act. The bill, originally enacted in 1933, requires the U.S. government to give preference to U.S.-made products when it makes purchases; loopholes enacted over the last 80 years have rendered the law “almost useless,” he said. The AAM report “will add enormous ammunition” to the case for reforming the Buy American Act, Murphy said. The military’s reliance on foreign suppliers “threatens America’s security independence,” said Rep. Mo Brooks, R-Ala. “Having a foreign-based supply chain makes our system vulnerable.”