1

 

U.S.-China Economic and Security 

Review Commission Staff Report

January 2011

(information current as of November 2010)

by USCC Research Staff

supported by Reperi LLC

 

 

THE NATIONAL SECURITY IMPLICATIONS 

OF INVESTMENTS AND PRODUCTS FROM

THE PEOPLE’S REPUBLIC OF CHINA

IN THE TELECOMMUNICATIONS SECTOR
2

Disclaimer: 

This paper is the product of professional research performed by staff of the 

U.S.-China Economic and Security Review Commission, supported by 

technical analysis and market trend analysis performed by Reperi LLC. The 

research supporting this report has been monitored by individual members of 

the Commission; however, this report and its contents do not necessarily 

reflect the positions or opinions of either the Commission or of its individual 

members, or of the Commission’s other professional staff.

Research for this report was performed in 2009 and 2010. A good faith effort 

has been made to present accurate information that would be current as of the 

time of publication. Any differences between current data and data in this 

report may be due to changes occurring during time elapsed for report 

preparation and review, or to the reliability of data from sources consulted.
3

NOTICE

This paper presents an open source analysis of the impact on U.S. national security interests of 

China’s extensive engagement in the U.S. telecommunications sector.

The paper’s research covers the following:

• The nature of changes in the U.S. telecommunications supply chains and the impacts on 

U.S. national security.

• The technological trends in telecommunications and related technologies.

• The People’s Republic of China’s (PRC) direct and indirect investment trends in 

telecommunications and related technologies and in the U.S. telecommunications 

marketplace.

• The nature of the People’s Republic of China’s direct and indirect ownership, control, 

and influence in the U.S. telecommunications supply chain.

• The penetration of the U.S. marketplace by companies subject to ownership, control, or 

influence by the People’s Republic of China.

• The locations where products designed, engineered, or manufactured in China or 

supplied by companies subject to control or influence by China may appear in the U.S. 

marketplace and critical supply chains.

• The trends in the marketplace that can be attributed to the influence of China’s 

ubiquitous presence in U.S. supply chains.

• The nature of relationship-building between U.S. companies and companies located in 

and/or subject to control or influence by the People’s Republic of China.

• The potential vulnerabilities of critical elements of the U.S. telecommunications market 

exploitable by actors in supply chain segments.

• The assessment of potential cyber security impacts.

• The means of assessing telecommunications and supply chain vulnerabilities.

• The impacts of present and emerging vulnerabilities on U.S. defense contractors and 

government procurement functions.
4

TABLE OF CONTENTS

INTRODUCTION 6

SECTION 1: 

MACRO-LEVEL PATTERNS OF CHINA’S

TELECOM INVESTMENT ACTIVITIES 9

• Text Box: Telecommunications as a “Strategic” Industry in China 10

• Global Telecommunication Market Trends in 2008-2009 11

• CHINESE TELECOM COMPANIES ENTER THE U.S. MARKET

China: Developer and Provider within China and

Global Exporter of Wireless and Next Generation Networks 12

• Huawei Technologies 13

• Text Box: European Controversies over Alleged State Support to Huawei 13

• Figure 1: Huawei Technologies Offices in North America 15

• Text Box: Controversies Surrounding the Activities of Huawei 15

• Recent Unconsummated Huawei Deals, and Potential Deals on the Horizon 19

• Text Box: Concerns Regarding Potential Network Penetration

by PRC Intelligence Agencies 20

• ZTE Corporation 21

• The Role of Huawei and ZTE in the U.S. Market 23

• Text Box: Examples of U.S. Market Penetration by Chinese 

Telecom Companies 23

• The Major Chinese Domestic Telecom Corporations 24

• Text Box: State-Directed Personnel Shuffling and Restructuring

At PRC Telecom Corporations 27

• HUAWEI AND 3-COM: A CLASSIC EXAMPLE OF CHINA’S FORAYS INTO

THE U.S. MARKET VIA JOINT VENTURE AND ACQUISITION 28

• Text Box: A Timeline History of 3Com 29

• DEALS IN THE TELECOM SECTOR, AND THE ROLE OF CFIUS 30

• Text Box: CFIUS and the Abortive Emcore / Caofeidian Deal 31

• Figure 2: Location of Caofeidian Island 32

• Figure 3: Artist Conception of Caofeidian Island 32

• THE GROWTH STRATEGY OF CHINESE TELECOM FIRMS 33

• EXPANSION INTO DEVELOPING MARKETS 34

• THE EAST-WEST FLOW OF INVESTMENTS 

IN THE COMMUNICATIONS SECTOR 36

SECTION 2: 

POTENTIAL VULNERABILITIES IN COMMUNICATIONS

INFRASTRUCTURE AND PRODUCTS, AND CHINESE

INVESTMENTS IN THESE SECTORS 39

• INVESTMENTS IN LONG-HAUL FIBER 39

• Text Box: The Security of Optical Fiber Networks, and the 

Case of Global Crossing and Hutchison-Whampoa 40

• Figure 4: Global Crossing Networks in 2010 41

• ROUTERS, SWITCHES, AND HUBS 42

• WiMAX/WiFi – NETWORK AND NETWORK CONTROL DEVICES 

AND PROTOCOLS FOR WIRELESS NETWORKING 44

• Text Box: Huawei and the Development of LTE Standards 45

• APPLICATIONS SOFTWARE: Software/Controllers/Drivers 46
5

• NETWORK SECURITY PRODUCTS: Security Software 46

• Text Box: The Creation of Huawei Symantec 47

• HANDSETS AND SMART PHONES 48

• Figure 5: A T-Mobile UK “Pulse” Smartphone with Huawei Android Technology 49

• HANDSETS AND SMART PHONES: POTENTIAL VULNERABILITIES 49

• Text Box: The Debate Over “Open” vs. “Closed” Standards 50

• WIRELESS HEADSETS, EARPIECES, AND BLUETOOTH 54

• Bluetooth: Potential Vulnerabilities 54

• Text Box: Switching Equipment and Other Networking

Services – The Nortel Story 54

• Table 1: Where China's Products Are Found in the

U.S. Communications Market 57

• Table 2: Where China's Investments Are Found in the 

U.S. Communications Market 58

• Figure 6: Sample Integrated Operational Network Model (Healthy) 59

• Figure 7: Sample Integrated Operational Network Model (Corrupted) 60

• Figure 8: Sample Integrated Operational Network Model (Disabled) 61

SECTION 3: 

SUPPLY CHAIN INTEGRITY, AND THE IMPACT 

ON GOVERNMENT/DEFENSE CONTRACTING 62

• Text Box: Supply Chain Integrity and Cyber Security 63

• Text Box: Chinese Cyber Espionage Directed vs. the United States 65

• CONTROL OF MANUFACTURING PROCESSES 65

• Text Box: Lenovo’s Entry into the U.S. Computer Market,

and Controversies Surrounding its Government Sales 66

• MICROCHIP MANUFACTURING: 

Key Cyber Security and National Security Risks 68

• Text Box: The Defense Science Board Task Force 

2005 Report on High-Performance Microchip Supply 69

• Text Box: Recent Cases Involving Counterfeited 

Computer Equipment from China 71

• TESTING OF INTEGRATED CIRCUITS 72

• Kill Switches and Backdoors 74

CONCLUSIONS & RECOMMENDATIONS 75

• SUPPLY CHAIN SECURITY AND POTENTIAL IMPACTS ON

GOVERNMENT CONTRACTING FOR SENSITIVE SYSTEMS 75

• RESPONSES TO SUPPLY CHAIN CHALLENGES 76

• THE CHESS GAME OF STANDARDS –

THE NEW METHODS FOR OWNING SUPPLY CHAINS 77

• INNOVATION IN AMERICA, AND THE SHORTAGE OF 

MATHEMATICIANS, SCIENTISTS, AND ENGINEERS 78

• Table 3: Computer Science and Engineering Bachelor’s Degree 

Enrollments in the United States, 1980-2005 80

• PRODUCT CONTROL ISSUES IN GOVERNMENT

COMMUNICATIONS SYSTEMS 80

APPENDICES

• Appendix A: What Is a Cyber Attack? 82

• Appendix B: Glossary 85

• Appendix C: Partial Bibliography 93
6

INTRODUCTION

The increased presence of Chinese telecommunications products and services in the American

marketplace is the result of bilateral investment between the United States and China. Chinese 

companies have offered U.S. investors (investment banks, venture firms, business investors, 

and others) opportunities to balance risk and gain potentially higher rates of return by 

participating in the world’s fastest-growing emerging market. By outsourcing some aspects of 

operations, U.S. businesses and multinational corporations have been able to increase the 

amount of value built into products compared to the same dollars expended domestically and 

have further been able to diversify market holdings in Asia after reaching saturation points in 

U.S. and European markets.

In a similar way, Chinese companies are increasingly looking to the American market to open 

up new opportunities.1 U.S. companies have offered Chinese firms and investment funds 

access to established business models and advanced research and development processes, 

increased efficiencies in select areas of business, and opportunities in the world’s wealthiest

market. Aside from raising their own levels of technical and management expertise, they are 

also able to affiliate their products with the excellent reputation of U.S. brands in global markets. 

China’s technology industry now appears to be a de facto part of the American communications 

industry landscape. Based on current market realities, the presence and continued growth of 

products with at least partial manufacturing and development origins in China will continue to 

increase and pervade most areas of American life, business, and government.

Chinese telecommunications companies are also actively expanding into global markets. In 

emerging markets not encumbered by existing legacy infrastructures, demand for new telecom 

capabilities is often best met by utilizing generation-leaping technologies, a phenomenon that is 

helping to drive a large global appetite for leading-edge technological innovation. Chinese 

telecom technology companies are aggressively pursuing customers in emerging 

communications technologies – and are thus gaining traction in global markets, particularly

emerging markets.

The expansion strategy of Chinese telecoms is becoming increasingly more effective as 

business acumen gained from joint ventures, partnerships, and acquisitions improves their 

competitive capabilities. Chinese companies have also thoughtfully cultivated global 

management and recruitment models that are helping them move into positions of global 

leadership through management excellence.2

 Direct and indirect investment from developed 

countries into Chinese telecom and technology ventures, and China’s own strategic acquisitions 

of technological know-how and physical infrastructures in other emerging markets, are also

facilitating their emergence as a formidable global competitor. 

Many aspects of the future global telecom and technology markets are now being shaped by 

Chinese business and governmental interests. The momentum they are gaining and the way 

they are applying their advantages are transforming global markets, propelling Chinese telecom 

 1 Dezan Shira & Associates, “Made in USA: China and India Invest Abroad,” May 13, 2010. 

http://www.2point6billion.com/news/2010/05/13/made-in-usa-china-and-india-invest-abroad-5645.html. 2 Northrop Grumman Corporation, “Capability of the People’s Republic of China to Conduct Cyber Warfare and 

Computer Network Exploitation” (contracted research paper for the U.S.-China Economic and Security 

ReviewCommission, June 2009). 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman_PRC_Cyber_Paper_FINAL_Approved%20Report_16

Oct2009.pdf.
7

and technology ventures toward the leading edge of technology development, manufacturing, 

and standards setting. If current trends continue, China (combined with proxy interests) will 

effectively become the principal market driver in many sectors, including telecom, on the basis 

of consumption, production, and innovation. 

This greater potential role for China has generated concerns regarding corresponding potential 

national security implications of manufacturing and investment by China’s telecommunications 

companies. Signals intelligence (SIGINT) is a significant source of Chinese intelligence 

collection,3 and there is growing public concern over the impacts of cyber espionage incidents 

that appear to originate in China.4

 Furthermore, large China-based, -owned, or -influenced 

companies – particularly those “national champions” prominent in China’s “going out” strategy of 

overseas expansion – are subject to government direction, to include support for PRC (People’s 

Republic of China) state policies and political goals.5

 In light of this, the large footprints of 

Chinese state-affiliated companies in global telecommunications markets, and their acquisitions 

in part or in whole of western telecom firms, may generate concerns in some quarters that this 

may facilitate increased intelligence exploitation of international communications and computer 

networks by Chinese state-affiliated entities. Concern over growing Chinese influence in this 

arena is not unfounded, but should be balanced by a realistic assessment of communications 

security vulnerabilities as well as by an appreciation of the symbiosis that has developed 

between the Chinese and western telecommunications industries.

The greatest potential impact on the United States could come in the form of Chinese

investments in U.S. telecommunications companies. The vast global telecommunications and

technology infrastructures owned or operated by these companies include undersea, terrestrial, 

wireless, and space-based networks. These investments would increase China’s leverage in 

the U.S. marketplace and beyond (even if indirectly through joint ventures and third parties) and 

could eventually provide China access to or control of vital U.S. and allied information, 

networks, or segments of critical supply chains.

Another key concern regarding the security of U.S. communication and computer networks 

relates to the reliability of electronics components found within the network hardware. National 

security vulnerabilities attributable to having critical infrastructure components manufactured, 

implemented, operated, or maintained by foreign actors are increasing at an escalated rate. 

Within government, steps can be taken to safeguard sensitive areas but at a substantially 

increased cost in both resources and lost opportunities to innovate. Trusted hardware and 

software produced domestically may cost more than commoditized products produced abroad. 

The government may also find that it will have to curb the infusion of ever-newer 

communications technologies into some especially sensitive areas in favor of retaining secure 

legacy technology models.

 3 Interagency OPSEC (Operations Security) Support Staff, Intelligence Threat Handbook (June 2004), p. 23. 

http://www.fas.org/irp/threat/handbook/foreign.pdf ; and Interagency OPSEC Support Staff, Intelligence Threat 

Handbook – Selected Supplemental Intelligence Service Information (June 2004), pp. 75-76. 

http://www.fas.org/irp/threat/handbook/supplement.pdf. 4

 Northrop Grumman Corporation, “Capability of the People’s Republic of China to Conduct Cyber Warfare and 

Computer Network Exploitation” (contracted research paper for the U.S.-China Economic and Security Review 

Commission, June 2009). 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman_PRC_Cyber_Paper_FINAL_Approved%20Report_16

Oct2009.pdf

5 For a detailed explanation and examples of this phenomenon, see “China, Inc.: The Party and Business,” chapter 2, 

in Richard McGregor, The Party: The Secret World of China’s Communist Rulers (New York: Harper Collins, 2010).
8

Staking out a middle course between being unduly alarmist and unduly complacent, this report 

seeks to lay out in greater detail many of the issues involved in the international investments 

made by Chinese telecommunications firms. It also seeks to describe some of the potential

security vulnerabilities in communications networks that might be exploited by hostile actors, 

whether state sponsored or otherwise. It is hoped that this will help to better illuminate for 

Congress and the general public a critical area of concern that stands astride the crossroads of 

U.S. national security and future economic security.
9

SECTION 1

MACRO-LEVEL PATTERNS OF CHINA’S

TELECOM INVESTMENT ACTIVITIES

The Chinese government treats the telecommunications sector as a “strategic” industry (see 

text box below) and has expended significant effort and resources to promote and enable new 

business opportunities in the telecommunications field. These efforts are supported by nationallevel policies, as the country’s senior leadership perceives investment in high-technology 

sectors to be instrumental in closing the technological gap between China and western nations.6

 

The large and growing state-controlled telecommunications sector is also a major source of 

government revenue. As stated by political scientist Cheng Li:

The Chinese government has always considered the telecom sector to be one of the 

most strategically important and commercially lucrative industries in the country. [As of]

2005, the six leading Chinese telecom operation providers [were]: China Telecom, China 

Mobile, China Netcom, China Unicom, China Railcom, and China Satcom, all of which

[were] state-owned enterprises (SOEs), reported that they had total assets of 10.6 trillion 

yuan, revenues of 6.6 trillion yuan, and profits of 600 billion yuan. [As of that year,]

[t]hese six companies constituted one-sixth of the total assets, and 20 percent of the 

profits, of all of the enterprises directly under the leadership of the State-Owned Assets 

Supervision and Administration Commission.7

National security concerns have accompanied the dramatic growth of China’s telecom sector. 

Signals intelligence is a significant source of Chinese intelligence collection,8 and there is 

growing public concern over the impacts of cyber espionage incidents that appear to originate in 

China.9 Additionally, large Chinese companies – particularly those “national champions” 

prominent in China’s “going out” strategy10 of overseas expansion – are directly subject to 

direction by the Chinese Communist Party (CCP), to include support for PRC state policies and 

goals.11

 6 Evan Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to the 

Information Age (Palo Alto, CA: Stanford University Press, 2003). 

From this point of view, the clear economic benefits of foreign investment in the United 

States must be weighed against the potential security concerns related to infrastructure 

7

Cheng Li, “China’s Telecom Industry on the Move: Domestic Competition, Global Ambition, and Leadership 

Transition,” China Leadership Monitor 19 (2006). 8 Interagency OPSEC Support Staff, Intelligence Threat Handbook (June 2004), p. 23. 

http://www.fas.org/irp/threat/handbook/foreign.pdf ; and Interagency OPSEC Support Staff, Intelligence Threat 

Handbook – Selected Supplemental Intelligence Service Information (June 2004), pp. 75-76. 

http://www.fas.org/irp/threat/handbook/supplement.pdf . 9 Northrop Grumman Corporation, “Capability of the People’s Republic of China to Conduct Cyber Warfare and 

Computer Network Exploitation” (contracted research paper for the U.S.-China Economic and Security Review 

Commission, June 2009). 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman_PRC_Cyber_Paper_FINAL_Approved%20Report_16

Oct2009.pdf

10 The ‘‘Going Out’’ strategy is a Chinese government campaign introduced at the 2002 Communist Party Congress 

to raise China’s global economic profile by investing overseas and acquiring foreign assets. See U.S.-China 

Economic and Security Review Commission, Annual Report to Congress 2009 (Washington, DC: U.S. Government 

Printing Office, November 2009), p. 94, footnote #52. See also Jamil Anderlini, ‘‘China to Deploy Forex Reserves,’’ 

Financial Times, July 21, 2009; and Accenture Consulting, “China Spreads Its Wings: Chinese Companies Go 

Global,” 2007.

11 For a detailed explanation and examples of this phenomenon, see “China, Inc.: The Party and Business,” chapter 

2, in Richard McGregor, The Party: The Secret World of China’s Communist Rulers (New York: Harper Collins, 

2010).
10

components coming under the control of foreign entities. This seems particularly applicable in 

the telecommunications industry, as Chinese companies continue systematically to acquire 

significant holdings in prominent global and U.S. telecommunications and information 

technology companies.12

Some analysts also believe that the government of the People’s Republic of China is interested 

in acquiring meaningful stakes in companies that have significant influence in other national 

governments. This particularly applies to companies that also have significant investment or 

stakes in China’s markets (such as technology and telecommunications equipment providers). 

Influencing the behavior of multinational companies with this form of leverage may be one 

logical way for the Chinese government to seek to protect its interests in a global context.13

Telecommunications as a “Strategic” Industry in China

Telecommunications is one of seven “strategic industries” in which the Chinese government 

seeks to maintain “absolute control” (meaning over 50 percent ownership). The government 

also wishes to maintain a dominant presence in six “heavyweight” industries through regulation 

and government control. These industries are as follows:14

Strategic Industries: Heavyweight Industries:

(1) Armaments (1) Machinery

(2) Power Generation and Distribution (2) Automobiles

(3) Oil and Petrochemicals (3) Information Technology

(4) Telecommunications (4) Construction

(5) Coal (5) Iron and Steel

(6) Civil Aviation (6) Nonferrous Metals

(7) Shipping

The Chinese government has actively sought to cultivate state-controlled “national champions” 

companies in these sectors.15 It has also offered state support to companies in its “strategic” 

and “heavyweight” industries, such as land and energy subsidies, favorable tax policies, and 

below-market interest rate loans issued from state banks with reduced or no expectation of 

repayment.16 The PRC’s “national champions” are a centerpiece of the government’s “going 

out” strategy to cultivate state-controlled firms capable of competing in the international 

marketplace.17

 12 For examples of overseas acquisitions made, or sought, in 2010 by Chinese telecommunications companies, see 

(1) A pending purchase of Nigerian Telecom (Nitel) by China Unicom, in “Rumor: China Unicom Leads Nitel 

Acquisition,” C114.com, October 16, 2010. http://www.cn-c114.net/583/a550716.html; and (2) the statement that 

China Telecom “will ‘closely examine’ opportunities for overseas acquisitions” as it moves into markets such as that 

of India, in Peter Stein and Yun-Hee Kim, “China Firm Eyes India,” Wall Street Journal, September 28, 2010. 13 Wayne M. Morrison and Marc Labonte, “China's Holdings of U.S. Securities: Implications for the U.S. Economy,” 

(Washington, DC: Congressional Research Service, CRS-7, January 9, 2008). 14 U.S.-China Economic and Security Review Commission, Annual Report to Congress 2009 (Washington, DC: U.S. 

Government Printing Office, November 2009), p. 59. For the underlying source, see U.S.-China Economic and 

Security Review Commission, Hearing on the Extent of the Government’s Control of China’s Economy, and 

Implications for the United States, written testimony of Barry Naughton and George Haley, May 24, 2007. 15 U.S.-China Economic and Security Review Commission, Hearing on the Extent of the Government’s Control of 

China’s Economy, and Implications for the United States, written testimony of Barry Naughton , May 24, 2007. 16 U.S.-China Economic and Security Review Commission, Annual Report to Congress 2009 (Washington, DC: U.S. 

Govrnment Printing Office, November 2009), pp. 57-65. 17Accenture Consulting, “China Spreads Its Wings: Chinese Companies Go Global,” 2007. 

http://www.accenture.com/NR/rdonlyres/1F79806F-E076-4CD7-8B74-

3BAFBAC58943/0/6341_chn_spreads_wings_final8.pdf
11

Some large Chinese companies, such as the telecommunications firm Huawei and the 

computer manufacturer Lenovo, retain a “hybrid” structure as “national champions” that receive 

favorable treatment through close government ties while also enjoying the freedom to operate 

as private companies domestically and abroad without bearing the onus of government ties.18

(See more on the background of Huawei on pp. 13-18, of ZTE on pp. 21-23, and of Lenovo on 

pp. 66-68).

Global Telecommunications Market Trends in 2008-2009

The merger and acquisition (M&A) environment in the telecommunications industry is active, 

and there are fast-growing markets worldwide, particularly in the developing world, Europe, and 

the United States.

19 More deals between U.S. and Chinese entities are likely to appear in the 

future: China has money to spend, telecommunications is a core strategic industry of interest, 

and a huge percentage of telecom equipment is manufactured in China. Therefore, it is 

reasonable to expect to see a global presence for Chinese companies as an acquirer and 

consolidator of assets and as a developer of new market opportunities.

Due to the global nature of communications and information markets, business trends in 

telecommunications are very often going to flow in a global context, with business transactions 

occurring within national contexts representing subtrends that will still seek centers of gravity 

created by global trends. M&A activity in telecommunications tends to fall into two categories:

A. Consolidations within mature markets.

B. Growth opportunities in emerging markets.

Some telecommunications businesses willing to risk emerging market hazards may wait for an 

emerging market’s conditions to conform to favorable metrics before attempting to develop a 

telecom prospect. Early infrastructure developers/service providers may at times wait for 

opportunities that will allow them to time early risks and will have few intentions of remaining in 

that particular developing market long term. Their business objectives may be to remain in an 

emerging market only long enough to develop service areas sufficiently for them to be attractive 

M&A targets by more long-term-oriented operators.

Following the panic in financial markets in 2008-2009, large telecommunications industry 

players have been waiting for greater economic distress to push M&A costs down to bargainbasement prices, but this did not happen as fully as had been anticipated. The year 2009 was 

characterized by “prospecting” in the telecom industry. Few actual mergers & acquisitions deals

occurred, however, as deeply discounted bargains did not materialize as much as might have

been expected or hoped for by prospective buyers. Future trends are likely to see a continual 

and marked increase in bids and sales as prospective buyers come back to bargaining tables 

with more realistic expectations.20

Lingering economic distress will undoubtedly push some vulnerable firms past the tipping point;

therefore, the future telecom marketplace, both globally and in the United States, should see 

 18 Geoff Dyer and Richard McGregor, “China’s Champions: Why State Ownership Is No Longer a Dead Hand,” 

Financial Times, March 16, 2008. 19 Within the United States, a great deal of new focus is to be found in rural markets, in particular. 20 “Up to Bat Again – Will it be Strike Two for Huawei in the U.S.?” Bill Newman Inbound Acquisitions and 

Investments Blog, quoting Financial Times article, April 16, 2010.
12

many M&A deals. Globally, telecom businesses are becoming much more tough-minded, are 

holding their most profitable business units back from M&A’s as they are best able to do so, and 

are disposing of underperforming business units much faster than might have been the case in 

the past.

CHINESE TELECOM COMPANIES ENTER THE U.S. MARKET

China: Developer and Provider within China, and Global Exporter of Wireless and Next 

Generation Networks

As wireless networking comes under cost pressures in the United States, more incentive has 

been created in the U.S. market to consider alternative vendors. By keeping costs down and 

moving ahead to next generation technologies, Chinese manufacturers have taken much of the 

initiative in developing the Worldwide Interoperability for Microwave Access (WiMAX)

21 and LTE 

(Long-Term Evolution) standards. As one example of ways in which these companies are 

creating more opportunities for themselves through innovation and partnerships, press reports 

have indicated that Huawei will provide equipment to Leap Wireless (Cricket) to support their 

wireless initiatives.22

Meanwhile, the United States has been slower to respond to demands for newer technology 

standards. U.S. wireless providers are under enormous cost pressures while also being subject 

to increasing regulatory pressures to open their networks and create network and device 

interoperability. This comes on the heels of paying off expensive spectrum auctions purchased 

in efforts to create more contiguous networks.23 The U.S. market has also been more difficult to 

penetrate due to security and regulatory concerns, such as those raised by the Committee on 

Foreign Investment in the United States when Huawei attempted to buy equipment 

manufacturer 3Com in 2008.24 (For more on these issues, see pp. 28-30.)

China is poised to become the world’s number one end-to-end supplier of telecom, cable, and 

mobile wireless equipment, much like AT&T and IBM dominated technology sectors in the 

past.25

 21 WiMAX (Worldwide Interoperability for Microwave Access), “What is WiMAX,” WiMAX.com. 

http://www.wimax.com/education.

 The global financial crisis pushed many telecom companies into severely vulnerable 

positions, allowing their market shares to be acquired easily by buyers as price competition 

increased globally. As wireless networking comes under cost pressures in the United States, 

more incentive has been created in the U.S. market to consider alternative vendors to remain 

competitive. Initially, many Chinese products were found only in certain parts of a telecom 

22 “Huawei Supplies Leap Wireless,” LightReading.com, August 15, 2006. 

http://www.lightreading.com/document.asp?doc_id=101446. 23 A spectrum auction is “a process whereby a government uses an auction system to sell the rights to transmit 

signals over specific electromagnetic wavelengths.” See “Spectrum Auction,”Wikipedia.org. 

http://en.wikipedia.org/wiki/Spectrum_auction. A major spectrum auction for the 700 megahertz frequency band, of 

interest to wireless providers, was held in January 2008. See Federal Communications Commission Press Release, 

“Auction of 700 MHz Band Licenses Scheduled for January 16, 2008 / Comment Sought on Competitive Bidding 

Procedures for Auction 73,” August 17, 2007. http://fjallfoss.fcc.gov/edocs_public/attachmatch/DA-07-3415A1.pdf 24Bruce Einhorn, “Huawei’s Business Deal Flops,” Business Week, February 21, 2008. 25 XChange Magazine, “Huawei: ‘It’ Vendor 2010,” January 8, 2010, notes Huawei sales may be $36 billion in 2010 

and take the place as the number one infrastructure supplier as it closes in on Ericsson. The world strength of global 

telecom deals by all Chinese firms, including ZTE, and scores of other companies may move China quickly to the 

number one slot across all categories. 
13

network, but now Chinese companies rapidly are becoming the global, integral, “end-to-end” 

solution for telecom networks around the world.26

HUAWEI TECHNOLOGIES

Huawei Company Logo

Huawei Technologies [Shenzhen Huawei Jishu Youxian Gongsi / 深圳华为技术有限公司] is a 

high-technology enterprise that specializes in research and development (R&D), production,

and marketing of communications equipment and providing customized network solutions for 

telecom carriers. Huawei has emerged as one of the largest global manufacturers of 

telecommunications equipment, particularly in the wireless market segment.

The dramatic growth of companies like Huawei is an extraordinary accomplishment.

27 By 2007,

Huawei served 35 of the top 50 telecom operators and was investing 10 percent of revenue 

back into R&D each year.28 By the end of 2009, Huawei was the world’s second-largest telecom 

provider, ranking only behind the Swedish firm Ericsson.29 The rise of Huawei has been so 

dramatic that some industry analysts have suspected "unsustainably low prices and government 

export assistance" as key to the company’s rapid expansion.30 (See text box below.) Others, 

however, would identify the key to the company’s successes as its “sound business strategies,” 

to include an early focus on underserviced markets in rural China, “to which multinational titans 

did not even bother to seek access.”31

European Controversies over Alleged PRC State Support to Huawei

Allegations of PRC state subsidies to Huawei raised controversy in Europe in summer 2010, 

with both workers’ unions and Option SA, a Belgian manufacturer of wireless wide-area network 

(WWAN) modems,32 making complaints that Chinese government assistance to Huawei and 

ZTE allowed the Chinese companies to compete with an unfair pricing advantage.33 According 

to Option SA’s complaint, the companies received beneficial financing arrangements from PRC 

state banks, to include Huawei signing:

“...a cooperation agreement in September 2009 with the China Development Bank worth $30 

billion—above its 2009 revenue of $22 billion and the sort of funding line the complaint said 

 26 China Technology and Telecom Sector M&A Report 1st Quarter 2009, 

www.cowenlatitude.com/document/09q1_china_tech_ma.pdf.

27 Annual Reports 2008, Cisco, Huawei, Motorola ( Securities and Exchange Commission [SEC] 10K filings). 28 “China’s Technological Challenger”, New Zealand Herald, March 15, 2007. 29 Kevin O’Brien, “Upstart Chinese Telecom Company Rattles Industry as it Rises to No. 2”, New York Times, 

November 29, 2009. 30 “The Huawei Way”, Newsweek, January 15, 2006. 31 Cheng Li, “China’s Telecom Industry on the Move: Domestic Competition, Global Ambition, and Leadership 

Transition”, China Leadership Monitor, No. 19 (2006). 32 Jonathan Stearns, “China Modem Makers May Face EU Anti-Subsidy Tariff,” Bloomberg, September 16, 2010. 33 Matthew Dalton, “Europe Raises Cry Over China Tech Exports,” Wall Street Journal, October 5, 2010.
14

wouldn't be extended in a market economy... ZTE, with 2009 revenue of $8.4 billion, got a $15 

billion credit line from the bank in March 2009. The complaint says these and other financing 

deals were provided with favorable terms, including three-year moratoriums on interest 

payments... Option said such terms have allowed Chinese companies to sell wireless modems 

in Europe for as little as €20 ($27) a device. Option would have to charge more than twice that 

much, it says, to earn a profit of 10% to 15% on its sales.” 34

In response to these complaints, in September 2010 the European Commission indicated that it 

would conduct an inquiry into whether Chinese-manufactured modems are “being subsidized 

and whether this subsidization has caused injury to the Union industry” and also ordered 

customs authorities to begin registering European Union (EU) imports of Chinese-manufactured 

WWAN modems as a preparatory action in the event that countervailing duties might be applied

in the future.35

Huawei Technologies headquarters, in the Shenzhen Technology

Development Park in Shenzhen, China (Source: Associated Press.)

Although Huawei is headquartered in China, it has established more than 100 international 

branch offices and 17 R&D facilities around the world. In addition to domestic centers in 

Shenzhen, Shanghai, Beijing, Nanjing, Xi’an, Chengdu, and Wuhan, Huawei has also 

established research facilities in Stockholm, Sweden; Dallas and Silicon Valley, United States; 

Bangalore, India; Ferbane in Offaly, Ireland; Moscow, Russia; Jakarta, Indonesia; and the 

Netherlands.36 Its presence in the North American market has increased rapidly in recent years:

From 2006 to 2010, Huawei has grown from 180 employees to more than 1,000.37

 34 Matthew Dalton, “Europe Raises Cry Over China Tech Exports,” Wall Street Journal, October 5, 2010. 35 Jonathan Stearns, “China Modem Makers May Face EU Anti-Subsidy Tariff,” Bloomberg, September 16, 2010. 36 Huawei Technologies Co., Ltd., the largest networking and telecommunications equipment supplier in the People's 

Republic of China. http://www.huawei.com. 37 Huawei Technologies (North America Region) Corporate Social Responsibility Report 2009-2010, p. 19. 

http://www.huawei.com/na/en.
15

Figure 1: Huawei Technologies Offices in North America

Source: Huawei Technologies (North America Region),

Corporate Social Responsibility Report 2009-2010, p. 19. http://www.huawei.com/na/en.

Huawei operates as an employee-owned company; however, its management structure is 

opaque, and media sources have raised questions about the true nature of the company’s 

ownership. Huawei Technologies Co., Ltd., is itself a wholly owned subsidiary of Shenzhen 

Huawei Investment & Holding Co., Ltd. The company’s employee shareholding program is 

managed by a shareholder body called the Union of Shenzhen Huawei Investment Holdings 

Co., Ltd., whose governing board is made up entirely of senior company officials. The 

company’s shares are not freely traded but rather allocated to employees annually as 

incentives. Only employees within China can hold shares, and they must sell them back to the 

company if they leave Huawei’s employ.38

Controversies Surrounding the Activities of Huawei

Allegations of Intellectual Property Piracy

Although Huawei has emerged as a highly successful company, it has been troubled by 

controversy over the years. Huawei has been accused in the past by its international 

competitors of extensive piracy and intellectual property theft: In one example, Cisco Systems, 

Inc., filed suit against Huawei and its American subsidiaries in 2003, alleging “wholesale 

infringement of Cisco’s copyrights and misappropriation of Cisco’s trade secrets... [to include] 

blatant and systematic copying of Cisco’s router technology... [and] theft of Cisco’s intellectual 

property by misappropriating and copying Cisco’s source code, duplicating Cisco’s user 

interface, and plagiarizing extensively from Cisco’s user manuals.”39 The lawsuit was dropped in 

July 2004 after Huawei pledged to modify aspects of its computer products line.40

 38 Juha Saarinen, “Analysis: Who Really Owns Huawei?” ITNews (Australia), May 28, 2010. 

http://www.itnews.com.au/News/175946,analysis-who-really-owns-huawei.aspx. 39 United States District Court for the Eastern District of Texas (Marshall Division), Civil Action #2:03-CV-027 TJW, 

Cisco Systems, Inc., and Cisco Technology, Inc. (Plaintiffs) vs. Huawei Technologies Co., Ltd., Huawei America, Inc., 

and Futurewei Technologies, Inc. (Defendants), “Cisco’s Motion for Preliminary Injunction,” dated February 5, 2003. 

http://newsroom.cisco.com/dlls/Cisco_Mot_for_PI.pdf.

40 Cisco, Inc., press release, “Cisco Comments on Completion of Lawsuit Against Huawei,” July 28, 2004. 

http://newsroom.cisco.com/dlls/2004/hd_072804.html.
16

Allegations of Threats to Communications Security

Huawei has also been the subject of questions regarding the nature of the company’s 

management and its alleged close ties to the Chinese military. Some analysts have challenged 

the assertion that Huawei is an actor operating independently of the Chinese government. 

Noting that “both the [Chinese] government and the military tout Huawei as a national 

champion,” an analysis by the RAND Corporation states that: 

“...one does not need to dig too deeply to discover that [many Chinese information technology

and telecommunications firms] are the public face for, sprang from, or are significantly engaged 

in joint research with state research institutes under the Ministry of Information Industry, 

defense-industrial corporations, or the military... Huawei was founded in 1988 by Ren Zhengfei, 

a former director of the PLA [People’s Liberation Army] General Staff Department’s Information 

Engineering Academy, which is responsible for telecom research for the Chinese military. 

Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an 

important customer, as well as Huawei’s political patron and research and development 

partner.”

41

 

Huawei founder Ren Zhengfei

Source: Google Images.

Aside from the controversy in the United States over the abortive effort by Huawei to purchase 

3Com (see pp. 28-30), media reports from other countries have also indicated concerns on the 

part of government security agencies in regard to Huawei’s activities. British intelligence officials 

have reportedly warned government ministers of potential infrastructure threats emerging from 

communications equipment provided by Huawei to networks operated by British Telecom.

42 In 

Australia, intelligence officials have reportedly investigated alleged links between Chinese 

military officials and employees of Huawei’s Australian offices.

43 In May 2010, Indian press 

reports revealed concern among intelligence officials about Huawei’s activities in India, and the 

Indian communications ministry has placed limitations on the role of Huawei in India’s 

communications networks.44 In Taiwan, representatives of the opposition Democratic 

Progressive Party have also expressed concern over the expansion of Huawei into the island’s 

telecom and network equipment markets, identifying this as a threat to Taiwan’s security.45

 41 Evan Medeiros et al., A New Direction for China’s Defense Industry (Arlington, VA: RAND Corporation, 2005), pp. 

217-218. 42 See Michael Smith, “Spy Chiefs Fear Chinese Cyber Attack,” Sunday Times (London), March 29, 2009; and 

Alastair Jamieson, “Britain Could Be Shut Down by Hackers from China, Intelligence Experts Warn,” Telegraph (UK), 

March 29, 2009.

43 Cameron Stewart, “Huawei in ASIO’s Net,” Australian, September 5, 2009. 44 Bharti Jain, “Huawei Part of Chinese Spy Network, Says R&AW,” Economic Times (India), May 7, 2010. 45 “Taiwan – Opposition Voices Concern over Huawei's Inroads,” Open Source Center Report, June 10, 2010.
17

Huawei company officials have steadfastly rejected all such alleged security concerns related to 

the company’s operations. Huawei officials have asserted the private nature of the company, 

calling it a Chinese embodiment of the “American Dream” and stressing the positive advantages 

of job creation at its facilities in the United States.46 They also continue to maintain that "Huawei 

is privately held and 100 per cent owned by its employees” and that "[n]o other organizations, 

including the government, army or business hold stakes in Huawei."47

Allegations of Industrial Espionage

In July 2010, Motorola Inc. filed suit against Huawei in the U.S. District Court for the Northern 

District of Illinois, alleging a multiyear plot by Huawei’s senior management to steal proprietary 

trade secrets from Motorola. The case had been in the making for some time but reportedly had 

been placed on hold while Motorola considered selling its network infrastructure business to 

Huawei.48 However, on the heels of the July 19, 2010, announcement that Motorola was selling 

the majority of its wireless network infrastructure assets to Nokia Siemens Networks for $1.2 

billion USD,49 there was no longer any commercial incentive for Motorola to refrain from filing 

the lawsuit.

The lawsuit alleges that multiple Motorola employees – with two identified by name, Shaowei 

Pan and Hanjuan Jin – colluded with representatives of Huawei, including Huawei’s founder 

Ren Zhengfei, to steal proprietary technology and pass it to Huawei. The alleged vehicle for 

some of these transfers was Lemko, a company founded by Shaowei Pan and other Motorola 

employees in 2002 while they were still employed by Motorola.50 The matters in dispute in the 

civil case follow from a criminal case that first came to light in February 2007, when, according 

to allegations by U.S. government investigators: 

“...one day after quitting Motorola, [Ms. Hanjuan] Jin was stopped at O’Hare airport with over 

1,000 Motorola documents in her possession, both in hard copy and electronic format. A review 

of Motorola computer records showed that [Ms.] Jin accessed a large number of Motorola 

documents late at night. At the time she was stopped, Jin was traveling on a one-way ticket to 

China... [the charges against her] are based on evidence that Jin intended that the trade 

secrets she stole from Motorola would benefit the Chinese military.”51

Mr. Pan allegedly held multiple meetings with Huawei officials from 2001 onwards, discussing 

Motorola’s operations in international markets and his plans to establish Lemko as a company 

“independent of Motorola, Inc.” Among the technology allegedly transferred was information 

about a Motorola base station – labeled “Motorola Confidential Property” – which Mr. Pan 

allegedly e-mailed to Huawei executives from his personal e-mail account in March 2003.52

 46 Statements made by Huawei representatives to staff of the U.S.-China Economic and Security Review 

Commission, July 7, 2009.

47 Renai Lemay, “Huawei Denies ‘Ludicrous’ Espionage Claims,” ZDNet News Online, December 18, 2008. 

http://www.zdnet.com.au/huawei-denies-ludicrous-espionage-claims-339293911.htm. 48 Loretta Chao, “Motorola Suit Poses Challenges to Huawei’s Success,” Wall Street Journal, July 23, 2010. 49 Motorola Inc. press release, “Nokia Siemens Networks to Acquire Certain Wireless Network Infrastructure Assets 

of Motorola for US $1.2 Billion,” July 19, 2010. 

http://mediacenter.motorola.com/content/detail.aspx?ReleaseID=13055&NewsAreaId=2.

50 Jamil Anderlini, “Motorola Claims Espionage in Huawei Lawsuit,” Financial Times, July 22, 1010. 51 U.S. Department of Justice, “Recent Espionage-Related Prosecutions Involving China,” July 20, 2010. 

http://media.washingtonpost.com/wp-srv/politics/documents/spyprosecutions072010.pdf. 52 Christopher Rhoads, “Motorola Claims Huawei Plot,” Wall Street Journal, July 22, 2010.
18

Representatives of both Huawei and Lemko have denied the allegations, and the case is unadjudicated as of the writing of this report.

Concerns about Huawei Expressed by Members of the U.S. Congress

Members of the U.S. Congress have weighed in on some of the controversies surrounding 

Huawei and have expressed concerns regarding the potential national security impacts of 

Huawei’s efforts to purchase stakes in U.S. telecommunications companies. As one example, in 

October 2007 Representative Ileana Ros-Lehtinen (Florida, 18th District), along with 12 cosponsors, introduced a draft House resolution (H.Res.730) that would have expressed 

opposition to Huawei’s moves to acquire a stake in 3Com. 53 (For further details on the abortive 

3Com / Huawei deal, see pp. 28-30.)

More recently, in August 2010 eight Members of the U.S. Senate (Sen. Jon Kyl, Arizona; Sen. 

Christopher Bond, Missouri; Sen. Richard Shelby, Alabama; Sen. James Inhofe, Oklahoma; 

Sen. Jim Bunning, Kentucky; Sen. Jeff Sessions, Alabama; Sen. Richard Burr, North Carolina; 

and Sen. Susan Collins, Maine) addressed a letter to senior officials of the Obama 

Administration (Secretary of the Treasury Timothy Geithner; Secretary of Commerce Gary 

Locke; Director of National Intelligence James Clapper; and Administrator of General Services 

Martha Johnson) that expressed concern over a pending deal by Huawei to supply equipment to 

Sprint Nextel (see following page). The letter expressed concern that “Huawei's position as a 

supplier of Sprint Nextel could create substantial risk for US. companies and possibly 

undermine U.S. national security.” The letter further offered a list of several questions about 

Huawei and its business activities and requested that the addressees provide responses to 

these questions.54

 53 H.Res.730, “Expressing the Sense of the House of Representatives Regarding the Planned Acquisition of a 

Minority Interest in 3Com by Affiliates of Huawei,” 110th Cong., 1st sess., introduced October 10, 2007. Text available 

at http://thomas.loc.gov/cgi-bin/query/z?c110:H.RES.730. 54 Letter from Sen. Jon Kyl, Arizona, Sen. Christopher Bond, Missouri, Sen. Richard Shelby, Alabama, Sen. James 

Inhofe, Oklahoma, Sen. Jim Bunning, Kentucky, Sen. Jeff Sessions, Alabama, Sen. Richard Burr, North Carolina, 

and Sen. Susan Collins, Maine, addressed to Secretary of the Treasury Timothy Geithner, Secretary of Commerce 

Gary Locke, Director of National Intelligence James Clapper, and Administrator of General Services Martha Johnson, 

dated August 18, 2010. The eleven specific questions directed to the addressees are as follows:

• Does the United States government have unclassified information regarding Huawei's affiliation, if any, with 

the PLA? What does that information say about the affiliation/relationship, e.g., what control, if any, is 

exerted by the PLA on Huawei's operations?

• Is there any concern that Huawei, if it gained any measure of control over a U.S. contractor involved with 

sensitive U.S. government contracts, would present a national security threat for technology leakage or 

enhanced espionage against the United States? Please provide an unclassified response.

• Is the U.S. Treasury Department discussing or negotiating a deal to allow Huawei to acquire or invest in U.S. 

companies? What is the status of the negotiations? Will you agree to provide a briefing to Senators and their 

staffs on the present status?

• Has the Treasury Department included members of the intelligence community (lC) in its negotiations, if any, 

with Huawei? If yes, does the IC have a veto over any final negotiated product? Will you share with us and 

our staffs any IC analysis concerning the potential threat of Huawei obtaining any measure of control over a 

U.S. firm with sensitive contracts?

• What contracts with the Department of Defense (DOD) and the IC does Sprint Nextel have?

• Does Huawei currently supply companies with U.S. government contracts? If so, what are they?

• Have any goods provided to a U.S. government supplier by Huawei ever been found to contain suspect 

technology, such as intentional defects or "back doors" allowing remote entry?

• Please describe what, if any, a priori security review the General Services Administration conducts on 

technology (software or hardware) that the United States government purchases from overseas suppliers. 

• Have U.S.-based employees of Huawei been granted security clearances by the U.S. government for 

access to classified information?
19

Recent Unconsummated Huawei Deals, and Potential Huawei Deals on the 

Horizon

Huawei emerged into the spotlight of telecom industry analysts once again in spring and 

summer 2010, with speculation of potential new deals by Huawei in the U.S. telecom sector. In 

April 2010, an article in the Financial Times indicated that Huawei might be preparing a bid for 

the network infrastructure unit of Motorola, the U.S. mobile phone manufacturer. In an apparent 

attempt to head off the concerns surrounding the abortive 3Com deal, Huawei indicated that it 

would consider a “mitigation agreement,” which would “show its willingness to co-operate with 

the US, [as] Alcatel of France did when it bought Lucent in 2006.”55 This came only two months 

after Motorola announced that it would be restructuring itself in 2011 into two separate 

companies--one that would operate its network infrastructure business, and one to handle its

mobile phone and television set-top box business, with Huawei reportedly to pursue the 

former.56 However, speculation on any such deal was ended in July 2010, when Motorola 

announced the purchase of its network infrastructure business by Nokia Siemens and filed suit 

against Huawei for alleged industrial espionage (see text box on pp. 17-18).

It was also reported in spring 2010 that Huawei might be a potential suitor to buy into Harbinger 

Capital’s planned Long-Term Evolution (LTE) network, which is likely to become a 4G (4th

generation) technology standard.57 (See more on Huawei and LTE technology issues on pp. 45-

46.) Speculative reports have indicated that the hedge fund Harbinger Capital, which owns 

spectrum rights in the United States, could be looking for the cost efficiencies that Huawei can 

offer.58 Huawei’s known desire to expand in the smart phone business could also be satisfied by 

Harbinger’s potentially expansive technology in a developed market. 

In late July 2010, Huawei lost out in a bid to acquire the firm 2Wire. 2Wire, a U.S.-based 

broadband technology firm, was acquired by the British firm Pace for a reported $475 million, 

with the buyer reportedly interested in 2Wire’s business in the residential broadband services 

market.59 Huawei had reportedly offered a higher bid than Pace, but concerns over its ability to 

receive approval for the deal from the Committee on Foreign Investment in the United States 

(CFIUS) played a role in its failure to secure the deal. 60 (For more on the committee and its 

review process, see pp. 30-33.) 

 • Please describe in detail any export licenses currently in review, or approved in the past five years, between 

any U.S. firm and Huawei.

• Has the Defense Intelligence Agency (DIA), Central Intelligence Agency (CIA), or National Security Agency 

(NSA) communicated with foreign intelligence agencies regarding their concerns, and vice versa, about 

Huawei's operations, affiliations and relationships? 55 Stephanie Kirchgaessner, “Huawei Tries To Calm US Fears,” Financial Times, April 4, 2010. 

http://www.ft.com/cms/s/2/44e5e210-400d-11df-8d23-00144feabdc. 56 Trading Markets, “Huawei Emerges As Potential Buyer of Motorola’s Mobile Network, Report,” March 17, 2010. 

http://www.tradingmarkets.com/news/stock-alert/mot_huawei-emerges-as-potential-buyer-of-motorola-s-mobilenetwork-report-851479.html. 57 C114, “Harbinger Pioneers Open-Access LTE Network US,” April 1, 2010. http://www.cnc114.net/575/a495001.html.

58 Stephanie Kirchgaessner, “Security Concerns Hold Back Huawei,” Financial Times, July 8, 2010. 

http://www.ft.com/cms/s/0/6fd9f072-8aba-11df-8e17-00144feab49a.html. 59 Paul Sandle, “Pace Buys U.S. Broadband Co 2Wire for $475 Mln,” Reuters, July 26, 2010. 

http://www.reuters.com/article/idUSTRE66P1UL20100726.

60 Stephanie Kirchgaessner and Helen Thomas, “US Divided on How to Tackle Huawei,” Financial Times, July 29, 

2010.
20

Finally, in what arguably has emerged as Huawei’s most high-profile deal of 2010, media 

reports first disclosed in July 2010 that Huawei was bidding to sell equipment for an expansion 

of the wireless broadband network of Sprint Nextel, America’s third-largest mobile operator.61

Huawei’s leading partner in this proposed deal is Amerilink Telecom Corporation, a company 

staffed largely by former employees of Sprint Nextel. To date, Amerilink is acting primarily as a 

distributor for equipment made by Huawei and as a consultant for Huawei’s efforts further to 

penetrate the U.S. market.62 These efforts have been the subject of controversy: In August 

2010, eight Members of the U.S. Senate addressed a letter to senior officials of the Obama 

Administration that expressed concern over the pending deal by Huawei to supply equipment to 

Sprint Nextel (see text box on page 18).

63

A trio of prominent public figures is associated with Amerilink: its founder, William Owens, is a 

retired U.S. Navy admiral and a former vice chairman of the U.S. Joint Chiefs of Staff;64 and in 

2010, the company recruited former U.S. House of Representatives Democratic Leader Richard 

Gephardt and former World Bank President James Wolfensohn to serve as members of its 

board of directors.65 Amerilink representatives have been active in engaging U.S. officials about 

the proposed deal with Sprint Nextel; they reportedly have also sought to mitigate concerns 

about Huawei’s hardware by offering that Amerilink certify it for network security purposes.66

Security concerns expressed by government officials are believed to be a factor in Sprint

Nextel’s decision in November 2010 to exclude Huawei Technologies Ltd. and ZTE Corporation 

from final consideration as equipment suppliers for upgrades to its cellular networks, a deal 

worth billions of dollars.67

Concerns Regarding Potential Network Penetration by PRC Intelligence Agencies

The Washington Post has reported that representatives of the National Security Agency (NSA) 

contacted senior executives of AT&T late in 2009 to warn them against purchasing equipment 

from Huawei. According to the Post article, “The NSA called AT&T because of fears that China's 

intelligence agencies could insert digital trapdoors into Huawei's technology that would serve as 

secret listening posts in the U.S. communications network.” 68

 61 Paul Taylor and Stephanie Kirchgaessner, “Huawei in Drive to Land Big US Deal,” Financial Times, July 8, 2010; 

and Reuters, “China’s Huawei Bids for Sprint Equipment Deal: Report,” July 8, 2010. 

http://www.reuters.com/article/idUSTRE6680E920100709.

At the time, AT&T was taking bids 

from potential suppliers for its planned next-generation LTE phone network. AT&T has not 

made any public comment about the reported messages from the NSA, but it did announce in 

62 Loretta Chao and Paul Ziobro, “Huawei Enlists an Ex-Sprint Team,” Wall Street Journal, August 24, 2010. 63 Letter from Sen. Jon Kyl, Arizona, Sen. Christopher Bond, Missouri, Sen. Richard Shelby, Alabama, Sen. James 

Inhofe, Oklahoma, Sen. Jim Bunning, Kentucky, Sen. Jeff Sessions, Alabama, Sen. Richard Burr, North Carolina, 

and Sen. Susan Collins, Maine, addressed to Secretary of the Treasury Timothy Geithner, Secretary of Commerce 

Gary Locke, Director of National Intelligence James Clapper, and Administrator of General Services Martha Johnson, 

dated August 18, 2010. 

64 Team.” Prometheus. http://prometheusasia.com/team.html; and Loretta Chao and Paul Ziobro, “Huawei Enlists an 

Ex-Sprint Team,” Wall Street Journal, August 24, 2010. 65 Spencer Ante and Shayndi Raice, “Dignitaries Come on Board to Ease Huawei Into U.S.,” Wall Street Journal, 

September 21, 2010.

66 John Pomfret, “Between U.S. and China, a Trust Gap,” Washington Post, October 8, 2010. 67 Joann S. Lublin and Shayndi Raice, “Security Fears Kill Chinese Bid in U.S.,” Wall Street Journal, November 5, 

2010.

68 John Pomfret, “Between U.S. and China, a Trust Gap,” Washington Post, October 8, 2010.
21

February 2010 that it had selected Ericsson and Alcatel-Lucent as its equipment and service 

suppliers for the network upgrade.69

Assuming that the account of the NSA warning is true, the PRC intelligence entity of greatest 

concern would likely be the Third Department of the People’s Liberation Army General Staff 

Department, China’s leading signals intelligence agency. The Third Department is reportedly the 

largest of all of China’s intelligence services,

70 offering the PRC: 

“by far, the most extensive SIGINT capability of any nation in the Asia-Pacific region. The 

Chinese operate several dozen SIGINT ground stations deployed throughout China. There they 

monitor signals from Russia, Taiwan, Japan, South Korea, India, and Southeast Asia. Signals 

from U.S. military units located in the region are of significant interest to these monitoring 

stations, and a large SIGINT facility at Hainan Island is principally concerned with monitoring 

U.S. naval activities in the South China Sea.”71

Aside from the collection of communications information, the Third Department also likely bears 

primary responsibility within the PLA for computer network exploitation (i.e., “cyber espionage”) 

operations. The Third Department is also assessed to have a complementary relationship with 

the Fourth Department of the PLA General Staff Department, which takes a leading role in 

computer network attack operations.72 (For further discussion of PRC intelligence agencies and 

their functions, see the Commission’s 2009 Annual Report to Congress, chapter 2, section 3, 

“China’s Human Espionage Activities that Target the United States, and the Resulting impacts 

on U.S. National Security.”)

ZTE CORPORATION

ZTE Company Logo

 69 Ruth Bender and Gustav Sandstrom, “2nd UPDATE: Ericsson, Alcatel Get 4G Network Deal From AT&T,” 

Foxbusiness.com, February 10, 2010. http://www.foxbusiness.com/story/markets/industries/telecom/nd-updateericsson-alcatel-g-network-deal-att/. 70 U.S.-China Economic and Security Review Commission, Annual Report to Congress 2009 (Washington, DC: U.S. 

Government Printing Office, November 2009), p. 153. A firm open-source estimate on the number of personnel in the 

Third Department is not available. For two sources, see Howard DeVore, China’s Intelligence and Internal Security 

Forces (Alexandria, VA: Jane’s Information Group, 1999), p. 48; and Nicholas Eftimiades, Chinese Intelligence 

Operations (Annapolis, MD: Naval Institute Press, 1994), p. 46. A figure of 20,000 personnel is provided by Mr. 

DeVore. A figure of 130,000 is provided in Kan Chung-kuo, ‘‘Intelligence Agencies Exist in Great Numbers, Spies Are 

Present Everywhere; China’s Major Intelligence Departments Fully Exposed,’’ ‘Chien Shao’ (Frontline), January 1, 

2006. OSC ID: CPP20060110510011.www.open source.gov. 71 Interagency OPSEC Support Staff, Intelligence Threat Handbook (2004), p.75. 

http://www.fas.org/irp/threat/handbook/supplement.pdf.

72 U.S.-China Economic and Security Review Commission, Annual Report to Congress 2009 (Washington, DC: U.S. 

Government Printing Office, November 2009), pp. 153 and 172. James Mulvenon, ‘‘PLA Computer Network 

Operations,’’ in Beyond the Strait: PLA Missions Other Than Taiwan, eds. Roy Kamphausen, David Lai, and Andrew 

Scobell (Carlisle, PA: U.S. Army War College Strategic Studies Institute, 2009); Northrop Grumman Corporation, 

‘‘Capability of the People’s Republic of China to Conduct Cyber Warfare and Computer Network Exploitation’’ 

(contracted research paper for the U.S.-China Economic and Security Review Commission, June 2009), p. 19. 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman/ 

PRC/Cyber/Paper/FINAL/Approved%20Report/16Oct2009.pdf.
22

Another major player in the Chinese networking market is ZTE Corporation [Zhongxing Tongxun 

Gufen Youxian Gongsi /中兴通讯股份有限公司], a telecommunications company based in 

Shenzhen. One of the first Chinese telecom equipment providers to pursue business in 

overseas markets, ZTE now has about 62,000 employees, about 107 representative offices 

around the world, and 15 research labs throughout North America, Europe, and Asia. ZTE 

states that 34 percent of its workforce and 10 percent of its revenues are dedicated to R&D. 73 

Since 1996, the company has provided products and services to 135 countries and regions, 

serving major telecom operators in the Asia Pacific region, South Asia, North America, Europe, 

Latin America, Africa, and the Commonwealth of Independent States.74

ZTE was established in 1985 from “a handful of state-owned companies affiliated with the 

Ministry of Aerospace Industry.”75 Though the company is publicly listed on the Shenzhen stock 

exchange and the Hong Kong stock exchange, government-affiliated entities appear to retain a 

majority share of its stock.76 Over the last decade, ZTE has steadily increased its global market 

share among telecom equipment makers.77 This increase is mostly due to the company’s ability 

to focus on networking gear, as opposed to phones, and its dedication to delivering equipment

that is low cost but reliable. By 2007, ZTE had already become one of the world’s top ten mobile

phone makers, joining the ranks of telecom giants Nokia and Samsung. ZTE’s annual income in 

2009 was US $486.4 million78 and, despite the global downturn, the company’s growth is 

projected to be strong.

Among western countries, ZTE is a quiet giant, supplying handsets to operators without 

branding them under its own name. ZTE also has focused mainly on customers in developing 

countries who require cost-effective telecom solutions and whose countries lack sophisticated 

infrastructure. ZTE is highly specialized in CDMA [code division multiple access] technology 

and is willing to customize products for clients. As a result, ZTE’s export sales account for a 

majority of its revenues.

ZTE has established strategic cooperation agreements with leading telecom giants such as 

Portugal Telecom, France Telecom, Alcatel-Lucent, Ericsson, and Nortel in next generation 

network and mobile systems, with Hutchison in 3G (3rd generation), and with Marconi in optical 

transmission systems. The company has also established joint laboratory partnerships with 

Texas Instruments, Intel, Agere Systems, HHNEC, IBM, Microsoft (China), Qualcomm, 

Huahong NEC, and Tsinghua University.79

 73 ZTE- Corporate information. 

As Chinese products achieve greater acceptability 

http://zte.com.cn. 74 Zhong Xing Telecommunication Equipment Company Limited, “ZTE Corporation,” a publicly owned Chinese 

corporation that designs and manufactures telecommunications and networking equipment and systems. 

http://wwwen.zte.com.cn/en. 75 Bloomberg Business Week, “A Global Telecom Titan Called... ZTE?” March 7, 2005. 

http://www.businessweek.com/magazine/content/05_10/b3923071.htm.

76 A press clipping from 2006 posted on a ZTE company website states that “Although a listed company, [ZTE] is still 

very much a state-owned enterprise (SOE), with more than 69 percent of its shares owned by government-affiliated 

entities.” See China Online News, “Why Zhongxing is the CDMA Leader in China,” September 13, 2006. Posted on 

the ZTE “Press Center” webpage at 

http://wwwen.zte.com.cn/en/press_center/press_clipping/200106/t20010622_156932.html .

77 Economist, “Silent Mode; ZTE,” October 16, 2008. 

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78 “Company Description: ZTE Corporation,” Hoovers Inc., July 1, 2010. 79 ZTE Corporation. http://wwwen.zte.com.cn/en/about/corporate_information. 
23

with American consumers – just as Japanese products began to be accepted in the 1960s and 

1970s – price points and dependability tend to mute country-of-origin concerns. 

THE ROLE OF HUAWEI AND ZTE IN THE U.S. MARKET

The telecommunications sector may be one of the most interconnected sectors of business 

between U.S. companies and Chinese companies, and this trend is continuing. For example, 

Huawei has expanded its facilities in Plano, Texas, to become its new North American 

headquarters,80 and press reports in 2009 indicated that Huawei plans to expand its workforce 

to nearly 1,100 people within the United States and Canada.81

Huawei and ZTE are now among the top six global wireless equipment manufacturers, 

eclipsing, in some product categories, Alcatel-Lucent, Nortel (now in bankruptcy and being sold 

off in pieces), Cisco, and Motorola.

82 (For more on Huawei’s dealings with Nortel, see pp. 54-

56.) In many product classes, Huawei and ZTE rank in the top three of manufacturers, with 

Huawei rapidly moving toward number one in providing a full range of wireless networking 

equipment and handsets (often relabeled under other wireless network manufacturer brand 

names).

Huawei and ZTE have developed, manufactured, and sold technologically savvy, lower-cost, 

good-quality products in market niches.

83 While Huawei has had many product entries in the 

wireless market, its extraordinary range of product offerings supports almost every meaningful 

segment of telecommunications network architecture. Both Huawei and ZTE have typically 

introduced their mobile phones into the United States and other new market spaces through 

relabeling for companies like Verizon Wireless and T-Mobile.

Along with other technology equipment, as the manufacture of mobile phone handsets and 

associated software moves to offshore outsourcers, security could be compromised. Although 

there are no readily available case studies where this has actually happened, there is a potential 

risk of jeopardizing one of the most widely used forms of communications in the United States. 

Of most interest are Huawei’s product uses that have deep vertical penetrations across all 

aspects of wireless, long haul, deep sea fiber, software, security, and cable networks.

Examples of U.S. Market Penetration by Chinese Telecom Companies

• July 2007: An infrastructure agreement between Huawei and Leap Wireless was 

announced.84

• March 2009: Huawei became a supplier to Cox Communications for its wireless 

network, giving the company a major foothold in cable and wireless85

 80 “Huawei to Add Hundreds of Tech Jobs,” Texas Business Journal, May 1, 2009.

in the United 

States.

81 “Huawei to Add Hundreds of Tech Jobs,” Texas Business Journal, May 1, 2009. 82 The original research for this report was performed in 2009, therefore some data have changed. The website 

“Seeking Alpha” recently reported that Huawei’s expansion into the international router market is eating into Cisco’s 

core router business and that “Huawei is currently the 2nd largest telecom equipment supplier globally with a share of 

20% as of Q3 2009.” See “China’s Huawei: Margins, Market Share and Cisco’s Router Business,” 

SeekingAlpha.com, April 12, 2010. http://seekingalpha.com/article/198323-china-s-huawei-margins-market-shareand-cisco-s-router-business. 83 Wall Street Journal, “China’s Telecom Gear Makers, Once Laggards at Home, Pass Foreign Rivals,”,April 10,2010. 84 Fierce Wireless, “Huawei to deploy CDMA 2000 infrastructure for Cricket Communications,” July 11, 2007.
24

• March 2009: Announcement was made that Huawei had deployed a 3G wireless 

network in Chicago for Cricket Communications, a subsidiary of Leap Wireless.86

• August 2009: Clearwire, LLC, announced a partnership with Huawei for its wireless 

communications network.87 (Clearwire and Sprint Nextel merged in 2008.

88

• March 2010: ZTE, Chinese manufacturer of mobile phone handsets and infrastructure,

announced its expectation to sell phones through major U.S. operators in the second 

half of the year.

)

89

In 2008, Huawei announced a joint venture with Symantec, a U.S. manufacturer of network 

security products. The Huawei Symantec joint venture is likely complementary to Huawei’s 

continued range of product offerings for telecommunications and network services.90 It is 

natural for communications manufacturers to gravitate to the network security space. However, 

as foreign companies occupy a greater role in this field, there is an increased risk for 

compromised network security products to be implemented unnoticed in sensitive 

infrastructures. (For more on the Huawei Symantec joint venture, see p. 47.)

On September 29, 2008, a press release posted on Nokia's website announced that the Nokia 

Siemens Networks and Huawei, with its affiliates, had agreed upon a patent license for 

standards-essential patents. This will cover the worldwide use of all standards-essential patents 

of all parties, including GSM (global system for mobile communications), WCDMA (wideband 

code division multiple access), CDMA2000, optical networking, datacom, and WiMAX, and will 

affect mobile devices, infrastructure, and services.91 On March 30, 2009, the Huawei website 

announced that Huawei had been selected to provide end-to-end cellular solution and services 

to Cox Communications. Cox, the third-largest cable provider in the United States, will launch its 

3G wireless network utilizing Huawei's LTE (3GPP [partnership project] 4G technology)-ready 

SingleRAN solution and industry-leading 3900 Series base stations.92 In 2008, Huawei offered 

its handset unit for sale to private equity firms including Bain Capital, Blackstone, TPG (formerly 

Texas Pacific Group), Kohlberg Kravis Roberts, Warburg Pincus, and Carlyle Group for $4 

billion.93 The offer was later pulled, reportedly due to the condition of financial markets.

THE MAJOR CHINESE DOMESTIC TELECOM CORPORATIONS

While Huawei and ZTE have been among the most active Chinese telecoms in their overseas 

investments and business activities, China also has other telecom companies, which primarily 

service the domestic market. The three most prominent, which are all state owned, are listed 

below.

 85 Light Reading, Cable Digital News, “Cox, Huawei Make Wireless Connection,” March 30, 2009. 86 Huawei Press Release, March 2009. 87 Light Reading Mobile, “Clearwire Confirms Huawei Deal,” August 11, 2009. 88 InformationWeek, “FCC Approves Sprint Clearwire Merger,” November 5, 2008. 89 Fierce Wireless, March 29, 2010. 90 Symantec Press Release, “Huawei and Symantec Commence Joint Venture,” February 5, 2008. 91 “Nokia Siemens Partners with Huawei,” September 29, 2008. The agreement covers worldwide use of all standards 

essential patents of all parties. http://news.softpedia.com/news/Nokia-Siemens-Partners-With-Huawei-94374.shtml. 92 Huawei website, March 20,2009. http://www.huawei.com/news/view.do?id=10799&cid=42. 93 Michael Flaherty and Vinicy Chan, “Private Equity Firms Line Up for Huawei Unit Sale,” Reuters, June 5, 2008. 

http://in.reuters.com/article/idINHKG31043120080605.
25

China Mobile

China Mobile Ltd. [Zhongguo Yidong Tongxin - 中国移动通信] is currently the world’s largest 

mobile telephone operator.94 China Mobile provides cellular and value-added mobile services 

to 31 provinces of mainland China and Hong Kong. With approximately 548 million subscribers 

(as of May 31, 2010) and over 70 percent of the Chinese cellular market, China Mobile is 

considered a central state-owned enterprise by the Chinese government.95 The company has 

historically operated on a GSM network, but in 2009 it rolled out its home-grown 3G network 

operating on a time division synchronous code division multiple access (TD-SCDMA) network.96

China Mobile is currently listed on both the New York Stock Exchange (NYSE:CHL) as well as 

the Hong Kong stock exchange (941:HKG). Its operating revenue in 2009 was renminbi (RMB)

518.08 billion.97

Founded in 1988 as Guangdong Mobile, the commercial mobile telephone network was initially 

operated by the provincial government of Guangdong for use by high-level officials of stateowned enterprises and high-ranking government officials.98 By 1997, the Chinese government 

sought to restructure the telecommunications industry by consolidating provincial telecom 

corporations. In 2000, the government merged Guangdong Mobile and the telephone operator 

of Zhejiang into a subsidiary of China Telecom Hong Kong BVI, called China Mobile Ltd. To 

date, the company is still directly controlled by the government, which has a 74.22 percent

equity stake through China Mobile (Hong Kong) Limited, which is wholly owned by the 

government as an arm of China Mobile Communications Corporation, also government

owned.99

China Telecom

China Telecom [Zhongguo Dianxin / 中国电信] is the largest fixed-line telecommunications 

operator and broadband service provider in the world.100 It is one of the leading providers of 

broadband access services in the Chinese market and has a strong foothold in the residential 

market.101

 94China Mobile Limited, “Operation Data.” http://www.chinamobileltd.com/about.php?menu=1.

Considered one of the top three state-backed telecommunications companies in 

95 Bruce Einhorn, “China Mobile Is Counting on Android,” Business Week, August 20, 2009. 

http://www.businessweek.com/globalbiz/content/aug2009/gb20090820_505265.htm.

96 New York Times, “China Mobile’s 2nd Quarter Profit Slips,” August 21, 2009. 

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eMax=true&treeWidth=0&selRCNodeID=37&nodeStateId=411en_US,1,36&docsInCategory=5&csi=6742&docNo=1.

98 Financial Times, “China Mobile Ltd.,” July 19, 2010. 

http://markets.ft.com/tearsheets/businessProfile.asp?s=941:HKG.

99 Business & Company Resource Center: Novel NY, “China Mobile Ltd.” 

http://ezproxy.library.nyu.edu:2081/servlet/BCRC?rsic=PK&rcp=CO&vrsn=unknown&locID=nysl_me_nyuniv&srchtp=

cmp&cc=1&c=1&mode=c&ste=74&tbst=tsCM&tab=4&ccmp=China+Mobile+Ltd.&tcp=china+mobile&n=25&docNum=

I2501313383&bConts=13119.

100 Economist, “Strait Deals; Chinese Investment,” May 9, 2009. 

http://ezproxy.library.nyu.edu:2076/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T97690899

16&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlKey=29_T9769089925&cisb=22_T9769089924&tre

eMax=true&treeWidth=0&selRCNodeID=26&nodeStateId=411en_US,1,23&docsInCategory=5&csi=7955&docNo=2.; 

and Doug Young, “China Mobile Growth Prospects Improve,” Reuters, March 18, 2010. 

http://www.reuters.com/article/idUSTRE62H0IU20100318.

101 China Telecom, “Company Overview. http://www.chinatelecom-h.com/eng/company/company_overview.htm. 102 Frederick Yeung, “China Telecom Challenges Leader,” South China Morning Post (Hong Kong), November 18, 

2008. 

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China, China Telecom is the leader in fixed-line networks but is currently the third-largest 

wireless operator (behind China Mobile and China Unicom), with only 56 million subscribers.102

The company was listed on the New York Stock Exchange (NYSE:CHA) and the Hong Kong 

Stock Exchange (HK:728) in November 2002, with an initial public offering of approximately 

USD $1.3 billion. 

China Telecom was established in 1994 by the Chinese government to oversee the nation’s 

public telecommunications operations. By 1997, China Telecom had become the second-largest 

fixed-line telephone network in the world, with over 100 million subscribers.103 In 2008, China 

Telecom acquired the CDMA network of China Unicom, the third-largest telecommunications 

firm in China, a move intended to boost the mobile phone operations of China Telecom.104 The 

company is still largely subject to policy changes in the Chinese government: China 

Telecommunications Corporation, a state-owned enterprise, owns a 70.89 percent stake in 

China Telecom.

China Unicom

China Unicom [Zhongguo Liantong / 中国联通] is China’s second-largest telecom company, 

after China Mobile. It is an integrated telecommunications operator offering mobile voice, valueadded, fixed-line voice, and broadband services. In 2008, the company had over 273 million 

subscribers and total assets of around RMB 500.09 billion.105 China Unicom is the only Chinese 

telecom to be traded on the New York Stock Exchange (NYSE:CHU), the Hong Kong Stock 

Exchange (SEHK:0762), and the Shanghai Stock Exchange (SSE:600050). Even so, the 

company is a state-owned enterprise, with China Netcom Group Corporation (BVI) Limited and 

China Unicom (BVI) Limited, both state-owned firms, as the two largest shareholders.

Created in 1994 with the permission of the State Council, China Unicom was part of a 

government reform aimed at the domestic telecom industry to discourage monopolies.106 For 

many years, the company mainly operated in northern China and eventually became the official 

partner of the 2008 Beijing Olympic Games for fixed communications services. In 2009, China 

Unicom sold its CDMA mobile assets to China Telecom and merged with China Netcom. The 

merger resulted in an acquisition of fixed-line businesses in 21 provinces in southern China for 

RMB 4.63 billion.107

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eMax=true&treeWidth=0&csi=11314&docNo=2.

In recent years, it has formed strategic alliances with such companies as 

103 Toh Han Shih, “China Telecom Expects Earnings Rebound,” South China Morning Post (Hong Kong), March 23, 

2010. 

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eMax=true&treeWidth=0&csi=11314&docNo=9.

104 Business & Company: Resource Center, “China Telecom Corporation Ltd.” 

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ode=c&ste=74&tbst=tsCM&tab=4&ccmp=China+Telecom+Corporation+Ltd.&mst=china+telecom&n=25&docNum=I2

501151876&bConts=9023.

104Economist, ‘Rewired; Telecoms in China,” May 31, 2008. 

http://ezproxy.library.nyu.edu:2076/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T97704295

90&format=GNBFI&sort=BOOLEAN&startDocNo=1&resultsUrlKey=29_T9770429596&cisb=22_T9770429595&treeM

ax=true&treeWidth=0&selRCNodeID=9&nodeStateId=411en_US,1,8&docsInCategory=3&csi=7955&docNo=2. 105 China Unicom, “Corporate Profile.” 106 China Unicom, “Our History.” http://eng.chinaunicom.com/about/Eng_qywh/index.html. 107 Benjamin Scent, “Unicom in 6.43B Yuan Deal,” Standard (London), December 17, 2008.
27

Spanish telecommunications operator Telefónica to swap stock as well as jointly purchase 

mobile networks and phones.108

State-Directed Personnel Shuffling and Restructuring at PRC Telecom Corporations 

While questions may circulate about the extent of PRC state influence over the nominally 

private companies Huawei and ZTE, there is far less ambiguity regarding China’s major 

domestic telecom corporations, all of which are directly state controlled. With these companies, 

the controlling hand of the state is very clear. The Chinese government exercises extensive 

command over the management and operations of these companies, as illustrated in the 

examples below: 

2004

In October 2004, the Chinese government abruptly shuffled the senior management of the three 

“China” telecoms: a senior executive from China Unicom was made the new head of China 

Mobile, a former China Mobile vice president was appointed to head China Telecom, and the 

head executive of China Telecom was moved to China Unicom.

109 The sudden personnel 

moves had been directed by the Central Organization Department of the Chinese Communist 

Party,

110 and ignored the nominal legal and fiduciary responsibilities of the corporate boards to 

select the managing officials of each company.111 It shocked many shareholders and industry 

analysts and even drew criticism from the business journal Caijing, one of the bolder voices in 

the Chinese media.112 It was, as one author has said, “the equivalent of the CEO [chief 

executive officer] of AT&T being moved without notice to head its domestic US competitor, 

Verizon, with the Verizon chief being appointed to run Sprint, at a time when the three 

companies were locked in a bruising battle on price and industry standards.”113

2008

Another dramatic shuffle of personnel, and an accompanying state-mandated restructuring of 

the telecom sector, occurred in May 2008. At that time, new appointments were made to (1) the 

positions of company president and party secretary at both China Mobile and China Telecom; 

(2) the president of China Tietong [Zhongguo Tietong Gongsi / 中国铁通 公 司], the vice 

president of China Unicom, and the vice president of China Unicom were all transferred to 

China Mobile; and (3) the vice president of China Unicom, and the head of the CCP Discipline 

Inspection Team of China Unicom, were transferred to China Telecom.114 The restructuring also 

mandated the merging of China Mobile and the smaller China Tietong and for China Unicom to 

be divided, with its CDMA network sold off to China Telecom and its GSM network business 

merged into China Netcom.115

 108Kevin O’Brien, “Telefónica and China Unicom Deepen Links,” International Herald Tribune, September 7, 2009. 109 Kathrin Hille, “China Mobile in Board Shake Up,” Financial Times, May 31, 2010. 110 Richard McGregor, The Party: The Secret World of China’s Communist Rulers (New York: Harper Collins, 2010), 

pp. 84-89; and Kathrin Hille, “China Mobile in Board Shake Up,” Financial Times, May 31, 2010. 111 Richard McGregor, The Party: The Secret World of China’s Communist Rulers (New York; Harper Collins, 2010), 

p. 85.

112 Caijing, “The Telecoms Reshuffle: More Harm Than Good,” November 15, 2004. 113 Richard McGregor, The Party: The Secret World of China’s Communist Rulers (New York: Harper Collins, 2010), 

p. 84.

114 ChinaTechNews.com, “China’s Telecom Restructuring Plan Finally Announced,” May 26, 2008. 

http://www.chinatechnews.com/2008/05/26/6787-chinas-telecom-restructuring-plan-finally-announced. 115 Wang Xing, “Jury Out on Dramatic Telecom Restructure,” China Daily, May 24, 2008.
28

2010

Another government-directed management shake-up in the telecom sector was seen in May 

2010, when Wang Jianzhou, the chief executive of China Mobile, was removed from his position 

as general manager and appointed to chair a newly established board of directors for the 

company. Mr. Wang was also appointed party secretary of China Mobile’s Communist Party 

committee. He was succeeded as general manager by Li Yue, the company’s vice president. 

China Mobile indicated that the move had been directed once again by the Central Organization 

Department, and in phraseology evocative of internal CCP discourse, indicated that it was part 

of a plan to “make the company’s management strategy more scientific and regulated.” The 

Financial Times commented that the sudden reshuffle at China Mobile “left observers 

confused... underscoring the opaque nature of China’s state enterprises.”116

HUAWEI AND 3-COM: A CLASSIC EXAMPLE OF CHINA’S 

FORAYS INTO THE U.S. MARKET VIA JOINT VENTURE AND 

ACQUISITION

3Com Corporation was a major American telecommunications company that invented, 

manufactured, integrated, and implemented network infrastructure products and developed 

supporting service models throughout the small, medium, and (to a lesser degree) large 

enterprise markets of North America.117 3Com Corporation and Huawei formed a joint venture in 

2003 for the purpose of developing data communications products. In 2006, 3Com bought out 

the Huawei stake in the joint venture. In 2007, Bain Capital and Huawei made a $2.2 billion 

dollar bid for 3Com, which was eventually abandoned due to security concerns on the part of

the U.S. government.118 (See more below.) In November 2009, 3Com announced its acquisition 

by Hewlett-Packard for $2.7 billion.119

As a manufacturer of routers, switches, and hubs, 3Com had equipment that was often found in 

the heart of telecommunications networks and that provided connectivity to some of the most 

secure areas of infrastructures. Nevertheless, despite being a pioneer in the technology of 

Internet protocol (IP) communications and networking, 3Com lacked brand identity and 

penetration into the large enterprise market segment due to the presence of more wellestablished vendors. Strategic decisions to avoid affiliation with IP telephony technology 

platforms by some companies, such as Microsoft, further constrained 3Com’s ability to 

penetrate further into its chosen markets.

Within two weeks after announcing a net loss of $18.7 million for its first quarter 2008 revenues, 

3Com said that it was being acquired by Bain Capital Partners LLC. Bain had previously

handled numerous large technology-based buyouts, to include the takeover of Texas 

Instruments Inc.'s sensors and controls division.120

 116 Kathrin Hille, “China Mobile in Board Shake Up,” Financial Times, May 31, 2010.

Bain’s offer for the deal was $2.2 billion, with 

Huawei Tech Investment Co. Ltd. (Hong Kong) to acquire a minority 16.5 percent interest worth 

$363 million. Huawei Tech Investment Co. Ltd. is a wholly owned subsidiary of Huawei 

Technologies Co. Ltd. (Hong Kong), 3Com’s former joint venture partner in the H3C venture.

117 3-Com website section on corporate history. http://www.3-Com.com. 118 Reuters, “Opposition Leads Bain to Call Off 3Com Deal,” March 21, 2008. 

http://www.nytimes.com/2008/03/21/technology/21com.html; and Cajing China (English version), “The 3Com Deal, 

Behind the Security Flap,” October 23, 2007.

119 Bloomberg.com, “3-Com Agrees to $2.2 billion dollar purchase,” September 28, 2007. 120Texas Instruments press release, “TI Completes Sale of Sensor Control Business to Bain Capital,” April 26, 2006.
29

However, the intended deal between Huawei and 3Com fell afoul of the U.S. government 

interagency Committee on Foreign Investment in the United States (CFIUS), which investigated 

the deal on national security grounds. (For further information on the CFIUS process, see pp. 

30-33.) Among the alleged concerns were (1) that Huawei had links to the Chinese military; and 

(2) that Tipping Point, a subordinate unit of 3Com, provides network security products and 

services to the Department of Defense (DOD) and a number of other federal agencies.121

Following failure to negotiate a “mitigation agreement” to answer government concerns, Bain 

announced in March 2008 that it was backing out of the deal.122

A Timeline History of 3Com 123

• 1979: Founded by Robert Metcalfe (inventor of Ethernet) in 1979.

• 1984: Goes public.

• 1987: Acquires Bridge Communications.

• 1997: Acquires U.S. Robotics (modem manufacturer and owner of Palm, Inc.).

• 1999: 3Com acquires NBX and achieves much progress in initial validation and adoption 

of VOIP (Voice Over Internet Protocol).

• 2000: Reaches its peak market value of $25.8 billion listed on the NASDAQ.124

• 2003: Joint venture with Huawei to create H3C. Combined research on routers, 

switches, wireless networking, security, VOIP, network management systems, and other 

enterprise and small office home office SOHO (small office home office) -level solutions. 

3Com gains access to Asian markets, and Huawei gains access to U.S. and European 

markets.

 -- Sells ComWorks Corporation to UT StarCom.

 -- Exits the high-end router business due to strong competition from Cisco; many of 

3Com’s larger customers feel abandoned by their vendor of choice.

 -- Buys Kerbango and attempts new business entry into Internet radio market but 

abandons the initiative in less than a year.

 -- U.S. Robotics & Palm are spun off and become separate again.

125

• 2005: After the DotCom bust, shares of stock fall in value from an adjusted record of 

$21.89 to $2.96 per share.

• 2006: Generates nearly 37.6 percent of revenues from Europe, Middle East, and Africa;

31.3 percent from North America; 22.1 percent from Asia/Pacific; and 9 percent from 

Central and South America.

• 2007: Juniper Networks (carrier-level telecom and network hardware manufacturer) 

expresses an interest in buying the H3C joint venture.

 121 Reuters, “Opposition Leads Bain to Call Off 3Com Deal,” March 21, 2008. 

http://www.nytimes.com/2008/03/21/technology/21com.html ; and Steven R. Weisman, “Sale of 3Com to Huawei is 

Derailed by U.S. Security Concerns,” New York Times, February 21, 2008. 

http://www.nytimes.com/2008/02/21/business/worldbusiness/21iht-3com.1.10258216.html. See also Tipping Point 

website, “U.S. Federal Government Solutions.” http://www.tippingpoint.com/solutions_federal.html. 122 Reuters, “Opposition Leads Bain to Call Off 3Com Deal,” March 21, 2008. 

http://www.nytimes.com/2008/03/21/technology/21com.html. 123 Bloomberg.com press release data/public filings/multiple press reports, September 28, 2007. 124 Bloomberg.com, “3-Com Agrees to $2.2 billion dollar purchase,” September 28, 2007.

125 Mobile Monday.Net, “UT Starcom Buys 3Com’s Operator Assets,”,March 5, 2003. Quote from the article: 

“Acquiring the CommWorks assets will allow UT Starcom to add to its base of tier-one customers and accelerate its 

geographic diversification outside of China,“ said Hong Lu, president and chief executive officer of UT Starcom. “We 

are already the largest vendor to China Telecom and sell to major customers such as China Netcom.”
30

• 2007: 3Com sees the H3C venture as an option for reversing its multiyear unprofitable 

trend and decides to acquire and keep total ownership of H3C. Huawei sells 3Com its 

49 percent share of the H3C joint venture.

• 2007: 3Com announces its acquisition by Bain Capital Partners and Huawei for $2.2 

billion.

• 2008: 3Com acquisition by Bain and Huawei falls through due to regulatory 

opposition.126

• 2009: In November, 3Com announces acquisition by Hewlett-Packard for $2.7 billion.

Many industry analysts viewed the attempted acquisition of 3Com in concert with Bain as 

another example of Huawei’s efforts to expand its products to overseas markets that it had not 

yet penetrated, as well as a way of competing directly against global leaders such as Cisco. 

Huawei was particularly interested in penetrating the North American marketplace at the 

enterprise solution level.127

DEALS IN THE TELECOM SECTOR, AND THE ROLE OF CFIUS

The Committee on Foreign Investment in the United States is a U.S. government interagency 

committee chaired by the Treasury Department. Its role is “to review transactions that could 

result in control of a U.S. business by a foreign person (‘covered transactions’), in order to 

determine the effect of such transactions on the national security of the United States.”128 The 

CFIUS process is usually initiated when parties to a proposed or pending transaction of 

potential concern jointly file a voluntary notice with CFIUS. 129

Membership in CFIUS includes the secretaries of seven federal departments (the Treasury, 

Justice, Homeland Security, Commerce, Defense, State, and Energy), and the heads of two 

executive offices (U.S. Trade Representative, Science & Technology Policy). The director of 

National Intelligence and the secretary of Labor are also nonvoting, ex officio members of 

CFIUS; and five additional federal offices (Office of Management & Budget, Council of 

Economic Advisors, National Security Council, National Economic Council, and Homeland 

Security Council) also participate as observer members of CFIUS.130

CFIUS investigates only a limited number of cases each year. It officially blocks only a very 

small number, although some deals are withdrawn by the filing companies if problems appear 

likely to crop up in the CFIUS review. In the three-year period from 2006 to 2008, CFIUS 

received a total of 404 notices (in all industrial sectors) and investigated 36 of them; 57 of these 

 127 Reuters, “Opposition Leads Bain to Call Off 3Com Deal,” March 21, 2008. 

http://www.nytimes.com/2008/03/21/technology/21com.html; and Caijing China (English version), “The 3Com Deal, 

Behind the Security Flap,” October 23, 2007.

127 Funding Universe.com/histories; 10Ks, public filings. 128 United States Department of the Treasury website, “Office of Investment Security -- Committee on Foreign 

Investment in the United States.” http://www.ustreas.gov/offices/international-affairs/cfius. CFIUS operates pursuant 

to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security 

Act of 2007 (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. 

Part 800. 129 United States Department of the Treasury website, “Office of Investment Security -- Committee on Foreign 

Investment in the United States – Overview of the CFIUS Process.” http://www.ustreas.gov/offices/internationalaffairs/cfius/overview.shtml. 130 United States Department of the Treasury website, “Office of Investment Security -- Committee on Foreign 

Investment in the United States – Composition of CFIUS.” http://www.ustreas.gov/offices/internationalaffairs/cfius/members.shtml.
31

proposed deals were subsequently withdrawn after filing, but none were formally rejected.131 In 

the same period, CFIUS reviewed a total of 133 cases classified as “information” sector deals

(one-third of the total number); of these, 22 cases were in the telecommunications industry.132

Three out of the total 133 “information sector” deals involved investors based in China.133

Huawei, in particular, has been a focus of great attention and controversy in association with 

CFIUS reviews of potential telecom deals. As stated by the Financial Times:

US government agencies charged with reviewing sensitive acquisitions are engaged 

in a debate over how to handle Huawei... There are two schools of thought within the 

US government. One pragmatic view holds that [CFIUS] should approve a future 

transaction [with Huawei] because it would allow the government to negotiate what is 

known as a mitigation agreement, a set of strict conditions and security-related 

requirements that could give the US valuable insight into the inner workings of a 

company that some allege has close ties to the Chinese military... 

But there are strong arguments against such a move that support keeping Huawei at 

bay. One former official close to the [CFIUS] process said the government engaged 

in a similar debate during its review of Huawei’s joint bid for 3Com... ‘At the time, 

most of the national security agencies concluded that the window into Huawei would 

not be useful enough and that it would be very difficult to write procedures that would 

ensure [network security]...’

134

CFIUS and the Abortive Emcore / Caofeidian Deal

Aside from the abortive deal between Huawei and 3Com, another recent Chinese-related 

telecommunication deal that encountered difficulties with CFIUS was the cancelled 2010 deal 

between Emcore Corporation and China’s Tangshan Caofeidian Investment Corporation 

[Tangshan Caofeidian Touzi Jituan / 唐山曹妃甸投 资集 团], or TCIC. Emcore Corporation, a 

New Mexico-based manufacturer of components for fiber optic equipment and solar panels, had 

agreed to sell a 60 percent stake in its fiber optics business to TCIC for $27.75 million USD.135

There is little known about TCIC; the company has no website, and only limited information 

regarding the investment firm is readily available. It is possible that TCIC is a subsidiary of the 

Tangshan Caofeidian Infrastructure Investment Corporation [Tangshan Caofeidian Jichu Sheshi 

Jianshe Touzi Jituan Youxian Gongsi / 唐山曹妃甸基础设施建设投资集团有限公司], a stateowned conglomerate created by the Caofeidian Ministry of Investment. The company is a key 

 131 Committee on Foreign Investment in the United States, Annual Report to Congress 2009 (Washington, DC: 

November 2009), p. 3. http://www.ustreas.gov/offices/internationalaffairs/cfius/docs/2009%20CFIUS%20Annual%20Report.pdf.

132 Committee on Foreign Investment in the United States, Annual Report to Congress 2009 (Washington, DC: 

November 2009), pp. 4 and 7. http://www.ustreas.gov/offices/internationalaffairs/cfius/docs/2009%20CFIUS%20Annual%20Report.pdf.

133 Committee on Foreign Investment in the United States, Annual Report to Congress 2009 (Washington, DC: 

November 2009), p. 15. http://www.ustreas.gov/offices/internationalaffairs/cfius/docs/2009%20CFIUS%20Annual%20Report.pdf.

134 Stephanie Kirchgaessner and Helen Thomas, “US Divided on How to Tackle Huawei,” Financial Times, July 29, 

2010.

135 Emcore Corp. Press Release, “EMCORE and Tangshan Caofeidian Investment Corporation (‘TCIC’) Pursue 

Alternative Means of Cooperation to Address Regulatory Concerns,” June 28, 2010. 

http://www.emcore.com/news_events/release?y=2010&news=249.
32

player in the financial and economic development of Caofeidian, an industrial zone on a manmade island in the Gulf of Bohai. The Caofeidian project was initiated at the direction of the 

PRC State Council in 2004 and is administered by Tangshan City, Hebei Province.136

Tangshan Caofeidian Infrastructure Investment Corporation claims 28 subsidiaries and several 

equity affiliates. These subsidiaries and affiliates are reportedly involved in a wide variety of 

industries, to include real estate, hotels, railroads, logistical services, construction, 

petrochemicals, and even electric vehicle development.137

Figure 2: Location of Caofeidian Island Figure 3: Artist Conception of Caofeidian Island

 Source: http://www.caofeidian.us/index.html. Source: http://hy.csm.org.cn/icsr10/en/110.htm.

Although it is unconfirmed, the TCIC involved in the Emcore deal may be associated with 

Tangshan Caofeidian Financial Investment, Ltd., [Tangshan Caofeidian Touzi Youxian Zeren 

Gongsi 唐山曹妃甸投资有限责任公司], a state-owned investment bank based in Caofeidian. The 

bank is involved in private equity investment, direct investment, consulting, and financial 

advisory services.138

中

Tangshan Caofeidian Investment, Ltd., has invested in a plethora of 

domestic and foreign firms and funds, to include the China-Africa Development Fund, the 

China-Belgium Equity Investment Fund, the Bohai Industry Investment Fund, the China-ASEAN 

Investment Fund, China Aluminum Corporation, Mandarin Capital Partners [Zhong-Yi Mandalin 

Jijin / 意曼达林基金, a joint investment project between Chinese and Italian banks],139 as well 

as other “major projects that are in the interest of shareholders.”140

 136 Caofeidian promotional website. http://www.caofeidian.us/index.html. 137 "Tangshan Caofeidian Infrastructure Construction Dynamic Management Platform" [Tangshan Caofeidian Jichu 

Sheshi Jianshe Dongtai Guanli Pingtai / 唐山曹妃甸基础设施建设动态管理平台], "Company Introduction." Translation 

by USCC staff. http://www.cfdjt.com/Integration/ProjectIntro.aspx. 138 Daily Economic News [Mei Ri Jingji Xinwen / 每日经济新闻], "National Development Bank Goes Through 

Tangshan Caofeidian to March into City Development" [Guojia Kaifa Yinhang Jiedao Tangshan Caofeidian Zhijie 

Jinjun Chengshi Kaifa / 国家开发银行借道唐山曹妃甸直接进军城市开发], March 10, 2010. Translation by USCC staff. 

http://finance.ce.cn/rolling/201003/10/t20100310_15590232.shtml.

139 Mandarin Capital Partners website. http://www.mandarincp.com/index.html. 140 Daily Economic News [Mei Ri Jingji Xinwen / 每日经济新闻], "National Development Bank Goes Through 

Tangshan Caofeidian to March into City Development" [Guojia Kaifa Yinhang Jiedao Tangshan Caofeidian Zhijie 

Jinjun Chengshi Kaifa / 国家开发银行借道唐山曹妃甸直接进军城市开发], March 10, 2010. Translation by USCC staff. 

http://finance.ce.cn/rolling/201003/10/t20100310_15590232.shtml.
33

The proposed deal between Emcore and TCIC was withdrawn in late June 2010.141 As is its 

usual practice, CFIUS has not made any public statement about the matter. Emcore has stated 

only that CFIUS communicated “certain regulatory concerns about the transaction” and that 

“EMCORE and TCIC remain willing to explore alternative means of cooperation that would 

address regulatory concerns and meet the parties' objectives.”142

THE GROWTH STRATEGY OF CHINESE TELECOM FIRMS

An apparent strategy for Chinese companies has been to pursue developing markets first and 

then move on to developed markets, as seen in the involvement of Chinese companies in 

telecom infrastructure markets in the 1980s and 1990s.143 Their product strategy was to provide 

broad-scale telecommunications and network products for low procurement and implementation 

costs.144

Within China’s domestic market, the government appears to have strongly favored domestically 

produced telecommunications products and services.145 This protected environment allowed 

domestic firms such as Huawei and ZTE to gain strength and size while also being able to 

compete against world-class solutions providers such as Cisco, 3Com, Avaya, Nortel, AlcatelLucent, Ericsson, IBM, and others across a wide range of solution sets that may have been 

unsustainable in the face of free and open competition.

Huawei’s initial forays into the global marketplace were into other Asian nations in China’s

economic near abroad.

146 This was the initial arena where some Chinese companies may have 

refined their strategy of “developing markets first, developed markets second” before moving 

forward with a strategy for global competition.

147

Huawei has competed very successfully worldwide and is often in the number one or two slot in 

developing markets.148 Its aggressive strategy and pricing have a major economic impact for 

both large and small service providers, and its market prospects appear positive. Nevertheless, 

if a company wants to ascend to the top tier of global telecommunications and networking 

equipment companies, historically it has been essential that it gain access to the U.S. 

marketplace. The North American market appears to have been one of Huawei’s last target 

markets, as penetrating the U.S. marketplace promised to pose one of the toughest challenges 

and could remain a weaker market for Huawei for some time.149

 141 Stephanie Kirchgaessner, “US Blocks China Fibre Optics Deal Over National Security,” Financial Times, June 

30, 2010; and Emcore Corp. Press Release, “EMCORE and Tangshan Caofeidian Investment Corporation (‘TCIC’) 

Pursue Alternative Means of Cooperation to Address Regulatory Concerns,” June 28, 2010. 

http://www.emcore.com/news_events/release?y=2010&news=249.

 This may have driven much of 

142 Emcore Corp. Press Release, “EMCORE and Tangshan Caofeidian Investment Corporation (‘TCIC’) Pursue 

Alternative Means of Cooperation to Address Regulatory Concerns,” June 28, 2010. 

http://www.emcore.com/news_events/release?y=2010&news=249

143 NPR.org, “Chinese Telecom Companies Look to Global Markets,” August 16, 2005. 144 Voice & Data Online, India, “ZTE Right Pricing,” September 3, 2008. 145 Asia Times, “3G is Key to a Foreign Telecom Role in China,” December 6,

, 2006, and ” Voice & Data Online, India, 

“ZTE Right Pricing," September 3, 2008.

146 Voice & Data Online, India, “ZTE Right Pricing,” September 3, 2008. 147 RCR Wireless, “Huawei’s Aggressive Push Pays Off,” September 24, 2008. 148 Del Oro Group Press Release, “Chinese Vendors Huawei and ZTE Gain Ground on Leaders Ericsson and Nokia 

Siemens,” April 26, 2008.

149 Forbes, “Huawei’s U.S. coming out Party,” March 27, 2009; and Forbes, “Huawei Buys Back Into 3Com,” October 

1, 2007.
34

Huawei’s joint venture strategy with 3Com, which may be considered the company’s first large,

strategic attempt to move into U.S. markets.

The abortive deal with 3Com would have offered Huawei an opportunity to establish the 

beachhead for a stronger presence in the North American marketplace. It was also an 

opportunity for Huawei to jump on the mergers and acquisitions (M&A) bandwagon that was 

gaining momentum in the telecommunications industry. Huawei’s statements indicated a desire 

to use its H3C joint venture with 3Com as a means of refining the focus of its product strategy to

telecommunications service providers. However, its actions may have also indicated a more 

ambitious strategy for the North American market.

150 After 3Com bought out the H3C venture, it 

appears that Huawei may have used the resulting cash to turn back around and pursue 3Com in 

acquisition mode. Although its efforts in this regard were opposed by regulators (see pp. 28-

30), this still serves as a useful example of the way in which Huawei’s direct market entry was 

attempted.

Huawei can be expected to learn both from experience and from studying other companies as it

refines its global business model and presence. As it expands into new areas of business and 

employs new marketing strategies, Huawei can be expected to evolve continually in ways that 

will facilitate penetration into the United States and other target global markets. After sufficient 

globalization of its business model, Huawei may continue to move from being an equipment and 

solution manufacturer/provider to being a foundational shaper of markets. By no longer merely 

competing within market space boundaries, Huawei may overcome market models that 

compete with its own in order to redefine the way telecommunications and networking 

technologies are consumed and perhaps even redefine the market spaces by itself.

Investments take many more forms than simply financial investments or acquisitions. Chinese 

companies have made thoughtful investments in leading-edge financial practices, management 

talent, expertise, global engineering, R&D, and training facilities. Consistent with industry 

practices, many Chinese companies have successfully recruited executives from other major 

telecommunications companies for decades in an effort to conform to or drive best global 

management practices.151 These companies apparently have gone to great efforts to manage, 

compensate, and retain top talent for expanding market share and achieving corporate earnings 

growth: for example, Huawei recently recruited a former Nortel executive to run its European 

operations.152

EXPANSION INTO DEVELOPING MARKETS

China has made its mark in wireless networking products. It is postured potentially to become 

the global leader in wireless networking worldwide as its networking products become part of 

infrastructure contributions to developing nations. Developing nations have certain advantages 

when acquiring technology and communications infrastructures, principally because they are not 

encumbered by legacy infrastructure. In many cases, they will not need to invest in groundbased infrastructure for telecommunications and can go straight to wireless networks.

 150 Forbes, “Nortel’s China Syndrome,” January 12, 2009. 151 Kevin Maney,"The New Face of IBM" - "China's biggest IT brand wants to go global. So it bought the PC division -

and the world-class management - of an American icon. Who says being 'oceans apart' is a bad thing?" Wired, July 

2005. http://www.wired.com/wired/archive/13.07/lenovo.html. 152 Cellular News, “Huawei Taps Former Nortel Exec to European Job,” July 13, 2009.
35

Outside of China, Chinese telecom companies have been aggressive in purchasing networks in 

the developing world. This expansion into emerging markets may have been facilitated in part 

by western investments in China, which have freed Chinese capital to reach outward for 

acquisitions in other parts of the world.153 However, the main driver behind these acquisitions 

appears to be the PRC’s “going out” strategy, intended to encourage China’s selected “national 

champions” to compete in international markets. In regions that may have been underserviced 

for telecommunications products and services, the lower-cost options offered by Chinese firms 

can be a natural fit.

U.S. corporate investments in China’s telecom infrastructure and technical capabilities may be 

allowing Chinese companies to redirect a very large amount of their investment capital to 

purchase assets and networks in emerging markets – thereby effectively degrading U.S. 

competitive postures in these same growth markets when they find themselves competing 

directly against Chinese firms. In addition, as foreign firms increasingly have their technologies 

developed and manufactured in China, this provides unique insights to Chinese firms that they 

are able to use to improve their own products, a trend that will strengthen China’s competitive 

position in both U.S. and global markets.

Recently, China has continued its acquisition approach to building market share in emerging 

markets.154 For example, in 2006, China Mobile acquired Millicom International Cellular, which 

operated mobile telephone services in some of the world’s least-developed regions, to include

parts of Central America, South America, Africa, and the Asia-Pacific region. 155 As China 

Mobile expands successfully into emerging markets, other Chinese telecom providers such as 

Huawei and ZTE also seem likely to displace western suppliers. Developments of this nature 

can be increasingly negative for western wireless network equipment providers.156

Likewise, in February 2007, China Mobile acquired a 100 percent stake in Paktel and renamed 

the company China Mobile Pakistan. At that time, “[a]ccording to China Mobile Pakistan's COO

[chief operating officer] Zafar Usmani, China Mobile had invested $1.66 billion USD in Pakistan, 

creating 41,700 job opportunities for the country.”157 Following up on this investment, in 

February 2009 China Mobile Pakistan announced an additional investment of $500 million to 

construct networks and infrastructures in Pakistan under its “Zong” brand. 158

Other recent deals have continued the pattern of Chinese telecom expansion. In October 2008, 

China announced a planned investment of $50 million USD to develop telecommunications 

facilities in Guinea-Bissau’s national post and telecom operator (PTO) Guinea Telecom, 

 153Jason Singer and Jason Dean, “China Mobile Nears $5.3 Billion Deal For Millicom; Beijing's Biggest Purchase 

Overseas Would Intensify Push Into Emerging Markets,” China Daily, May 25, 2006. 

http://www.chinadaily.com.cn/world/2006-05/25/content_600127.htm. 154 CNNMoney.com, “China’s New Frontier, Chinese Telecom gear maker Huawei and ZTE have already conquered 

Africa and Asia. Next stop: Latin America..” June 23, 2009. 155Jason Singer and Jason Dean, “China Mobile Nears $5.3 Billion Deal For Millicom Beijing's Biggest Purchase 

Overseas Would Intensify Push Into Emerging Markets,” China Daily, May 25, 2006. 

http://www.chinadaily.com.cn/world/2006-05/25/content_600127.htm. 156David Jackson, “China Mobile - Millicom Deal Threatens Ericsson, Nokia, Lucent, Motorola, QualComm,” 

SeekingAlpha.com, May 25, 2006. http://seekingalpha.com/article/11224-china-mobile-millicom-deal-threatensericsson-nokia-lucent-motorola-qualcom. 157China Tech News, “Pakistan Welcomes More Chinese Telecom Investment," February 18, 2009. 

http://www.chinatechnews.com/2009/02/18/8855-pakistan-welcomes-more-chinese-telecom-investment. 158 China Tech News, “Pakistan Welcomes More Chinese Telecom Investment," February 18, 2009. 

http://www.chinatechnews.com/2009/02/18/8855-pakistan-welcomes-more-chinese-telecom-investment.
36

including the installation of a fiber-optic network to span the entire country, from the border with 

Senegal in the north to Guinea in the south.159 Chinese telecoms are also reaching into 

wealthier nonwestern markets. In April 2009, China Mobile announced its desire to pursue an 

investment in the Taiwanese telecommunications company Far EasTone.

160 Instead, China 

Mobile gained approval to set up a subsidiary under its “Zong” brand, which will be used to 

source telecommunications handsets and equipment.161

A clear model has emerged: Chinese companies leverage their inexpensive and plentiful 

engineers, designers, contractors, and any others needed to build new networks or to upgrade 

existing networks in these emerging markets.162 As western markets become saturated, these 

emerging markets become the growth areas and enable government-influenced 

telecommunication companies to find attractive new areas for expansion.163 Where fixed-line 

infrastructure is poor or limited, cellular networks are much cheaper to roll out and are used as 

the primary means of communication.”164 As China expands its network influence and infuses its 

supply chains with propriety standards and equipment, China builds its global influence in the 

overall standards processes and becomes a much stronger player in developing global 

standards. By influencing these global standards, China may increase the overall value of its 

own proprietary intellectual property.

THE EAST-WEST FLOW OF INVESTMENTS IN THE 

COMMUNICATIONS SECTOR

Investments between China and the United States have become symbiotic, with 

results that may not have been immediately apparent at the outset. Chinese and 

American companies have shared in both the risks and the rewards in their 

capitalist ventures.165 While the events cataloged in this report lead to the 

eventual conclusion that American network security could potentially be 

imperiled, our national security also depends upon how we manage our business 

relationships with China and how we deal with the successive companies that 

have been born out of our broad trading framework. National security will not be 

effectively maintained without economic security.

Through the use of mergers and acquisitions, the aggressive application of sovereign wealth 

funds, joint ventures, and many other business mechanisms, China is rapidly gaining the

 160 PriMetrica, Inc.,“Guinea Telecom to receive USD50m in Chinese investment” (Carlsbad, CA: October 21, 2008. 

http://www.telegeography.com/cu/article.php?article_id=25675. 161Dow Jones & Company, Inc., “

Taiwan stocks on fire on China Mobile-Far EasTone.Deal Plan,” Wall Street Journal

Digital Network, MarketWatch, Inc., Asia Markets, April 29, 2009. http://www.marketwatch.com/story/china-mobilestaiwan-plan-could-change-everything. 161Chinmei Sung and Janet Ong, “Taiwan Opens 100 Industries to Chinese Investment (Update2),” Bloomberg, June 

30, 2009. http://www.bloomberg.com/apps/news?pid=20601080&sid=aFeN1SK55G7U; and NetworkWorld, “China 

Mobile Wins Approval for Taiwan Subsidiary,” May 11, 2010.

162Jason Singer and Jason Dean, “China Mobile Nears $5.3 Billion Deal For Millicom Beijing's Biggest Purchase 

Overseas Would Intensify Push Into Emerging Markets,” China Daily Information Co. (CDIC), May 25, 2006. 

http://www.chinadaily.com.cn/world/2006-05/25/content_600127.htm. 163 Jason Singer and Jason Dean ,“China Mobile Nears $5.3 Billion Deal For Millicom Beijing's Biggest Purchase 

Overseas Would Intensify Push Into Emerging Markets,

” China Daily Information Co. (CDIC), May 25, 2006. 

http://www.chinadaily.com.cn/world/2006-05/25/content_600127.htm; and Reuters, “Russia’s MTS (WHAT IS MTS?) 

picks Huawei for 3G Armenia Network,” January 16, 2009.

164Jason Singer and Jason Dean, “

China Mobile Nears $5.3 Billion Deal For Millicom Beijing's Biggest Purchase 

Overseas Would Intensify Push Into Emerging Markets,” China Daily Information Co. (CDIC), May 25, 2006. 

http://www.chinadaily.com.cn/world/2006-05/25/content_600127.htm. 165 Wall Street Journal ,“China Ready to Place Bets on Hedge Funds,” June 19, 2009.
37

potential for establishing global dominance in the telecommunications sector. Significant 

investments have been made in the communications sector over the last two decades, with 

substantial escalation occurring over the last ten years and increasing escalation over the most 

recent five years. These investments parallel the overall growth of Chinese investments in the 

United States and U.S. investments in China. 

Some U.S. venture funds and hedge funds have targeted China exclusively in an effort to 

generate both growth and higher yields in their portfolios and to take advantage of China’s 

burgeoning infrastructure build-out.166 Many major venture capital and private equity firms have 

looked toward China for growth. Billions of dollars from firms such as Draper Fisher, Sycamore 

Ventures, The Carlyle Group Asia, Intel Capital (the venture arm of Intel), Softbank Asia, JP 

Morgan Asia – all firms with strong U.S. roots or investment ties – have been invested in 

Chinese telecommunications ventures since the early 2000s. Many of these companies are 

now publicly traded on exchanges like the NASDAQ, NYSE, FTSE, and NIKKEI.167

China has announced continued network investment at home on next-generation wireless 

technologies, potentially reaching 280 billion RMB (~$44B USD) in 2009.168 Faced by an 

ongoing financial crisis in the United States, some U.S. venture firms have announced a 

renewed investment strategy in China’s infrastructure.169 Networks of investment, venture 

capital, hedge funds, other financial instruments, and management entities seem almost as 

interconnected today as the technologies themselves.

China has also moved forward aggressively on an array of European partnerships that allow 

rapid growth in space-based communications markets.170 This is due to the fact that companies 

from China are not only investors in foreign firms but are also investors in China’s own “homegrown” manufacturing talent and capabilities base. Chinese companies have used mergers, 

acquisitions, and international partnerships to steadily and rapidly increase China’s home-grown 

technologies – which, in many cases, might be more accurately identified as “grafted foreign 

hybrids.”

Chinese companies have also made considerable investments through sovereign wealth funds 

in numerous hedge funds and investment banks. For example, Beijing Wonderful 

Investments/The China Investment Corporation recently took an expanded 12.5 percent stake in 

Blackstone Group.171 Blackstone’s private equity group has, over the years, taken stakes in 

companies like T-Mobile (one of the largest wireless cellular carriers in the global market,

including the United States), TDC Telecom, Sungard (provider of backup, disaster recovery, and 

storage solutions – provider of critical disaster recovery services to the U.S. government), 

Global Tower (an operator of towers for wireless networks), NewSkies (a broadband satellite 

communications company), TRW Automotive, Charter Communications, Adelphia 

Communications (cable), iPCS (wireless communications provider), and StorageApps (provider 

of storage area networking solutions).172

 166 New York Times, “Silverlake Eyes Asia Tech Investments,” November 28, 2008. 167 Asia Private Equity Review, April 2006; China C SR [corporate social responsibility], May 27, 2008. 168 China Daily, “China Finally Awards Telecom Operators 3G Wireless,” January 7, 2009. 169 Annual Reports and 10K filings, Carlyle Group website. www.carlyle.com. 170 Alcatel Alenia Press Release, “Alcatel Alenia Space Wins New Communication and Broadcast Satellite Contract 

Chinasat 6B From ChinaSatcom, Bolstering Cooperation With China,” redOrbit.com, December 5, 2005.

171 Blackstone 10K Filing 2009. Annual Report and consolidated financial statements. 172 The Blackstone Group. http://www.blackstonegroup.com.
38

Patterns of these investments suggest the potential for a continual increase of Chinese 

investments in global business markets, which might also provide deep access by PRC 

government-influenced or controlled actors to both influential foreign companies and to sensitive 

communications networks. However, as with any investment, it is also possible that investments 

and relationships such as these continually will open doors to new opportunities to expand 

business lines and portfolios constructively. Many American businesses have embraced strong 

ties with Asian companies over the last few decades, and the American consumer less

frequently associates negative brand identity with Chinese technology products, particularly 

when they are paired with major American, Japanese, or European brand identities.
39

SECTION 2

POTENTIAL VULNERABILITIES IN COMMUNICATIONS 

INFRASTRUCTURE AND PRODUCTS, AND CHINESE 

INVESTMENTS IN THESE SECTORS

Note: This report mentions only a few actors and fields of technology, representing a fraction of 

the various actors, technologies, and relationships present in the communications sector. They 

were selected because references are often more readily available or particularly noteworthy. 

Although valid examples, they may not be fully representative of the overall sector environments 

themselves.

Efforts to analyze potential technological risks are often plagued by a failure to account for the 

continuous nature of technological innovation, difficulties associated with “control dilemmas,”

173

and faulty assumptions of a continuity of currently prevailing trends. New technologies are 

constantly evolving, and U.S. technological competitiveness will be challenged frequently in the 

future and from many quarters. As applies to this analysis, U.S. policymakers and industry 

officials cannot fully understand and appreciate the risks of China’s rising influence in the 

communications sector until that influence has become somewhat manifest. Nevertheless, 

working continually toward reasonable forecasts of risks is necessary in light of the potential 

national security stakes involved. 

INVESTMENTS IN LONG-HAUL FIBER

Fiber is being used extensively worldwide as the primary means of high-bandwidth 

communication, to include advanced digital video and data and high-speed Internet and 

telephony applications. In the past few years, the number of new fiber connections has 

outpaced the number of new copper cable connections, principally due to the superior 

performance of fiber technology.174 Fiber has become the transport technology of choice 

because it has thousands of times the bandwidth of copper wire and can carry signals hundreds 

of times farther before needing a repeater. Most carrier-level or business network backbones 

are fiber-based using Ethernet standards.175

Insofar as sensitive U.S. data are transported across global undersea networks, the data are

vulnerable to interception or interference by hostile actors but perhaps only by degrees more so 

than before. Hacking into optical networks is not overly difficult. Perhaps the easiest and 

consequently most undetectable means is simply bending a cable, as this will allow a small (but 

sufficient amount) of light to leak from the cable without actually breaking connections –

something that operations engineers try to be very quick to notice and investigate. A “tap” is 

completed by using commercially available couplers to place a microbend in the cable to allow 

light to radiate through the cladding and be exposed to a photodetector. The photodetector is 

connected to an electro-optical converter that acts as an interface to a network interface card. 

This tap allows the data being transmitted through the cable to be intercepted and “sniffed” for 

 173 A “control dilemma” relates to the fact that the catastrophic risks of new changes and technologies often cannot be 

known until they have been implemented to the degree necessary for the risks to be incurred.

174 InfoTech News, “Research and Markets: Gigabit Ethernet Fiber and Copper Cabling Systems,” TMCNET.com, 

April 15, 2010.

175 Cisco website. http://www.cisco.com/en/US/docs/internetworking/technology/handbook/Ethernet.pdf.
40

desired information in much the same way as any network data may be compromised.176

Splicing is another method for tapping fiber optic cables but is much more difficult to perform 

successfully, as it usually results in briefly breaking the connection, which may lead to detection. 

When millions of connections are severed, even momentarily, this is noteworthy and will 

possibly lead to an investigation of the event by affected carriers.177

The potential for disruption of communications through undersea cables was seen in December 

2006 when an earthquake broke cables in the South China Sea between Taiwan and the 

Philippines, disabling 90 percent of the region’s telecommunications capacity. It was 

demonstrated again in January and February 2008 when cables in Middle Eastern waters were 

reportedly broken by stray ship anchors. The cable outages disrupted a wide variety of 

communications, to include the ability of the U.S. military’s Central Command to communicate 

with facilities and units in Iraq and Afghanistan.178

Whether fiber is cut by accident, by design to disrupt communications, or hacked to intercept 

sensitive data, the threat to national security can be significant. All fiber networks consist of 

complex electronic components, many of which are manufactured outside of the United States.

These components could form another source of insecurity, as they can be infected with 

malicious code such as kill switches, Trojan horses, worms, or many other harmful features 

during the manufacture process. Repair parts179 and diagnostic tools also can be a source of 

malware exposing fiber communications to third-party eavesdropping. The United States has 

placed itself in a position of relying on other countries for much of its technology infrastructure, a 

set of circumstances with serious implications for network security. (For more on this subject, 

see sec. 3 of this report, “Supply Chain Integrity, and the Impact on Government/Defense 

Contracting.”)

The Security of Optical Fiber Networks, 

and the Case of Global Crossing and Hutchison-Whampoa

 Global Crossing Company Logo Hutchison Whampoa Company Logo

Source: Global Crossing.com. Source: Hutchison-Whampoa.com.

In late 1999, an aggressive global fiber optic build-out was in progress as the Internet boom 

pushed the development of optical fiber networks to carry greater traffic loads at increasing 

speeds. This spurred increased construction of an undersea fiber to bridge high-density points 

in Asia and Europe. Global Crossing, a holding company based in Bermuda with significant 

U.S. and global interests, made significant investments in high-capacity undersea fiber routes, 

ultimately establishing a “$20 billion global fiber optic network [that] crosses both the Atlantic

and Pacific Oceans and connects twenty-seven countries in Asia, North and South America and 

 176 Sandra Kay Miller, “Hacking at the Speed of Light,” SecuritySolutions.com, April 1, 2006. 177 Sandra Kay Miller, “Hacking at the Speed of Light,” SecuritySolutions.com, April 1, 2006. 

http://securitysolutions.com/mag/security_hacking_speed_light.

178 James Geary, “Who Protects the Internet?” Popular Science, March 13, 2009. 179 Reperi - Integrated circuits (ICs) can be altered to introduce malware into the hardware. That includes 

replacement parts that consist of ICs. Specifically, fiber uses transceivers and multiplexers along with other 

equipment. Any of these devices can be sources of malware.
41

Europe.”

180

Figure 4: Global Crossing Networks in 2010

Global Crossing’s interests have been strategically significant because of the depth 

of its holdings in undersea cable connecting key strategic transport routes and its exposure to 

U.S. government communications traffic through substantial holdings and the holdings of 

subsidiaries.

 Source: Global Crossing, "Carrier Overview," 2010.

Overestimating demand and timing caused a telecommunications bust cycle in the early 2000s, 

resulting in bankruptcy filings by long-haul fiber carriers. Hutchison Whampoa had a $400 

million convertible bond stake in Global Crossing at the time Global Crossing entered 

bankruptcy in 2002. In early 2002, Singapore Telecom (ST Telemedia) and Hutchison

Whampoa of Hong Kong attempted to acquire a majority stake in Global Crossing’s network 

assets at a price of $750 million).181 Hutchison Whampoa subsequently withdrew from the 

purchase agreement and ST Telemedia exercised its option under the purchase agreement to 

assume all of Hutchison’s rights and obligations, purchasing a 61.5 percent stake in Global 

Crossing (reorganized following bankruptcy) for $250 million.

182 These actions were taken due 

to ongoing CFIUS objections to the potential role of Hutchison Whampoa.

183 (For more on 

telecom deals that ran afoul of CFIUS, see pp. 30-33.)

Hutchinson Whampoa is Hong Kong’s largest multinational conglomerate, operating in 54 

countries worldwide. The company holds a broad range of investments, from health and beauty 

products to port operations, property development, and telecommunications.

184

 180 James Lewis, “CFIUS - The Committee on Foreign Investment in the United States” (Washington, DC: Center for 

Strategic and International Studies, February 2006). http://csis.org/files/media/csis/pubs/060212_cfius.pdf.

To date, 

Hutchison Whampoa is the largest company traded on the Hong Kong Stock Exchange, with a 

181 Global Crossing Press Release, “Hutchison Whampoa Limited and Singapore Technologies Telemedia Pte. Ltd. 

Plan to Invest $750 Million in Global Crossing,” January 8, 2002.

182 Global Crossing Press Release, “ST Telemedia Increases Proposed Stake in Global Crossing,” April 30, 2003; 

and Global Crossing 2003, 2004 10K SEC [Securities and Exchange Commission] filings.

183 James Lewis, “New Objectives for CFIUS: Foreign Ownership, Critical Infrastructure, and Communications 

Interception,” Federal Communications Law Journal (June 2005). 

http://www.law.indiana.edu/fclj/pubs/v57/no3/Lewis.pdf.

184 Hutchison Whampoa Limited, About HWL. http://www.hutchison-whampoa.com/eng/about/overview.htm.
42

total market capitalization of HKD $205.7 billion.185 The company was British owned until 1979, 

when Hong Kong and Shanghai Banking Corporation (HSBC) sold its controlling 22 percent

stake to Cheung Kong Holdings, owned by Hong Kong tycoon Li Ka-Shing, for HKD $639 

million.

Commonly referred to in Hong Kong as “Superman,” Li Ka-Shing is the 11th richest man in the 

world, with a net worth of USD $23.1 billion, making him the richest man in Asia.186 Mr. Li 

maintains close ties to the Chinese government. He is a director of the China International Trust 

and Investment Corporation (CITIC), a state investment arm operated by the China government, 

and also serves on several state advisory bodies.187 According to James Lewis, a research 

fellow with the Center for Strategic and International Studies:

“The crux of the opposition to Hutchison was the company’s alleged connections to the Chinese 

government. Senior Chinese government officials are reputedly among Hutchison’s 

stockholders. The Department of Defense and others feared that China could use this 

investment relationship to influence Hutchison and particularly to obtain access to Global

Crossing’s communications networks... Hutchison is clearly a legitimate, commercial, publiclytraded entity with a long history of business success, but Chinese intelligence entities have used 

their ownership stake in foreign companies as a means to obtain controlled technology. The fear 

that the Chinese government, if given the opportunity, would extend the use of this technology

to collect communications is not an unreasonable fear.”

188

ROUTERS, SWITCHES, AND HUBS

Routers are used to connect users between networks, while switches and hubs are used to 

connect users within a network. With advances in technology, many routers are now designed 

to perform the functions of switches and hubs as well as other security services such as 

intrusion detection/prevention and antivirus scanning. Routers have become the “Swiss army 

knife” of networking. Most networks are designed for redundancy and have multiple routers so 

that the failure of a few will not cause a complete network outage. In the case of an outage, 

routing tables of the remaining routers are reconfigured, and the network continues functioning, 

although at a reduced level until faulty routers can be repaired or replaced.

Typically, network customers subscribe with an Internet service provider (ISP) or carrier to 

transport their traffic between networks. When traffic is destined for a network using a different 

ISP as their carrier, some means must be provided to hand the traffic off to the other carrier for 

final delivery to the destination. Carriers may enter into their own teaming or peering 

 185 Bloomberg Businessweek, HUTCHISON WHAMPOA LTD (13: Hong Kong). 

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=13:HK.

186 Michael Schuman, “The Miracle of Asia’s Richest Man,” Forbes, February 24, 2010.

http://www.forbes.com/2010/02/24/li-ka-shing-billionaire-hong-kong-richest-opinions-book-excerpt-michaelschuman.html?boxes=Homepagelighttop.

187 Stephen Vines, “The Other Handover,” TIMEasia, August 6, 2005. 

www.time.com/time/asia/2005/journey/hutchison.htm.

188 James Lewis, “New Objectives for CFIUS: Foreign Ownership, Critical Infrastructure, and Communications 

Interception,” Federal Communications Law Journal (June 2005). 

http://www.law.indiana.edu/fclj/pubs/v57/no3/Lewis.pdf. Others have also voiced concerns about Hutchison 

Whampoa: for example, former Senate Majority Leader Trent Lott once went so far as to allege that Hutchison 

Whampoa is “an arm of the People’s Liberation Army.” See Economist, “Keeping Out Li Ka-Shing,” May 3, 2003. 

However, a detailed examination of these allegations, or a deeper study of the background of Hutchison Whampoa, is 

beyond the scope of this report.
43

arrangements to handle such traffic or use an Internet exchange point (IXP) that has been set 

up for this specific purpose. An Internet exchange point is the physical infrastructure that allows 

ISPs to exchange Internet traffic between their networks by means of mutual peering 

arrangements that allow traffic to be exchanged without cost. These IXPs use a host of 

networking equipment, including sophisticated routers and switches to enable traffic to be 

properly routed.

This equipment is comprised of integrated circuits that can be severely impacted through 

malicious circuits that modify functionality or include backdoors and/or kill switches. Although a 

hostile actor manufacturing such products could conceivably target all integrated circuits to be 

used in routers, they might instead target integrated circuits used in the most sophisticated 

equipment, thus assuring the maximum amount of damage per individual attack. Following this 

line of reasoning, the Internet in the United States could theoretically be brought down or 

severely disrupted because the routers and switches serving the IXPs were disabled and traffic 

could no longer be routed between networks, except where carriers had their own private 

peering arrangements. Generally, the larger the network, the more sophisticated the equipment 

(such as routers and switches) becomes. Arguably, by focusing on the larger classes of routers 

and switches, a potential enemy could disrupt the most traffic and cause the greatest amount of 

harm with the fewest resources expended in an attack.189 

However, this does not preclude strategies based on attacking large numbers of lower-end 

equipment components. Cyber attacks can be shaped in many different ways and attack the full 

spectrum of systems and networks. Depending on which effects are desired and tools that are 

available, cyber attackers may use old techniques to attack new systems effectively or may find 

that the massive effects of attacks based on using multitudes of smaller compromised 

components (workstations, access points, low-end routers, smart phones, etc.) can easily 

outweigh the effects of attacking higher-end systems or networks.

One of the central reasons that the proposed purchase of 3Com by Bain Capital and Huawei 

proved so controversial was the prominent position of 3Com in the router market. As a 

manufacturer of routers, switches, and hubs, 3Com had equipment that was often found in the 

heart of telecommunications networks and provided connectivity into some of the most secure 

areas of critical infrastructures. 3Com was also a significant provider of data communications 

equipment to the U.S. federal government.190 (For a fuller account of the abortive deal between 

3Com and Huawei, see pp. 28-30.) The U.S. companies Cisco and Juniper still hold a large 

share of the global high-end router market; however, Huawei is growing quickly and expanding 

worldwide, causing U.S. companies to lose ground.191

 189 Reperi – nonpublic research - there are numerous vectors for attacks intended to have a large-scale impact, and 

the possibility of massive attacks at large numbers of smaller routers is very real. However, some consider striking at 

large routers to be more attractive.

190Reuters, "Opposition Leads Bain to Call Off 3Com Deal," March 21, 2008. 

http://www.nytimes.com/2008/03/21/technology/21com.html; and Cajing China (English version), “The 3Com Deal, 

Behind the Security Flap,” October 23, 2007.

191 “Cisco and Juniper's combined market share fell from 69% in 2008 to 59% in 2009. Huawei and Alcatel-Lucent 

gained much of the share these companies lost.” See TelecomsEurope.net, “Cisco, Juniper Lose Routing Market 

Share in 2009,” February 22, 2010. http://www.telecomseurope.net/content/cisco-juniper-lose-routing-market-share2009.
44

WiMAX/WiFi – NETWORK AND NETWORK CONTROL DEVICES AND 

PROTOCOLS FOR WIRELESS NETWORKING

Over the past decade, WiFi (wireless fidelity) has significantly raised the amount of interest in 

the wireless market. It is quickly becoming a replacement for or addition to wireline Ethernet in 

the business community and the access method of choice in the home. The creation of WiFi 

hot spots in locations such as airports, hotels, and coffee houses offers greater user mobility in 

connecting to service providers for data and voice transmissions. There are multiple standards 

in widespread use today, including 802.11a, 802.11b, 802.11g, and fairly recent developments 

such as 802.11n. The difference in each is in the frequency spectrum and modulation 

technology use, and the transmission rates available.

Worldwide Interoperability for Microwave Access (WiMAX) is a relatively new standard 

approved in January 2003 that will offer a last-mile alternative to digital subscriber line (DSL) 

and cable modem service, promising to lead to ubiquitous, continuous, mobile wireless 

connectivity. Huawei makes this type of equipment and will become a vendor to Clearwire 

Communications as the company rolls out 4G services at multiple locations in the United States.

WiMAX can provide broadband on demand or last-mile wireless access to speed the 

deployment of IEEE 802.11 WiFi hotspots and wireless LANs. Public safety trials among 

various network providers in the United States have included utilizing WiMAX combined with 

Land Mobile Radio (LMR) applications to deliver public safety communications between multiple 

law enforcement and emergency responders. Clearwire has been quoted in the press regarding 

its intent to offer public safety solutions over its network.192 Sprint Nextel is a major equity 

investor in Clearwire.193

Understanding China’s internal domestic telecommunications market is essential to 

understanding Chinese communications investments in U.S. companies and around the world. 

China’s own market for wireless communications has made it an attractive target for U.S. 

investment and an inexpensive development and manufacturing hub for wireless technologies. 

In the wireless world, it presents the mass market of mass markets, where manufacturing for 

wireless equipment can more easily cultivate economies of scale.

China began issuing 3G licenses for its internal spectrum in January 2009. The first three 

companies receiving licenses were China Mobile (TD-SCDMA - the domestically developed 3G 

standard), China Telecom (CDMA2000 - U.S. developed), and China Unicom (WCDMA -

Europe developed).194 The Chinese Ministry of Industry and Information Technology provided 

regulatory oversight for 3G network operation, dealing with competition, consumer rights, 

security, telecom charges management, and facilities.195

 192 WiMAX is a telecommunications technology providing wireless transmission of data using a variety of transmission 

modes, from point-to-multipoint links to portable and fully mobile Internet access. Based on the IEEE 802.16 standard 

(Broadband Wireless Access), WiMAX can be thought of as a more powerful relative of WiFi. For directional use, 

under ideal conditions WiMAX can reach between line-of-sight points for as far as 20 miles or more to connect local 

hotspots into a larger wireless wide-area network. Meanwhile, WiMAX hotspots can be as much as five or six miles 

across. A user may have a WiFi hotspot in their home that talks to a WiMAX hotspot in their neighborhood, which is 

connected to a WiMAX backbone that connects to the Internet at a distant location.

193 Clearwire Press Release, May 7, 2008. 194China Daily, "China's telecom sector gets 3G licenses," January 7, 2009. 

http://www.chinadaily.com.cn/bizchina/2009-01/07/content_7375721.htm. 195China Daily, "China's telecoms sector gets 3G licenses," January 7, 2009. 

http://www.chinadaily.com.cn/bizchina/2009-01/07/content_7375721.htm.
45

At the same time, China has been making massive investments in 4G technology. The “NextGeneration Broadband Wireless Mobile Communications Network” began in 2008 and will 

stretch over 15 years, with total spending expected to reach 70 billion RMB (close to $10 billion 

USD).

196 China has been trying to promote its own standards for international adoption but has 

yet to achieve this goal. The network standard LTE is considered to be the next standard for 

replacing and upgrading 3G/4G systems and includes both frequency division and time division 

duplexes.197 TeliaSonera, a Scandinavian telecom company, launched the first live LTE 4G 

services in Norway and Sweden in December 2009 using Huawei infrastructure in the Norway 

deployment. China Mobile launched the world’s first TD (time division) LTE network recently 

providing download speeds ten times faster than 3G networks.198 A significant number of LTE 

trials are already underway worldwide with Huawei having premier product entries in this market 

segment.

Huawei and the Development of LTE Standards199

Long-Term Evolution (LTE) is a “high performance air interface for cellular mobile telephony,”200

and many of the world’s leading telecommunications firms (including Verizon Wireless and 

AT&T) are working on potentially converting their networks to LTE technology.201 The 

emergence of the LTE standard is the result of collaboration between telecommunications 

industry associations in Europe, Japan, China, South Korea, and North America. A number of 

international corporations are competing or collaborating in this market space, to include Cisco 

(United States), Ericsson (Sweden), Huawei (China), LG Technologies (Korea), Motorola 

(United States), Nokia Siemens Networks (Finland), Samsung (Japan), and ZTE (China).

Huawei has set for itself a strategic goal to become an industry leader in fixed wireline networks, 

wireless networks, and network switch segments worldwide. By spring of 2009, Huawei had 

become number two globally in the fixed wireline and network switch segment and number 

three in the wireless segment. Within the wireless segment, Huawei is investing considerable 

resources in the development of LTE technology.202 Huawei has been involved with LTE 

research and development since 2004 and as of July 2010 had “been awarded 14 LTE 

commercial contracts and more than 60 LTE trials, including the world’s first commercial LTE 

network in Oslo, Norway... [Huawei] intends to remain ahead of the industry curve by providing 

leading edge and customer-specific LTE solutions to allow operators around the world to 

establish and maintain long-term, competitive LTE leadership.”203

Interlocutors speaking on behalf of Huawei have cited the company’s superior position in LTE 

technology as a compelling reason for western telecom companies to adopt its products. 

Huawei’s products are not necessarily superior to those of other suppliers worldwide: they are 

comparable in some ways and inferior or superior in others, depending on relative product 

development strategies. However, Huawei is competing fiercely in the entire LTE business 

model, to include services and management, and it might be able to position its product 

 196Kaiser Kuo, "China’s 4G Master Plan," February 26, 2008. http://digitalwatch.ogilvy.com.cn/en/?p=205. 197Kaiser Kuo, "China’s 4G Master Plan," February 26, 2008. http://digitalwatch.ogilvy.com.cn/en/?p=205. 198 CNET News, “TeliaSonera Launches First LTE 4G Network,” December 14, 2009; and Richard Wilson, “China 

Goes for 4G LTE in a Big Way,” Electronicsweekly.com, July 29, 2009.

199 The information in this section is based primarily on analysis provided to the Commission by Reperi LLC. 200 See the entry for “LTE” in the glossary of this report, p. 97. 201 Wireless Industry News, “AT and T Starts Building its LTE Network,” February 11, 2010. 

http://www.wirelessindustrynews.org/news-feb-2010/1836-021110-win-news.html. 202 Analysis provided to the Commission by Reperi LLC. 203 Huawei website, “LTE Overview.” http://www.huawei.com/radio_access_network/lte.do.
46

offerings to be less expensive than those of its competitors. U.S. telecommunications 

companies are under intense pressure to control costs, which may be forcing them to elevate 

pricing as a higher consideration than might otherwise have been the case.

The United States is currently faced by an accelerating technology paradigm shift in certain 

sectors, particularly telecommunications, in which foreign companies are moving into the 

position of being gatekeepers of standards in advanced technologies. Current-day decisions 

made by telecommunications companies regarding infrastructure build-outs will affect their 

business for years to come, and the question of which technology provider is likely to emerge as 

the industry leader is significant: “These telecom companies cannot afford (in a practical 

business sense) to choose a horse that won’t win... If current trends continue... going with 

products from someone like Huawei might be viewed as a business survival decision, 

regardless of [any] potential security risks.”204

APPLICATIONS SOFTWARE

Software/Controllers/Drivers

Networking equipment relies on controllers and/or drivers with associated software to deliver the 

functionality for which the equipment was designed. Since controllers may be embedded as 

integrated circuits in computer motherboards, routers, expansion cards, printer interfaces, or 

USB (universal serial bus) devices, they are subject to malicious actors inserting vulnerabilities 

that can render a device useless upon activation of a “kill” switch or changing the functionality in 

a way that reduces security by leaking or corrupting sensitive data. Controllers and drivers 

implemented through software are also potential sources of security vulnerabilities. Wellpositioned actors with malicious intent can easily add viruses and other malware such as 

Trojans, worms, rootkits, spyware, and other malicious and unwanted software.

Applications software in wireless handsets, smart phones, and other network devices is one of 

the crucial components of overall wireless telecommunications solutions. TechFaith Wireless is 

a joint venture between Qualcomm and China’s Techfaith to produce inexpensive software for 

wireless handsets.

205 Qualcomm is a manufacturer of wireless airlink technologies, chipsets, 

consumer electronics, hardware, mobile content services, secure phones, satellite phones 

(Globalstar), repeaters, wireless charging, and other devices.

NETWORK SECURITY PRODUCTS

Security Software

A trend is emerging of Chinese investment in network security companies and network security 

software and device manufacturing. In 2008, Huawei announced a joint venture with Symantec, 

a U.S. manufacturer of network security products best known for its popular antivirus 

software.

206

 204 Analysis provided to the Commission by Reperi LLC.

 (See text box on the following page.) It is natural for communications 

manufacturers to gravitate to the network security space. However, as foreign companies 

gravitate to these parts of the supply chain, foreign network security products gain the potential 

205 AllBusiness.Com, “Qualcomm, China TechFaith Create Wireless Company,” March 27, 2009. 206Symantec Press Release, “Huawei and Symantec Commence Joint Venture,”, February 5, 2008. “...the company 

will develop and distribute world-leading security, and storage appliances to global telecommunications carriers and 

enterprises, and the transaction has satisfied all closing conditions received all required government and regulatory 

approvals...”
47

ability to be implemented in sensitive infrastructures unnoticed. China’s technology 

manufacturers are increasingly moving into this security realm to meet their own growing needs, 

and their products therefore are appearing in global networks more frequently.

The Creation of Huawei Symantec

Huawei Symantec Company Logo

In February 2008, Huawei Technologies and the U.S.-based network security firm Symantec 

announced the creation of a joint venture to “develop and distribute world-leading security and 

storage appliances to global telecommunications carriers and enterprises.” The resulting joint 

venture, “Huawei Symantec,” was created with Huawei owning a 51 percent share of the 

company and Symantec owning a 49 percent share. John W. Thompson, chairman and chief 

executive officer of Symantec, serves as chairman of the board; Ren Zhengfei, chief executive 

officer of Huawei, serves as chief executive officer.

According to the company’s website, it employs over 4,000 people and has expanded from its 

Chengdu headquarters into R&D centers in Chengdu, Beijing, Shenzhen, and Hangzhou. The 

company describes its mission as “combin[ing] Huawei’s expertise in telecom network 

infrastructure and Symantec’s leadership in security and storage software to provide world-class 

solutions” for network security and storage.207

The lack of transparency surrounding the operations and management of Huawei 

Technologies,208 as well as the role of Symantec in designing and marketing network security 

products, could raise concerns in some quarters regarding potential national security issues 

associated with the joint venture. However, no specific allegations have been made against the 

company, and it has emerged as a significant competitor in the network security field.209

An important consideration in the market space for network security products is “technology 

refresh.” If network protocols advance beyond the technical capabilities of security hardware, 

there are dangers of networks having traffic that is unmonitored passing through security zones 

undetected. An example would be IPv6 packets being tunneled through an IPv4 capable-only 

firewall. Theoretically, some elements of the IPv6 traffic could breach security without notice.210

Protecting telecommunications networks and the equipment and data that comprise these 

networks is essential to national security. Protection may be in the form of antivirus software 

 207 Huawei Symantec website, “About Huawei Symantec.” 

http://www.huaweisymantec.com/en/About_Us/Company_Information/Company_Introduction. 208 See discussion of Huawei’s management structure on page 15 of this report. See also Kevin O’Brien, “Upstart 

Chinese Telecom Company Rattles Industry as It Rises to No. 2,” New York Times, November 29, 2009; and Kevin 

Eagles, “Huawei Needs To Be More Open on Security If It Is To Become a Global Player,” SC Magazine (UK), 

November 6, 2009.

210 For a list of the company’s products and services, see Huawei Symantec website, “Products & Solutions.”

http://www.huaweisymantec.com/en/Product___Solution. 210Network World, “Invisible IPv6 Traffic Poses Serious Network Threat,” July 13, 2009.
48

and the hardware/software comprising the various security appliances discussed above. 

Computer security is enhanced through the use of three processes: prevention, detection, and 

response. A failure in any of these processes could leave systems open to intrusion, with 

serious consequences. In the current environment of technology outsourcing, the opportunities 

for hostile nations to compromise U.S. security through the manipulation of security software or 

hardware used in critical infrastructure has increased dramatically. Reacting only when the 

threat materializes may prove to be far too late. The selection of sources for network security 

software and hardware begs careful consideration.

HANDSETS AND SMART PHONES

As the manufacture of mobile phone handsets and associated software moves to offshore 

outsourcers along with other technology equipment, security potentially could be compromised 

by actors with hostile intentions, thereby placing at risk one of the most widely used forms of 

communications in the United States.

Both of China’s two largest telecom equipment companies, ZTE and Huawei, are amassing 

significant market share in the handset sector. Many of these handsets are made to work with 

4G technologies (next-generation wireless). The Asian market has been an early adopter of 

standards that would allow 4G wireless technologies to expand rapidly; having the ability to

roam freely across many types of networks is an essential element of handset compatibility.

Many developing nations in South America, Africa, and Europe have followed suit.

211

Huawei and ZTE’s product lines compete with Motorola, Ericsson, LG, Samsung, and Apple. 

As markets shift, competition forces market participants to change relationships in order to 

adapt to new or emerging conditions. Most of these companies have agreements with one 

another to work together and develop certain product applications in order to stay competitive.

According to press reports, Huawei and ZTE have been focused on developing, manufacturing, 

and selling technologically savvy, lower-cost products as Huawei moves to occupy market 

niches. 212 Both Huawei and ZTE have typically introduced their mobile phones into the United 

States and other markets through relabeling for companies like Verizon Wireless and T-Mobile. 

Huawei’s new Android smart phone, manufactured for T-mobile, is a touch screen and Androidpowered hand set. (The Android operating system and application technology model was 

initially developed by Google and then shifted to an open source alliance.) Android has an open 

software standard that moves easily between networks and protocols and features Google 

search, utilities, and applications capabilities. These features make the Huawei Android phone a 

competitive new entrant into the U.S. wireless market.

Figure 5: A T-Mobile UK “Pulse” Smartphone with Huawei Android Technology

 211Firoze Manji and Stephen Marks, “African Perspectives on China in Africa,” Fahamu--Network for Social Justice, 

2007.

212 CNNMoney.com, “China’s New Frontier,” June 25, 2009.
49

Source: Google Images.

There were some indications in early 2010 that the computer firm Lenovo might be taking steps 

to consider further acquisitions in the North American market. Speculation also appeared in the 

business press in spring 2010 that Lenovo might make a bid for Palm, with an eye toward 

getting into the smartphone market.213 However, no confirmed action has occurred on such a 

deal as of the writing of this report. (For further discussion of the controversy surrounding the 

sales of Lenovo equipment to the U.S. government, see pp. 66-68 of this report.)

HANDSETS AND SMART PHONES: POTENTIAL VULNERABILITIES

How telephones/handsets are attacked is a useful study for understanding the vulnerabilities of 

communications equipment to malicious activity. From botnets214 to SMiShing (SMS phishing)

to battery draining,

215

 213 Kit Eaton, “Lenovo Wants in on Smartphone Biz, Acquiring Palm Could be the Ticket,” Fast Company, April 19, 

2010. 

the wireless handset is one of the latest and most favored vectors for 

http://www.fastcompany.com/1620623/lenovo-mobile-internet-smartphones-finances-growth-palm-palm-os-prepixi?#.

214 Fox News Network LLC, “Experts: Zombie Cell-Phone Hack Attacks May Be Next,” October 16, 2008. 

http://www.foxnews.com/story/0,2933,438481,00.html : “[S]ome of the most vicious Internet predators are hackers 

who infect thousands of PCs [personal computers] with special viruses and lash the machines together into 'botnets' 

to pump out spam or attack other computers. Now security researchers say cell phones, and not just PCs, are the 

next likely conscripts into the automated armies. The mobile phone as zombie computer is one possibility envisioned 

by security researchers from Georgia Tech in a new report coming out Wednesday. The report identifies the growing 

power of cell phones to open a new avenue of attack for hackers. Of particular concern is that as cell phones get 

more computing power and better Internet connections, hackers can capitalize on vulnerabilities in mobile-phone 

operating systems or web applications. Botnets, or networks of infected or robot PCs, are the weapons of choice 

when it comes to spam and so-called 'denial of service attacks,' in which computer servers are overwhelmed with 

Internet traffic to shut them down.”

215 ScienceDaily LLC, “Stealth Attack Drains Cell Phone Batteries,” August 30, 2006: “Cell phones that can send or 

receive multimedia files could be targeted by an attack that stealthily drains their batteries, leaving cellular 

communications networks useless, according to computer security researchers at the University of California-- Davis 

(UC Davis). ‘Battery power is the bottleneck for a cell phone,’ said Hao Chen, assistant professor of computer 

science at UC Davis. ‘It can't do anything with a dead battery.’ Cell phones are designed to conserve battery life by 

spending most of their time in standby mode. Chen, and graduate students Denys Ma and Radmilo Racic, found that 

the MMS [Microsoft Media Server] protocol, which allows cell phones to send and receive pictures, video and audio 

files, can be used to send packets of junk data to a cell phone. Every time the phone receives one of these packets, it 

‘wakes up’ from standby mode, but quickly discards the junk packet without ringing or alerting the user. Deprived of 

sleep by repeated pulses of junk data, the phone's batteries run down up to 20 times faster than in regular use. The 

attacker needs to know the number and Internet address of the victim's cell phone, but those are easy to obtain, 

Chen said. The computer used to launch the attack could be anywhere on the Internet. Chen and his students have 

tested the concept in the laboratory. They have also found other vulnerabilities in the MMS protocol -- one, for 

example, would allow users to circumvent billing for multimedia services and send files for free. As cell phone 
50

cyber attack. Viewing SMiShing216 as an example, this is a mobile device attack that seeks to 

dupe the recipient of an SMS (short message service – text) message into downloading 

malware onto their handset.217 Once the handset is infected, it can be turned into a “zombie,” 

allowing attackers to control the device.218 If the mobile device communicates with any 

computers, they too can be infected and become nodes on a “zombie botnet.”219

Analysts predict these and other threats of various types to cell phones and other mobile 

devices will eventually outnumber malware-laden e-mail messages.220 In addition, these 

attacks can be used to expand their own scope to personal computers (PCs) and other 

networks when unsuspecting users forward these messages to their PCs.221 Researchers have 

been able to demonstrate this style of attack scenario with no user involvement or action at all 

using only SMS messages.

These types of attacks on our cell phone infrastructure require very little in the way of resources, 

making them ideal candidates for malicious actors. The primary vehicle for the attack is the 

software that links the cell phones to their network, as the hardware is industry standard and 

already in most cell phones. These attacks illustrate the enormous impact that standards play 

vis-à-vis vulnerabilities that may affect communications security. If certain specific hardware 

and software standards were nationalized and closed, the ability for attackers to exploit specific 

national networks would be greatly reduced. By utilizing open standards, even in secure 

applications, it becomes an easier proposition for malicious actors, state affiliated or otherwise,

to cripple the wireless communication networks of other countries.

The Debate Over “Open” vs. “Closed” Standards

The question of whether to adopt “open” or “closed” standards has sparked debate in the 

realm of cyber security. Proponents of closed standards believe their way is most secure 

because it is most secret; proponents of open standards believe their way is most secure 

because it allows their vulnerabilities to be identified, for users to be informed, and for systems 

to be tested quickly and broadly for malware infections.

 providers offer more services, such as e-mail, web surfing and file sharing, they become vulnerable to the same 

attacks as computers, as well as to new types of attack that exploit their specific vulnerabilities. ‘It's important to 

evaluate security now, while cell phones are being connected to the broadband Internet,’ Chen said.” 

http://www.sciencedaily.com/releases/2006/08/060829090243.htm. 216 Washington State Office of the Attorney General, “Cell Phones Under Attack: How to block text spam and 

viruses,” December 19, 2007: “Cell phones with Internet access are especially at risk. By clicking on a link in a 

smishing message, you can unknowingly allow a hacker to steal your personal information, activate your phone’s 

camera or even listen in on your private cell phone conversations. In some cases, these programs can send fake 

messages to people in a phone’s contact list. Last year, techies discovered a Trojan horse program that pretended to 

access Web pages but instead sent SMS messages to premium-rate phone numbers -- costing the cell phone user. 

Another message offered victims free antivirus software for their phone, supposedly from their mobile service 

provider. Users that downloaded the software from the link were infected with malware.” 

http://www.sciencedaily.com/releases/2006/08/060829090243.htm. 217 TechTarget, “SMiShing,” SearchMobileComputing.com, Definitions. 

http://searchmobilecomputing.techtarget.com/sDefinition/0,,sid40_gci1241308,00.html. 218 TechTarget, “SMiShing,” SearchMobileComputing.com, Definitions. 

http://searchmobilecomputing.techtarget.com/sDefinition/0,,sid40_gci1241308,00.html. 219 TechTarget, “SMiShing,” SearchMobileComputing.com, Definitions. 

http://searchmobilecomputing.techtarget.com/sDefinition/0,,sid40_gci1241308,00.html. 220 TechTarget, “SMiShing,” SearchMobileComputing.com, Definitions. 

http://searchmobilecomputing.techtarget.com/sDefinition/0,,sid40_gci1241308,00.html. 221 TechTarget, “SMiShing,” SearchMobileComputing.com, Definitions. 

http://searchmobilecomputing.techtarget.com/sDefinition/0,,sid40_gci1241308,00.html.
51

Current cyber research is revealing that the majority of analyzed cyber intrusions utilize 

techniques and/or vulnerabilities that are not patchable in the contemporary sense (i.e., 

updating software to remain current). In other words, there may at times be a likelihood that 

security software or updates (whether open or closed) will not address the most commonly 

used vectors of targeted attacks and will offer little or no protection from them. Also apparent

is that the majority of analyzed attacks are committed using “old” means based on tools or 

techniques that have been in the wild for months or years. The duration of cyber attacks also 

seems to be increasing, with cyber-intruders persistently and dynamically present and 

undetected on systems for months or years. 

Therefore, a flexible, thoughtful, and informed hybrid approach to security that effectively uses 

simple tools (both open and closed as they demonstrate merit) may be the most meaningful 

approach to security.222

Mainstream wireless communications-based attacks could have significant economic impacts 

as well as negatively impacting national security by potentially limiting or eliminating the ability 

of defenders to communicate effectively. In the past, cell phones have generally been regarded 

as immune from viruses, worms, Trojan horses, or other malware that have threatened PCbased networks for years. However, that has changed with the targeting of high-end phones 

with fully functional operating systems and the ability to download and install a wide variety of 

applications. The biggest culprit leading to infection by viruses or Trojans is the downloading of 

files, applications, ringtones, games, and other related content. 

Mobile devices are capable of carrying a virus back to a PC when the two devices synchronize. 

A mobile user could pick up a virus outside a network perimeter on the mobile device, bring it 

back inside a firewall, and synchronize it with a system on their network, spreading the virus on 

an otherwise secure local area network (LAN), then a wide area network (WAN), and beyond. 

As an example of another potential vulnerability, a Trojan horse application can be installed on a 

device through memory cards, infrared file transfer, or synchronization. An attacker can send a 

special text message to the infected phone, signaling the Trojan to commit a hostile act such as 

stealing the last five minutes of phone conversation stored in the device’s memory.

In a demonstration presented at the Black Hat Security Conference in Las Vegas in July 2009, 

researchers revealed that an attacker could exploit a software hole to make calls, steal data, 

send text messages, and do more or less anything a person can do on their iPhone.223 The 

attacker needed only to send SMS control messages to the device and could then send SMS 

messages to anyone in the victim’s address book to spread the attack.224 This attack required 

no effort of the part of the user and only looked for the victim’s phone number.225 The attacker 

sends SMS messages containing configuration information that is normally found only on 

network servers.226

 222 Reperi LLC, information, technology, and telecommunications security research, supported variously by other 

sources.

 According to reports, Global System for Mobile Communications (GSM) 

223Elinor Mills, “Researchers take control of iPhone via SMS,” ZDNet.com, July 30, 2009. 

http://news.zdnet.com/2100-9595_22-326501.html. 224 Elinor Mills, “Researchers take control of iPhone via SMS,” ZDNet.com, July 30, 2009. 

http://news.zdnet.com/2100-9595_22-326501.html. 225Elinor Mills, “Researchers take control of iPhone via SMS,” ZDNet.com, July 30, 2009. 

http://news.zdnet.com/2100-9595_22-326501.html. 226 Robert McMillan, “Some SMS Networks Vulnerable to Attack,” July 28, 2009. 

http://tech.yahoo.com/news/pcworld/20090729/tc_pcworld/somesmsnetworksvulnerabletoattack.
52

networks are susceptible, but CDMA networks are not.227 Other bugs found in cell phone 

software have allowed attackers to control the user interface on Windows Mobile devices via the 

SMS messages to disable keypads, rendering the cell phone unusable.228

Prior to this report, another similar type attack was reported by Trust Digital in April 2009.229 In 

this type of attack, an SMS message is sent to a phone that opens its browser directing the 

phone to a malicious website; the website then downloads software to the phone and steals the 

information on the phone.230 In a paper written by Penn State University researchers in 2005, 

various SMS vulnerabilities were identified, details of how the SMS attacks could be 

accomplished were described, and mitigation recommendations were presented.231

Reports have indicated that three China-based entities created the “Sexy Space” Trojan and 

tried to send it through the Symbian Foundation's digital-signing process.232 All Symbian Series 

60 third-edition phones by Nokia, LG, and Samsung were potential targets of the malware.233 At 

the time of original reference, the Symbian platform was in use in just under 50 percent of all 

smart phones.234

Another potential national threat involving the iPhone and the exclusive AT&T wireless network 

has been dubbed “Jailbreaking.”

235 The lighter side of Jailbreaking involves users who want to 

break free from carrier and manufacturer restrictions to use software they prefer,

236 but it may 

also have more serious implications. Jailbreaking alters a phone's baseband processor (BBP) 

that facilitates connections to cell towers,

237 meaning that attackers could potentially disable 

those towers.238 Changing the BBP code can also allow the Exclusive Chip Identification (ECID) 

to be changed, making the device essentially anonymous on the network.239

 227 Robert McMillan, “Some SMS Networks Vulnerable to Attack,” July 28, 2009. 

These 

vulnerabilities in cell phones can be easily exploited with a computer, access to a WiFi network, 

http://tech.yahoo.com/news/pcworld/20090729/tc_pcworld/somesmsnetworksvulnerabletoattack; and also Jim 

Dalrymple , "Apple Fixes iPhone SMS Flaw,” July 31 2009. http://news.cnet.com/8301-1009_3-10301001-83.html. 228 Elinor Mills, “Researchers take control of iPhone via SMS,” ZDNet.com, July 30, 2009. 

http://news.zdnet.com/2100-9595_22-326501.html. 229 Elinor Mills, “SMS Messages Could Be Used to Hijack a Phone,” April 19, 2009. http://news.cnet.com/8301-

1009_3-10222921-83.html. 230Elinor Mills, “SMS Messages Could Be Used to Hijack a Phone,” April 19, 2009. http://news.cnet.com/8301-

1009_3-10222921-83.html. 231 William Enck et al.,"Exploiting Open Functionality in SMS-Capable Cellular Networks," (Pennsylvania State 

University, September 2, 2005). http://www.smsanalysis.org/smsanalysis.pdf. 232Vivian Yeo, “Chinese Firms Behind ‘Sexy Space' Trojan,” July 22, 2009. http://news.cnet.com/8301-1009_3-

10292917-83.html. 233 Vivian Yeo, “Chinese Firms Behind ‘Sexy Space' Trojan,” July 22, 2009. http://news.cnet.com/8301-1009_3-

10292917-83.html . 234 Vivian Yeo, “Chinese Firms Behind ‘Sexy Space' Trojan,” July 22, 2009. http://news.cnet.com/8301-1009_3-

10292917-83.html . 235 Dong Ngo, “Jailbreaking iPhone could pose threat to national security, Apple claims,” July 29, 2009. 

http://reviews.cnet.com/8301-19512_7-10298646-233.html; David Kravets, "iPhone Jailbreaking Could Crash 

Cellphone Towers, Apple Claims," Wired.com, July 28, 2009. http://www.wired.com/threatlevel/2009/07/jailbreak/. 236 David Kravets, "iPhone Jailbreaking Could Crash Cellphone Towers, Apple Claims," Wired.com, July 28, 2009. 

http://www.wired.com/threatlevel/2009/07/jailbreak/

237 David Kravets, "iPhone Jailbreaking Could Crash Cellphone Towers, Apple Claims," Wired.com, July 28, 2009. 

http://www.wired.com/threatlevel/2009/07/jailbreak/ . 238 David Kravets, "iPhone Jailbreaking Could Crash Cellphone Towers, Apple Claims," Wired.com, July 28, 2009. 

http://www.wired.com/threatlevel/2009/07/jailbreak/.. 239David Kravets, "iPhone Jailbreaking Could Crash Cellphone Towers, Apple Claims," Wired.com, July 28, 2009. 

http://www.wired.com/threatlevel/2009/07/jailbreak/.
53

a couple of cell phones, and a business card.240 These types of attacks are on the rise and,

given the speed with which information moves via the Internet, it becomes a challenge for the 

industry to close the holes before the next ones are discovered.241 

From a communications security perspective, government procurement of cell phones might 

appropriately consider both the hardware and software aspects of devices. Vulnerabilities 

associated with hardware may relate to overreliance on particular networks, and/or overreliance 

of supply chains on particular hardware supply models. One potential mitigation strategy is for 

the Department of Defense and other government organizations to consider the use of cell 

phones that are flexible in both data transmission standards and physical hardware -- which is 

to say, easily replaceable and able to function across multiple network types and spectrum 

bands/frequencies. Reliance on particular hardware designs could have negative impacts if the 

supplier(s) fail, withhold production, or otherwise undermine systems or services, or if 

consequent supply chains suffer disruptions or failure.242

Reliance on a particular transmission standard would limit the field of use to the range of 

compatible networks. By using a broad spectrum purchasing approach, security can be 

enhanced by having utilization capabilities across a wide variety of hardware and data 

transmission protocols. This would enable the supply chain to adapt to many adverse 

situations. Mobile devices are relatively inexpensive and easily moved from region to region. 

However, alternative approaches, consisting of closed networks and proprietary hardware, tend 

to be costly and ineffective from an economic and mobility standpoint. Manufacturers are often 

reluctant to dedicate scarce resources to pursue such technology models if they will lack broad 

market appeal.

From a software perspective, cell phone technology is changing and evolving every day. 

Attacks from a wide variety of vectors will only increase. The first step to mitigate these attacks 

should be increased user education and awareness. Comprehensive training on what to look 

for and how attackers are utilizing new technologies would improve the process of attack 

identification and prevention. Identifying when a device or network has been compromised is 

the fastest way of taking evasive action to close the device, move to another device, or utilize a 

different network. Having immediate access to source code for device operating systems and 

network software is another tactic to pursue to avoid delay in heading off cellular attacks. In 

addition to having the source code access, trained personnel are required to make lightning-fast 

adjustments to source code bases both to defend against and pursue attackers.

Smart phones blend the voice and data features of both phones and personal digital assistants 

(PDAs) into a single portable device. Many of today’s wireless handsets include calendars, 

alarms, and downloadable applications and typically support e-mail and desktop 

synchronization so that mobile users have access to their master contact, calendar, and to-do 

lists. Wireless handsets have evolved into a technology that offers near-constant access for

multimedia applications such as global positioning system (GPS), video gaming, stereo FM 

radio, digital photography, CD (compact disc)-quality music, texting, access to e-mail, Internet 

browsing, and many other functions. While such functions can contribute greatly to both 

professional productivity and personal entertainment, the ready connectivity of handset devices 

opens many more potential doors to malicious network actors.

 240Joan Goodchild, “3 Simple Steps to Hack a Cell Phone,” CSO Online, April 29, 2009. 

http://www.csoonline.com/article/491200/_Simple_Steps_to_Hack_a_Smartphone_Includes_Video._

241 Joan Goodchild, “CISCO: SMS Smartphone Attacks on the Rise,” CSO Online, July 14, 2009. 

http://www.csoonline.com/article/497120/Cisco_SMS_Smartphone_Attacks_on_the_Rise. 242 Reperi LLC, “Trends In Mobile Wireless Communications,” 2006.
54

WIRELESS HEADSETS, EARPIECES, AND BLUETOOTH

Almost all of China’s phone manufacturers make Bluetooth products. ZTE makes Bluetooth 

accessories to go with its mobile phone products, some of which may have limited market 

penetration in the United States but which could be part of any larger agreement with major U.S. 

telecommunications carriers. Bluetooth is an open wireless technology that allows wireless 

devices to exchange data over short distances. In essence, when Bluetooth devices connect to 

one another, they create a small wireless personal area network (PAN). Multiple devices can 

be connected to the same PAN. Bluetooth is a ubiquitous standard today, so most Chinese 

manufacturers do produce Bluetooth devices. Bluetooth uses frequency-hopping spreadspectrum radio technology, which breaks up data and spreads data out on up to 79 different 

frequencies, transmitting about a megabit of data per second. Connections can be made and 

information exchanged between any devices that are Bluetooth capable.

Bluetooth: Potential Vulnerabilities

When Bluetooth is enabled, it generally is configured to broadcast its device’s availability for a 

connection to any and all other devices in range, which makes the device very easy for an 

attacker to locate and exploit. An attacker need only be equipped with the required software and 

a portable computer with a Bluetooth adapter. The attacker need only go into an area where 

they expect to find targetable devices nearby and then perform their attack automatically when 

vulnerable devices are located. With the attacker’s system scanning for targets automatically, 

the attacker can remain inconspicuous, and the nature of the attacks generally will not alert the 

victim to the fact that they are under attack.

Once a device is compromised, the attacker can gain access to all data and system 

functionality. A large number of programs are available that are specifically designed to attack 

Bluetooth cell phones. “Bluesnarfing” is the common term for an attack that downloads all of the 

victim’s data, while “Bluebugging” is an attack that allows the attacker to turn a compromised 

wireless phone into a bugging device or to eavesdrop on all calls made on the device.

Compromised phones can be used for a myriad of purposes, from collecting private or sensitive 

information, diverting long distance charges, and eavesdropping, to rigging them with kill 

commands or other damaging exploits.

Switching Equipment and Other Networking Services – The Nortel Story

Nortel Company Logo

From its founding in 1895 as Northern Electric and Manufacturing, and its early days of 

manufacturing equipment for Canada’s fledgling telephone system,243

 243 Nortel.com website, “Nortel History.” http://www.nortel.com/corporate/corptime/index.html.

Nortel grew to become a 

major manufacturer of telecom equipment ranging from carrier-class systems to user equipment 

(much of it deployed throughout the U.S. government). Beginning in the early 2000s, Nortel 

started to experience financial difficulties and began exploring deals with other corporations:
55

-- In 2004, Nortel and China Putian Corporation244 agreed to a memorandum of understanding

for cooperation on research and development, and manufacture of 3G equipment and products. 

The two companies cooperated on projects such as 3G field trials sponsored by China's Ministry 

of Information Industry.

-- In 2005, Nortel and China Putian established a joint venture for research and development, 

manufacturing, and sale of 3G mobile telecom equipment and products to customers in China. 

Signing of the Joint Venture Framework Agreement occurred in Beijing and was witnessed by 

China's Premier Wen Jiabao and Canada's Prime Minister Paul Martin.245

-- In February 2006, Nortel and Huawei announced plans to form a joint venture in order to 

develop IP broadband internet solutions.246 This venture evidently did not progress beyond the 

early stages.

-- In 2008 – a year in which the company’s stock lost 96 percent of its value and the company 

was mulling bankruptcy247 – a possible deal emerged that would have resulted in an infusion of 

much-needed cash into the company. Huawei bid $400 million for Nortel’s Metro Ethernet 

Networking business, a bid that some industry observers considered far above its value.248

However, concerns over Huawei’s background appear to have derailed the deal, with some U.S. 

broadband providers reportedly indicating that they would stop buying Nortel equipment if 

Huawei acquired a large stake in the firm.249

-- On January 14, 2009, Nortel sought bankruptcy protection.250 Since this time, a general 

sell-off of Nortel’s business units and assets has occurred.251 Telefonaktiebolaget LM Ericsson 

("Ericsson"), Kapsch CarrierCom AG ("Kapsch"), Ciena, GENBAND, Inc., Avaya Inc., and 

Hitachi Ltd. have each purchased portions of Nortel or its assets and subsidiaries, constituting 

the bulk of the company.252

 244 Hoovers.com reference. http://www.hoovers.com/company/CHINA_PUTIAN_CORPORATION/rfjhhif-1.html. 245 Press release on the Nortel.com website. 

http://www.nortel.com/corporate/news/newsreleases/2005a/01_20_05_china_putian.html. 246Nortel.com, “Nortel, Huawei to Establish Joint Venture to Address Broadband Access Market” and “Plan to Jointly 

Develop Ultra Broadband Products for Delivery of Converged Services,” February 1, 2006. 

http://www2.nortel.com/go/news_detail.jsp?cat_id=-8055&oid=100194923. 247 Andy Greenberg, “Nortel’s China Syndrome,” Forbes.com, January 12, 2009. 

http://www.forbes.com/2009/01/11/nortel-huawei-buyout-tech-enter-cx_ag_0112nortel.html. 248 Andy Greenberg, “Nortel’s China Syndrome,” Forbes.com, January 12, 2009. 

http://www.forbes.com/2009/01/11/nortel-huawei-buyout-tech-enter-cx_ag_0112nortel.html. 249 Andy Greenberg, “Nortel’s China Syndrome,” Forbes.com, January 12, 2009. 

http://www.forbes.com/2009/01/11/nortel-huawei-buyout-tech-enter-cx_ag_0112nortel.html. 250 Lionel Laurent, “Nortel Throws in the Towel,” Forbes.com, January 14, 2009. 

http://www.forbes.com/2009/01/14/nortel-alcatel-technology-markets-equitycx_ll_0114markets11.html?partner=whiteglove_google.

251 Nortel.com, “Nortel Obtains Court Orders for Creditor Protection,” January 14, 2009. 

http://www2.nortel.com/go/news_detail.jsp?cat_id=-8055&oid=100251347&locale=en-US; and Nortel.com, “Nortel 

Business and Financial Restructuring,” http://www.nortel.com/corporate/restructuring.html; and Nortel’s U.S. claims 

agent, Epiq Bankruptcy Solutions, LLC. 

http://chapter11.epiqsystems.com/NNI/Project/default.aspx?DMWin=dcd9aa35-e94e-418b-84a3-d769f095df78. 252 Based on data available from the Nortel.com website, restructuring section. 

http://www.nortel.com/corporate/restructuring.html.
56

The Nortel Story as a Possible Sign of Things to Come

In the example of the abortive Huawei/Nortel deal, we see what is likely to become a repeating 

pattern in both the telecom and other industries: 

1. A western telecom company with a very strong and deep business posture in the U.S. 

marketplace in general (and the U.S. government in specific) begins to experience distress 

related to prevailing economic conditions;

2. The company accepts research and development ties with Chinese companies in an effort to 

gain large-scale entry into China’s lucrative new market but finds that the benefits of entering 

the Chinese market fail to provide the new lease on life that is hoped for;

3. A Chinese company flush with investment capital (Huawei) steps in to purchase portions of 

the distressed company's (Nortel) business in which it is interested (also giving the distressed 

company an infusion of much-needed cash);

4. However, push-back from the distressed company’s customers (due to security concerns) 

can be sufficient to discourage the deal. Numerous restructuring efforts may then fail to achieve 

sufficient positive traction, and the distressed company may subsequently wind up in 

bankruptcy.

At present, Nortel is being sold in parts to the highest bidders.
57

TABLE 1: WHERE CHINA’S PRODUCTS ARE FOUND IN THE U.S. 

COMMUNICATIONS MARKET

WHAT IT IS: 

PRODUCT

WHO MAKES IT: 

MANUFACTURER

WHAT IT IS USED FOR,

AND WHAT IT CAN DO

PRESENT OR 

FUTURE USE

SOURCE

ZTE EV-DO 

Modem/USB

ZTE, relabeled by 

Verizon and other 

companies

Connecting wirelessly to 

3G, GSM, EDGE, and 

HSDPA (High-Speed 

Downlink Packet Access)

Compatible with 

wireless networks like 

Verizon, AT&T

engadgetmobil

e.com

ZTE 

Smartphones/3G, 

4G with Qwerty 

keyboards, LTE 

devices

ZTE USA; planned 

partnership with 

Verizon Wireless

Competes with other 

wireless handset providers

Competes with Apple, 

Blackberry (RIM), 

Motorola, and other 

handset providers, 

Nokia, Ericsson, and 

Samsung

fiercewireless.c

om

Application 

Software for 

Wireless Devices 

– TechSoft 

Mobile Solutions 

Suite

QualComm/China 

TechFaith joint 

venture wireless 

company – each put 

in up to~$35 million, 

according to reports. 

The new company is 

China-based 

TechSoft. TechFaith 

was Qualcomm’s 

first independent 

design house 

partner

Operating software for 

CDMA mobile handsets

http://www.techfaithwireles

s.com/english/products/pro

ducts_ApplicationSoftware.

htm

3G CDMA mobile 

handset software 

applications

Electronics 

News, 

03/27/2008

Base Station and 

equipment for 

HSDPA (highspeed downlink 

packet access)

Huawei – Provider to 

T-Mobile – in Europe 

– working on a deal 

for U.S.

Base station for wireless 

networks allowing 

maximized use of 

towers/cabinets in rolling 

out HSDPA, reducing buildout costs for T-Mobile. 

HSDPA is a packet-based 

mobile telephony protocol 

used in 3G UMTS 

(universal mobile 

telecommunications 

system) radio networks to 

increase data capacity and 

speed up transfer rates.

Deployment in cellular, 

GSM, and wireless 

networks, provides 

access to data packets

Network World

Patent for 

WiMAX

wireless patents

Nokia Siemens 

Network/Nokia 

parent company and 

Huawei – patent 

deal

Deal covers standards 

relating to GSM, WCDMA, 

CDMA, optical networking, 

datacom, and WiMAX

Standards control telecoms.com

Huawei E583 X 

Modem

3G to WiFi

Huawei

It is what T-Mobile and 

other network providers 

would like to offer

Mobile network 

connectivity for 

individual users

CNET

SlashGear

3G Network 

Equipment/LTE 

Ready

Huawei 4G and 3G networks –

wireless.

Cox wireless network 

Deployment in U.S. 

cities

Wall Street 

Journal

Network World
58

TABLE 2: WHERE CHINA’S INVESTMENTS ARE FOUND IN THE U.S. 

COMMUNICATIONS MARKET

The table below highlights significant Chinese investments in the U.S. telecommunications 

sector. This table also lists some attempted deals that failed to obtain CFIUS approval. Even 

though some of the deals noted below did not go through, it is important to note that these 

investment attempts had the potential for impacting key network traffic important to U.S. national 

security interests. 

INVESTOR INVESTMENT WHAT IT 

IS/PART OF 

SUPPLY CHAIN

WHAT IT 

DOES/CAN 

DO

INVESTMENT 

AMOUNT

DATE SOURCE

Hutchison 

Whampoa

Joint venture 

with Global 

Crossing 

50/50.253

Total: both 

partners $1.2 

billion

Fiber routes.

Fixed line 

telecommunications.

Internet, fiber 

optic, 

international 

cable.

Web hosting.

Provide 

international 

telecom 

transport –

network 

monitoring.

Aggregate joint 

venture value of 

$1.2 billion.

2000 Highbeam.c

om

Hutchison 

Whampoa 

Press 

Release

Hutchison 

Whampoa –

Singapore 

Telecom 

STT

Assets of Global 

Crossing (Asian 

Crossing).254

Undersea cable 

traffic to U.S.

Carry traffic 

between U.S., 

Asia, Europe, 

and some 

continental 

U.S. routes

$250 Million

*Deal went 

forward with 

Singapore 

Telecom Only

2002 SEC 10K

Huawei

Bain Capital 

Partners 

and Huawei 

jointly

Acquisition 

attempt.

51/49 percent 

majority in 

Huawei 3-Com 

(H3C).

3-Com later 

bought out the 

joint venture.255

Wireless routers,

voice, data, 

networking 

products.

Proposed buyout 

for $2.2 billion of 

3Com in 2007 –

U.S. government 

objected; 

acquisition failed. 

3Com revenues 

have spiraled 

downward since.

Wireless data 

traffic 

transport.

Routers for 

DOD and 

federal 

government.

Unknown. 2003 -

2007.

Press 

Releases

Cox Com Huawei LTE and wireless 

base stations.

Broadband 

communicatio

ns.

Undisclosed 2009 Wall Street 

Journal

Leap 

Wireless 

“Cricket”

Huawei CDMA / EV-DO 

networking 

products.

Huawei

CDMA2000 

network with 

1xEV-DO Rev A 

capable BTS

(base transceiver 

Wireless 

broadband 

modems, 

routers.

Broadband 

data 

transmission.

Undisclosed 2009 EETimes 

Asia.Com

 253 Hutchison Whampoa Limited Press Release, “Hutchison Whampoa and Global Crossing complete telecom joint 

venture in Hong Kong,” January 12, 2000.

254 Global Crossing SEC (Securities and Exchange Commission) 10K Filing, 2002. 255 3-Com later bought out its portion of the H3C joint venture.
59

station). The 

solutions will 

include Huawei's 

SoftX3000-

Softswitch, Air 

Bridge BSC6600, 

UMG8900-

Universal Media 

Gateway, and 

high-capacity 

BTS 3606.

Clearwire 

(investors, 

Intel, Sprint 

Nextel, 

Google)

Huawei WiMAX.

4G networks.

WiMAX base 

stations.

LTE.

High-speed 

broadband 

wireless.

Undisclosed 2009 Wall Street 

Journal

Verizon ZTE USB modems. Data Comm. Unknown 2007 Newswire

Figure 6: Sample Integrated Operational Network Model (Healthy)
60

Figure 7: Sample Integrated Operational Network Model (Corrupted)
61

Figure 8: Sample Integrated Operational Network Model (Disabled)256

 256 A useful reference for additional perspective is the war impact maps of the Serbian networks during their 1999 

conflict, available at http://www.cheswick.com/ches/map/yu/index.html.
62

SECTION 3

SUPPLY CHAIN INTEGRITY, AND THE IMPACT ON 

GOVERNMENT / DEFENSE CONTRACTING

American interests are heavily dependent on cyber space and, in the case of businesses and 

private individuals, many vital functions are now tied together across private or public networks 

such as the Internet. In the case of national security and defense enterprises, cyberspace is 

also now a key enabler. Continuously available secure enterprise networks are indispensable 

and now reside at the core of national security mission needs.

The loss of unfettered access to cyberspace would not merely be “game

changing” in America, it would be profoundly catastrophic. Cyberspace is a 

crown jewel at our national core that should be protected with care. American 

awareness of the critical value of cyberspace is growing, but not at a pace that is 

commensurate with the rate at which cyber risks are increasing.

The most pressing critical strategic cyber security issues are the following:

• Recognition by policymakers of the need to adapt quickly to address and fund 

critical vulnerabilities.

• Substantial security risks posed by critical supply chain vulnerabilities due to 

dependence on foreign innovation and manufacturing.

• Potentials for permanent loss of critical supply chain elements.

The U.S. Department of Defense has recognized cyber security as a principal issue and is 

seeking to address it in both policy and practice. Admirable efforts to address culture, 

management, and technical challenges are being undertaken in the U.S. defense community in 

response to the growing awareness of the criticality of cyberspace.257 However, given the 

context of resources and policy, U.S. military efforts are necessarily focused first on the 

tremendous challenge of protecting and enabling military cyberspace, while the vast majority of 

American critical cyberspace existing in the private/commercial realm remains largely 

unaddressed by government cyber security efforts.

The question of supply chain security is a key element in cyber security. Dependency upon 

foreign manufacturers for critical products across the telecommunications, communications, and 

information systems supply chains impacts almost every aspect of voice and data transport. To 

date, public discussion of the vulnerabilities of electronics components to malicious tampering 

has been largely theoretical, but historical precedent does exist:

At the height of the cold war, in June 1982, an American early-warning satellite detected 

a large blast in Siberia... [It was] an explosion on a Soviet gas pipeline. The cause was a 

malfunction in the computer-control system that Soviet spies had stolen from a firm in 

Canada. They did not know that the CIA [Central Intelligence Agency] had tampered with 

 257 House Armed Services Committee, Subcommittee on Terrorism, Unconventional Threats, and Capabilities, 

Statement by Michael E. Krieger, deputy chief information officer/G-6, United States Army, 111th Cong., 2nd sess., 

May 5, 2009.
63

the software so that it would 'go haywire, after a decent interval, to reset pump speeds 

and valve settings to produce pressures far beyond those acceptable to pipeline joints 

and welds,' according to the memoirs of Thomas Reed, a former air force secretary. The 

result, he said, 'was the most monumental non-nuclear explosion and fire ever seen from 

space.'... 

... given that computer chips and software are produced globally, could a foreign power 

infect high-tech military equipment with computer bugs? 'It scares me to death,' says one 

senior military source. 'The destructive potential is so great.'

258 

If agents of the U.S. government could maliciously tamper with electronics components bound 

for purchase by an adversary, then adversaries of the United States could certainly consider 

doing the same. This may already have happened in at least one instance: Jim Lewis, an expert 

on cyber security issues at the Center for Strategic and International Studies, has described a 

case of sabotaged hardware that may have been used to facilitate a breach of secure systems 

at the U.S. Central Command in 2008. As stated in an interview with CBS News:

Last November, someone was able to get past the firewalls and encryption devices of 

one of the most sensitive U.S. military computer systems and stay inside for several 

days. 'This was the CENTCOM network,' Lewis explained. '[S]ome foreign power was 

able to get into their networks. They could see what the traffic was. They could read 

documents. They could interfere with things. It was like they were part of the American 

military command.'

Lewis believes it was done by foreign spies who left corrupted thumbnail drives or 

memory sticks lying around in places where U.S. military personnel were likely to pick 

them up. As soon as someone inserted one into a CENTCOM computer, a malicious 

code opened a backdoor for the foreign power to get into the system.259

Supply Chain Integrity and Cyber Security

Loss of control of telecommunications supply chains could constitute one of the 

single greatest threats to U.S. cyber and communications security. There are many 

potentially troubling issues surrounding potential corruption and/or tampering with 

electronics manufacturing supply chains. These include the following:

• Potential increased risk of loss of sensitive data and intellectual property through 

compromised networks;

• Impacts of a potential adversary’s reach into critical infrastructure and weapons systems 

for sabotage;

• Loss of manufacturing, infrastructure, scientific, and engineering expertise.

Exposure and national security risks should be evaluated from a variety of factors:

• The loss of U.S. dominance or competitiveness in the overall context of the national 

security supply chains or in key individual segments.

• The loss of supply chain components.

 258 Economist, “War in the Fifth Domain,” July 1, 2010. 259 CBS News, 60 Minutes, “Cyber War: Sabotaging the System,”, November 8, 2009. 

http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml.
64

• The ability of a foreign adversary to impact an element of the supply chain or resultant 

architectures through controllers and devices.

• The means by which networks and devices move classified and nonclassified 

information.

Cyber security concern centering on China is a core issue that has created problems for 

Chinese telecom product suppliers on the global stage. As cited previously, India is selectively 

barring telecom deals with some foreign providers on this basis. In December 2009, India’s 

Telecommunications Department asked Indian mobile phone operators to suspend deals with 

foreign equipment companies and told several mobile phone operators that proposed deals with 

Chinese companies could not proceed due to security concerns.260 Central to India’s concerns 

is the possibility of foreign malware, hacking, and spying. Restrictions have evidently been lifted 

on most foreign manufacturers, with those remaining under restriction being “principally 

Chinese.”

261 Similar concerns came to light in the United Kingdom.262 (For further discussion of

concerns by some governments regarding the alleged activities of Huawei, see p.16.)

U.S. concerns in these respects are no less significant; however, American considerations are 

perhaps even more complex. As previously noted, there are significant, pervasive, and 

increasing interdependencies between the Chinese and American economies, particularly in the 

telecommunications sector. Potential U.S. cyber vulnerabilities are profound relative to our 

cyber defense capabilities. Research by cyber security professionals has illustrated U.S. cyber 

vulnerabilities and helped define the context of risks in terms of severity, magnitude, time 

indexes, and potential solutions.263 Although collaboration with the private sector may be 

addressed in the Comprehensive National Cybersecurity Initiative,

264 the means of doing so 

may remain undefined and in need of exploration for some time. A major obstacle to 

meaningful public-private cooperative efforts is the absence of a common basis of knowledge 

and dialog to support operational working collaboration between the two sectors.

China’s cyber warfare and cyber espionage capabilities are reported as being very substantial

(see text box on the following page), with the potential for severe threats to both the integrity of 

government networks and to commercial intellectual property. Furthermore, with many U.S.

business organizations doing business in China, it is no longer sufficient only to consider the 

circumstances of cyber security within the United States. Careful consideration of the 

ramifications (including impacts within the United States) of cyber vulnerabilities created by 

direct exposure to the Chinese marketplace is needed. Perhaps one of the best recent 

examples to cite is the controversy surrounding alleged penetrations of Google networks by 

 260 China Tech News, “Indian Government Bans Import of Chinese Telecom Equipment,”,April 30, 2010. 261 Heather Timmons, “India Tells Mobile Firms to Delay Deals for Chinese Telecom Equipment,” New York Times,

April 30, 2010. http://www.nytimes.com/2010/05/01/business/global/01delhi.html. 262 Michael Smith, “Spy chiefs fear Chinese cyber attack,” Sunday Times (London), March 29, 2009. 

http://www.timesonline.co.uk/tol/news/uk/article5993156.ece. 263House Committee on Homeland Security, Subcommittee on Emerging Threats, Cybersecurity, and Science and 

Technology, “Addressing the Nation’s Cyber Security Challenges: Reducing Vulnerabilities Requires Strategic 

Investment and Immediate Action,” testimony of O. Sami Saydjari, president, Professionals for Cyber Defense, and 

chief executive officer, Cyber Defense Agency, LLC, 110th Cong., 1st sess., April 25, 2007. 

http://homeland.house.gov/SiteDocuments/20070425145307-82503.pdf. 264 The White House: “The activities under way to implement the recommendations of the Cyberspace Policy Review 

build on the Comprehensive National Cybersecurity Initiative (CNCI) launched by President George W. Bush in 

National Security Presidential Directive 54/Homeland Security Presidential Directive 23 (NSPD-54/ HSPD-23) in 

January 2008. President Obama determined that the CNCI and its associated activities should evolve to become key 

elements of a broader, updated national U.S. cybersecurity strategy.” White House.gov, May 2009.
65

Chinese hackers. U.S. telecommunications or technology companies with operations abroad 

may discover they are more vulnerable than expected.265

Chinese Cyber Espionage Directed vs. the United States

In a public report released in 2009, analysts with the Northrop Grumman Corporation produced 

a research report for the U.S.-China Economic and Security Review Commission that stated:

“China is likely using its maturing computer network exploitation capability to support

intelligence collection against the US Government and industry by conducting a long-term, 

sophisticated, computer network exploitation campaign. The problem is characterized by 

disciplined, standardized operations, sophisticated techniques, access to high-end software 

development resources, a deep knowledge of the targeted networks, and an ability to sustain 

activities inside targeted networks, sometimes over a period of months.”

266

In early 2010, the computer security firm Mandiant released a report titled The Advanced 

Persistent Threat, which stated that:

“MANDIANT defines the APT [Advanced Persistent Threat] as a group of sophisticated, 

determined and coordinated attackers that have been systematically compromising U.S. 

government and commercial computer networks for years. The vast majority of APT activity 

observed by MANDIANT has been linked to China.”

267

CONTROL OF MANUFACTURING PROCESSES

Recent years have seen significant outsourcing of America’s traditional manufacturing capacity. 

The impetus for such outsourcing is generally related to economics or more suitable operating 

environments (favorable tax treatments, government subsidies, less onerous labor laws, etc.), 

and these outsourcing opportunities can be very attractive to U.S. companies. Regardless, they 

can result in potential compromises to national security in a variety of ways, to include malicious 

intent or unintentional design or fabrication errors.

One of the dilemmas currently facing the American defense establishment is how to maintain 

both strategic and tactical superiority in an environment where the manufacture and provisioning 

of critical technology infrastructure is being outsourced rapidly to entities that may not have U.S. 

national interests foremost in their minds. In some cases, the loyalties of these entities may lie

first with other nations, some of whom may have geopolitical goals that run contrary to those of 

the United States. 

 265 Google, Inc., Google Beijing, Google Shanghai, Google Guangzhou, and Google Hong Kong; see also Dambala, 

Inc., “The Command Structure of the Aurora Botnet, History, Patterns and Findings,” March 3, 2010. 266 Northrop Grumman Corp., “Capability of the People’s Republic of China to Conduct Cyber Warfare and Computer 

Network Exploitation” (paper produced for the U.S.-China Economic and Security Review Commission, October 

2009). 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman_PRC_Cyber_Paper_FINAL_Approved%20Report_16

Oct2009.pdf.

267 Mandiant, “M Trends: The Advanced Persistent Threat,” January 2010.
66

The United States has evolved a growing dependency on foreign suppliers for a number of 

critical electronics components. As noted earlier, Chinese manufacturers have achieved 

significant integration into the communications supply chain through varying forms of 

investment. As a result, they have obtained technological expertise, lower cost capabilities that 

allow “supply chain dominance,” the ability not only to develop standards but also to dominate 

standards in many niches, and the ability to develop momentum in advancing development of

next-generation technologies.268

Much of the U.S. economy and national well-being is irrevocably tied to the extensive system of 

voice, data, and video networks that tie together almost every fabric of our lives. This includes 

access to government information and services, contact with business associates, financial 

transactions, education, health care, management of utilities and other critical infrastructure, 

and social networking, among other baseline enabling functions. As technologies progress, the 

network continues to extend its reach to other devices, from the remotely monitored supervisory 

control and data acquisition (SCADA) systems that control public utilities, to personal electronics 

that allow remote activation of cell phones or other devices that can be accessed through or 

controlled by cell phones.

269 Disruptions, whether intentional or unintentional, can and do have 

profound consequences.

Lenovo Company Logo

Lenovo’s Entry into the U.S. Computer Market,

and Controversies Surrounding its Government Sales

Lenovo has emerged as one of the world’s largest manufacturers of personal computers. 

Lenovo is headquartered in Purchase, New York, and manufactures in several locations in 

China as well as in Raleigh, North Carolina. The company began in 1984 as Legend Group, led 

by computer scientist Liu Chuanzhi. Legend originally received start-up capital from the Chinese 

Academy of Sciences, a government agency.270 To date, Legend Holdings is the largest 

shareholder of Lenovo, and the Chinese Academy of Sciences owns 65 percent of Legend 

Holdings. In effect, the Chinese government is the largest shareholder in the company, though 

the extent of the government’s role within the company is unclear.

In the 1990s, Lenovo served as the Chinese distributor for Hewlett-Packard Co. but has since 

expanded beyond manufacturing to information technology (IT) consulting, systems integration, 

software and e-commerce, mobile phones and personal digital assistants (PDA’s). In 1994, the 

company listed on the Hong Kong Stock Exchange (HKSE: 0992) and is currently trading with a 

market capitalization of US$41.52 billion.271

 268 Reperi - General conclusion from the Defense Science Board Task Force on High-Performance Microchips 

Supply, February 2005, pp. 29-32.

The company grew steadily over the last decade 

269 Reperi – It is reasonable to conclude that disruptions of this nature would have a profound and far-reaching 

detrimental effect.

270 Lenovo Group Ltd., NOVEL NY Business & Company Resource Center, July 1, 2010. 

http://ezproxy.library.nyu.edu:2081/servlet/BCRC?vrsn=unknown&locID=nysl_me_nyuniv&srchtp=glbc&cc=1&c=1&m

ode=c&ste=74&tbst=tsCM&tab=4&ccmp=Lenovo+Group+Ltd.&mst=lenovo&n=25&docNum=I2501310652&bConts=1

3119.

271 Yahoo! Finance, Lenovo Group Ltd. HKD0.025 (0992.HK), July 1, 2010. http://finance.yahoo.com/q?s=0992.HK.
67

through acquisition of IT consulting and systems integration systems. Legend was renamed The

Lenovo Group in 2003. 

Most famously, Lenovo acquired IBM’s Personal Computing Division in 2005 for US$1.75 

billion.272 With the deal, Lenovo also acquired the right to IBM’s Think Pad brand name for five 

years, although the company has focused on promoting its own brand name rather than 

leveraging the IBM name. 273 Lenovo’s purchase of IBM’s personal computer division was 

reviewed by the Committee on Foreign Investment in the United States, which allowed the deal 

to go through, with certain qualifications.274

However, Lenovo’s success has also been accompanied by controversy. In spring 2006, 

concerns were raised by members of the U.S.-China Economic and Security Review 

Commission regarding a planned State Department purchase of 16,000 Lenovo computers, with 

900 of the computers intended for use in a classified network connecting U.S. embassies and 

consulates.275 Dr. Larry Wortzel, then chairman of the Commission, stated that "[i]f you're a 

foreign intelligence service and you know that a [U.S.] federal agency is buying... computers 

from [a Chinese] company, wouldn't you look into the possibility that you could do something 

about that?"276 Another Commissioner, Michael Wessel, added that "[t]his event should trigger a 

broader review of our procurement policies for all our classified networks and 

communications."

277

Representative Frank Wolf (R-Va.), then chairman of the House Appropriations Subcommittee 

on Commerce, Justice, State and the Judiciary, led the effort to address concerns about this 

issue. In the face of these objections, the State Department indicated that the Lenovo 

computers would be used only on unclassified networks. In a statement, Representative Wolf 

said that "I was deeply troubled to learn that the new computers were purchased from a Chinabased company.... This decision would have had dire consequences for our national security, 

potentially jeopardizing our investment in a secure IT infrastructure.”278

For their part, Lenovo company officials have steadfastly denied that there are any reasons to 

worry about the security of the company’s computers. Jeffrey Carlisle, vice president of 

government relations for Lenovo, stated that the computers would be manufactured in “the 

same places, using the same processes as I.B.M. had,” and that “If anything were detected, it 

would be a death warrant for the company... No one would ever buy another Lenovo PC. It 

 272Kevin O’Brien, "Lenovo Steps Out Onto Global Stage,” International Herald Tribune, March 9, 2006. 

http://ezproxy.library.nyu.edu:2076/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T96635569

96&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlKey=29_T9663556999&cisb=22_T9663556998&tre

eMax=true&treeWidth=0&csi=8357&docNo=1.

273 Glenn Rifkin and Jenna Smith, "Quickly Erasing 'I' and 'B' and 'M,'" New York Times, April 12, 2006. 

http://ezproxy.library.nyu.edu:2076/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T96639108

91&format=GNBFI&sort=RELEVANCE&startDocNo=1&resultsUrlKey=29_T9663910894&cisb=22_T9663910893&tre

eMax=true&treeWidth=0&csi=6742&docNo=5. 274 Eric Bangeman, “Uncle Sam Looking Carefully at IBM/Lenovo Deal,” ArsTechnica (January 24, 2005).

http://arstechnica.com/old/content/2005/01/4550.ars.

275 Grant Gross, “U.S. State Department to Limit Use of Lenovo PCs,” ComputerWorld, May 19, 2006. 

http://www.computerworld.com/s/article/9000639/U.S._State_Department_to_limit_use_of_Lenovo_PCs.

276 Eric Bangeman, “Lenovo Laptop Deal Draws Scrutiny from Government Agency,” Ars Technica (March 26, 2006). 

http://arstechnica.com/old/content/2006/03/6475.ars. 277 Grant Gross, “U.S. State Department Limits Use of Lenovo PCs,” PC World, May 19, 2006. 

http://www.pcworld.com/article/125802/us_state_department_limits_use_of_lenovo_pcs.html.

278 Grant Gross, “U.S. State Department Limits Use of Lenovo PCs,” PC World, May 19, 2006. 

http://www.pcworld.com/article/125802/us_state_department_limits_use_of_lenovo_pcs.html.
68

would make no sense to do it."279 Lenovo Chairman Yang Yuanqing told the Associated Press:

"The [Chinese] government isn't involved in any daily operation of the company, including our 

strategic positions, appointment of our CEO, or our financing.... Our management team is in 

charge of that. I don't believe because Legend Holdings is our biggest shareholder that this 

means we are a government-controlled company." 280

The experience may have left Lenovo executives with a sense that increased engagement with 

Congressional representatives might head off similar problems in the future, and starting in 

2006 Lenovo began to sponsor lobbying efforts on Capitol Hill. From 2006-2009, Lenovo paid a 

total of $1,060,000 to lobbying firms, engaging the services of Akin Gump Strauss Hauer & 

Feld; Capstrat; the Gallagher Group; the Duberstein Group; and Miller and Chevalier. The bulk 

of this amount was paid to Akin Gump Strauss Hauer & Feld: a total of $920,000 for services in 

2008-2009, for matters centered on “China” and “technology issues.” In addition, Lenovo spent 

another $2,619,000 in the same period to fund direct lobbying efforts by its own 

representatives.281

MICROCHIP MANUFACTURING

Key Cyber Security and National Security Risks

Recent years have seen increasing attention paid by public officials to the potential security 

vulnerabilities inherent in the offshoring of computer hardware manufacturing. As was stated in 

2008 by Secretary of Homeland Security Michael Chertoff:

A less often focused on [than cyber espionage] but equally significant threat comes from 

the supply chain. Increasingly when you buy computers they have components that 

originate from places all around the world. We need to look at the question of how we 

assure that people are not embedding in very small components or things that go into 

computers [things] that can be triggered remotely and then become the basis of ways to 

[steal] information or [that] could become botnets.282

Representatives of private industry have also voiced concerns about the potential for security 

threats being embedded in computer hardware. As was stated in testimony before the U.S.-

China Economic and Security Review Commission by Kevin Coleman, cyber security consultant 

and senior fellow with the Technolytics Institute:

Hardware is just as susceptible as software is to hackers through the inclusion of 

malicious logic....Hidden malicious circuits provide an attacker with a stealthy attack 

vector. Commercial suppliers are increasingly moving the design, manufacturing, and 

testing stages of Integrated Circuit (IC) production to a diverse set of countries, which is 

making the securing of the IC supply chain infeasible. Together, commercial off-the-shelf 

(COTS) procurement and global production lead to an increasing risk of covert 

hardware/firmware based cyber attacks. The extraordinary effort required to uncover 

 279 Steve Lohr, “State Department Yields on PCs from China,” New York Times, May 23, 2006. 280 Gregg Keizer, “Lenovo Denies Its PCs Are Security Risk,” ChannelWeb, May 25, 2006. 

http://www.crn.com/security/188500323;jsessionid=3RJWEDHCIPK0DQE1GHRSKHWATMY32JVN?itc=refresh.

281 Calculations performed by staff of the U.S.-China Economic and Security Review Commission based on 

examination of disclosure documents in the U.S. Senate Lobbying Disclosure Act database. Database available at 

http://www.senate.gov/legislative//Public_Disclosure/LDA_reports.htm. 282 Popular Mechanics, “Homeland Chief Chertoff Gives Security Update,” October 1, 2009. 

http://www.popularmechanics.com/technology/gadgets/4237823.
69

such high-tech covert acts, combined with the massive number of chips we would have 

to test and validate from a circuitry and microcode perspective, as well as the need to 

scan through tens of millions of lines of code and validate each software instance on 

billions of devices, come together to make ensuring the integrity of our systems nearly 

impossible. Security must be designed and built in, not tested for after the fact.283

Cyber security expert Jim Gosler284 has stated that compromised chips and electronics have 

already been found in DOD systems: "We have found microelectronics and electronics 

embedded in applications that they shouldn't be there. And it's very clear that a foreign 

intelligence service put them there.”285

The Defense Science Board Task Force 

2005 Report on High-Performance Microchip Supply

The Department of Defense has taken note of potential security concerns related to the 

outsourcing of microchip manufacturing. In a report released in early 2005 by the Defense 

Science Board Task Force on High-Performance Microchip Supply,

286 several statements 

highlight the dangers of relying on foreign sources for integrated circuit components used in 

military applications:

“Trustworthiness includes confidence that classified or mission-critical information contained in 

chip designs is not compromised, reliability is not degraded, and unintended design elements 

are not inserted in chips as a result of design or fabrication in conditions open to adversary 

agents.”287

“Defense system electronic hardware, like that used in commercial applications, has undergone 

a radical transformation. Whereas custom circuits, unique to specific applications, were once 

widely used, most information processing today is performed by combinations of memory chips 

(DRAMs, SRAMs, etc.) which store data (including programs), and programmable microchips, 

such as Structured ASICs [application-specific integrated circuits], Programmable Logic Arrays 

(PLAs), central processors (CPUs), and digital signal processors (DSPs), which operate on the

data. Of the two classes of parts, the latter have more intricate designs, which make them 

difficult to validate (especially after manufacturing) and thus more subject to undetected 

compromise.”

288

 283 U.S.-China Economic and Security Review Commission, Hearing on China’s Propaganda and Influence 

Operations, Its Intelligence Activities that Target the United States, and the Resulting Impacts on U.S. National 

Security, testimony of Kevin Coleman, April 30, 2009. 284 Jim Gosler is or has been a Sandia fellow, National Security Agency visiting scientist, and the founding director of 

the Central Intelligence Agency's Clandestine Information Technology Office. See The White House, “The United 

States Cyber Challenge,” May 8, 2009. 

http://www.whitehouse.gov/files/documents/cyber/The%20United%20States%20Cyber%20Challenge%201.1%20%2

8updated%205-8-09%29.pdf. 285 CBS News, 60 Minutes, “Cyber War: Sabotaging the System,” November 8, 2009. 

http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml. 286 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005). http://www.acq.osd.mil/dsb/reports/ADA435563.pdf. 287 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), p. 17. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf. 288 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), pp. 44-45. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf.
70

“The semiconductor world can be divided into two broad producer segments – standard 

(commodity) and custom products. Standard products are sold to many customers for use in 

many applications; custom products – ASICs – are designed, manufactured and sold to one 

customer for specific uses. The economic models for suppliers and customers in these two 

segments are very different. While a great deal of attention is paid to securing trusted ASIC 

supplies for the DOD community, questions must also be asked about the future sources of 

standard commercial products.”289

“Since it is clear that the general tendency is to manufacture leading-edge semiconductor 

products outside the United States and the fixed costs of ASIC design and fabrication are 

skyrocketing, a clear trend is emerging for designers to use as few custom semiconductor 

products as possible; instead, they employ programmable standard products. Semiconductor 

standard products are those whose functionality can be changed by software programming, as 

in the case of microprocessors (MPUs) and digital signal processors (DSPs), or hardware 

programmability, as in the case of field programmable products such as field programmable 

gate arrays. While these standard products will also increasingly be manufactured offshore, 

their functionality is mostly controlled by the user, [thus] it may be impossible to independently 

secure that functionality.”290

“Programmable parts have more intricate designs, which make them difficult to validate 

(especially after manufacturing) and thus more subject to undetected compromise. Thus, it is 

important that programmable components be “trustable,” though only to a degree that is 

commensurate with their application.”291

“Trustworthiness of custom and commercial systems that support military operations – and the 

advances in microchip technology underlying our information superiority... ha[ve] been 

jeopardized. Trust cannot be added to integrated circuits after fabrication; electrical testing and 

reverse engineering cannot be relied upon to detect undesired alterations in military integrated 

circuits” (emphasis in original).292

The production and manufacture of customized microchips such as application-specific 

integrated circuits (ASICs) is a complex process involving three phases: design, mask making, 

and fabrication. Each phase presents opportunities for an adversary to insert vulnerabilities that 

can render a device useless upon activation of a “kill” switch or change the functionality in a way 

that reduces security by leaking or corrupting sensitive data. Since a single device may contain 

millions of transistors, the ability to identify malicious circuits is almost impossible to accomplish 

either practically or economically.

 289 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), p. 39. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf. 290 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), p. 40. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf. 291 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), p. 40. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf. 292 Department of Defense, Report of the Defense Science Board Task Force on High-Performance Microchips 

Supply (Arlington, VA: Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, February 

2005), p. 3. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf.
71

During the design phase, engineers have direct access to the design database and can, if they 

so desire, make subtle changes that modify the functionality or insert malicious code such as kill 

switches, Trojan horses, worms, or many other backdoor features. During the masking phase, 

ultraviolet (UV) light is used to expose patterns on the layers of the microprocessor in a process 

similar to photography. Masks used for the chip-making process are called stencils. When 

these are used with UV light, they create various patterns on each layer of the microprocessor. 

Similar to the design phase, the masking phase offers a potential malicious actor the opportunity 

to change the design of the circuit by substituting one mask for another. Changing the mask 

allows the addition of transistors that can alter functionality or insert malicious code.

The fabrication phase is the final step in the production of ASICs. During manufacture, it is 

possible to make changes to the design or embed hundreds of additional transistors into each 

circuit with little probability of being detected. It is also possible to alter the functionality of an 

integrated circuit after manufacture by using a focused-ion-beam (FIB) etching machine to 

remove material from the chip and etch new connections between the transistors. While this is 

a legitimate process for modifying chip design, it can also be used for nefarious purposes in the 

hands of a skilled technician. This technology can be particularly useful to those wanting to 

disrupt U.S. systems by focusing on the maintenance and repair chain following the initial 

production of microchips.

Recent Cases Involving Counterfeited Computer Equipment from China

Over the past several years there have been a number of law enforcement cases involving 

counterfeit computer chips of Chinese origin that were sold to U.S. government agencies. Such 

cases raise concerns for the potential security risk of tampering. However, they also raise 

concerns of a more prosaic but still serious nature, such as the risk of defective components 

being installed in critical computer, communications, or weapons systems. Many of these cases 

have involved the counterfeiting of computer products produced and marketed by Cisco 

Systems, Inc. Three such examples are the following: 

1. In January 2008, Michael and Robert Edman were charged with conspiring with a contact in 

China to purchase computer equipment and then falsely relabeling and selling the items as 

Cisco products. Operating under the company name Syren Technology, the two brothers 

allegedly shipped the counterfeit Cisco products directly to customers, including “the Marine 

Corps, Air Force, FBI [Federal Bureau of Investigation], Federal Aviation Administration, 

Department of Energy, as well as defense contractors, universities, school districts and financial 

institutions.” The men entered a partial guilty plea to the charges in September 2009.293

2. In January 2010, Yongcai Li, a Chinese citizen, was sentenced in California to 30 months in 

prison and ordered to pay $790,683 in restitution to Cisco Systems following from a conviction 

for trafficking in counterfeit Cisco computer products. Working through his company Gaoyi 

Technology, located in Shenzhen, China. Mr. Li procured counterfeit Cisco products in China 

and then shipped the products to the United States.294

 293 U.S. Attorney’s Office for the Southern District of Texas Press Release, “Brothers Plead Guilty to Selling 

Counterfeit Cisco Products to Bureau of Prisons,” September 9, 2009. 

http://www.justice.gov/criminal/cybercrime/edmanPlea.pdf. 

294 U.S. Department of Justice Press Release, “Departments of Justice and Homeland Security Announce 30 

Convictions, More Than $143 Million in Seizures from Initiative Targeting Traffickers in Counterfeit Network 

Hardware,” May 6, 2010. http://www.fbi.gov/pressrel/pressrel10/convictions_050610.htm.
72

3. Also in January 2010, Ehab Ashoor, 49, a Saudi citizen, was sentenced in Texas to 51 

months in prison and ordered to pay $119,400 in restitution to Cisco Systems. A federal jury 

found Mr. Ashoor guilty of charges related to trafficking in counterfeit Cisco products. Although 

no specific security threat is alleged, a Department of Justice press release sounded a note of 

alarm about the case, noting that “Ashoor purchased counterfeit Cisco Gigabit Interface 

Converters (GBICs) from an online vendor in China with the intention of selling them to the U.S. 

Department of Defense for use by U.S. Marine Corps personnel operating in Iraq,” to be used 

on a computer network “used by the U.S. Marine Corps to transmit troop movements [and] relay 

intelligence.”295

Many such investigations into counterfeit computer equipment were conducted by federal 

authorities under the names of “Operation Cisco Raider” and “Operation Network Raider.” 

According to a Department of Justice statement made in May 2010: 

“To date, [Immigration and Customs Enforcement--ICE] agents have seized counterfeit Cisco 

products having an estimated retail value of more than $35 million. ICE investigations have led 

to eight indictments and felony convictions... [Customs and Border Patrol--CBP] has made 537 

seizures of counterfeit Cisco network hardware since 2005, and 47 seizures of Cisco labels for 

counterfeit products. In total, ICE and CBP seized more than 94,000 counterfeit Cisco network 

components and labels with a total estimated retail value of more than $86 million during the 

course of the operation.”

296

However, the Department of Justice statement immediately above did not clearly indicate to 

what extent these counterfeit computer components originated in China and/or how many of the 

arrests and convictions involved linkages to China. Public statements from the Department of 

Justice have not alleged any negative actions by the Chinese government and have stressed 

the cooperative nature of these investigations with PRC officials: A Federal Bureau of 

Investigation (FBI) spokeswoman stated in May 2008 that the bureau “worked very closely with 

the Chinese government” on such cases,297 and a May 2010 press release stated that “U.S. law 

enforcement authorities continue to work with China’s Ministry of Public Security (MPS) to 

combat the manufacture and export of counterfeit network hardware from China... This ongoing 

work is being facilitated by the [Intellectual Property] Criminal Enforcement Working Group of 

the U.S.-China Joint Liaison Group for law enforcement, which is co-chaired by the Criminal 

Division [of the FBI] and the MPS.”

298

TESTING OF INTEGRATED CIRCUITS

Testing of integrated circuits to ensure the integrity of batches and manufacturing processes 

dealing with physical consistency, authenticity, and materials integrity can be partially done 

using electric current testing and layer scanning methods currently in industry use. However, 

 295 U.S. Department of Justice Press Release, “Departments of Justice and Homeland Security Announce 30 

Convictions, More Than $143 Million in Seizures from Initiative Targeting Traffickers in Counterfeit Network 

Hardware,” May 6, 2010. http://www.fbi.gov/pressrel/pressrel10/convictions_050610.htm. 296 U.S. Department of Justice Press Release, “

Departments of Justice and Homeland Security Announce 30 

Convictions, More Than $143 Million in Seizures from Initiative Targeting Traffickers in Counterfeit Network 

Hardware,” May 6, 2010. http://www.fbi.gov/pressrel/pressrel10/convictions_050610.htm. 297 John Markoff, “FBI Says the Military Had Bogus Computer Gear,” New York Times, May 9, 2008. 298 U.S. Department of Justice Press Release, “

Departments of Justice and Homeland Security Announce 30 

Convictions, More Than $143 Million in Seizures from Initiative Targeting Traffickers in Counterfeit Network 

Hardware,” May 6, 2010. http://www.fbi.gov/pressrel/pressrel10/convictions_050610.htm.
73

exhaustive preventative testing of the deeply embedded purposes of designs within an 

integrated circuit is increasingly less possible as densities approach and increase below 20

nanometers. As stated in a March 2008 article from the online journal of the Institute of 

Electrical and Electronics Engineers:

• Although commercial chip makers routinely and exhaustively test chips with hundreds of 

millions of logic gates, they can't afford to inspect everything. So instead they focus on 

how well the chip performs specific functions. For a microprocessor destined for use in 

a cell phone, for instance, the chip maker will check to see whether all the phone's 

various functions work. Any extraneous circuitry that doesn't interfere with the chip's 

normal functions won't show up in these tests...Nor can chip makers afford to test every 

chip. From a batch of thousands, technicians select a single chip for physical inspection, 

assuming that the manufacturing process has yielded essentially identical devices. They 

then laboriously grind away a thin layer of the chip, put the chip into a scanning electron 

microscope, and then take a picture of it, repeating the process until every layer of the 

chip has been imaged. Even here, spotting a tiny discrepancy amid a chip's many layers 

and millions or billions of transistors is a fantastically difficult task, and the chip is 

destroyed in the process.

299

• A single plane like the DOD's next generation F-35 Joint Strike Fighter can contain an 

‘insane number’ of chips, says one semiconductor expert familiar with that aircraft's 

design.300 Estimates from other sources put the total at several hundred to more than a 

thousand. And tracing a part back to its source is not always straightforward. The 

dwindling of domestic chip and electronics manufacturing in the United States, combined 

with the phenomenal growth of suppliers in countries like China, has only deepened the 

U.S. military's concern.

301

• Recognizing this enormous vulnerability, the DOD recently launched its most ambitious 

program yet to verify the integrity of the electronics that will underpin future additions to 

its arsenal. In December, the Defense Advanced Research Projects Agency (DARPA), 

the Pentagon's R&D wing, released details about a three-year initiative it calls the Trust 

in Integrated Circuits program. The findings from the program could give the military--

and defense contractors who make sensitive microelectronics like the weapons systems 

for the F-35--a guaranteed method of determining whether their chips have been 

compromised.302

Even if the military establishment is successful in determining which chips have been 

compromised in its microelectronics systems, problems with microchips and integrated circuits 

have the potential to cause significant harm to the entire country through disruptions of 

nonmilitary systems such as power plants, telephone systems, air traffic control infrastructure, 

Internet services, and private/public networks. Many, if not all, of these systems will continue to 

rely on nontrusted sources for technology products and services.

 299 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch. 300 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch. 301 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch. 302 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch.
74

Kill Switches and Backdoors

Although a sufficient reserve of trusted critical computer chips for a weapon system such as the 

F-35 can be identified and stockpiled, this is not the case with more commoditized 

telecommunications systems and components. The most-expected tampering threats in

fabricating integrated circuits are generally assumed to be the inclusion of kill switches or 

backdoors. Each is defined as follows:

A kill switch is any manipulation of the chip's software or hardware that would cause the 

chip to die outright... A backdoor, by contrast, lets outsiders gain access to the system 

through code or hardware to disable or enable a specific function. Because this method 

works without shutting down the whole chip, users remain unaware of the intrusion. An 

enemy could use it to bypass battlefield radio encryption, for instance.

303

Most computer users today are well aware of the risks in downloading computer viruses through 

software vulnerabilities, but few consider the dangers of purchasing a computer or other 

network devices with security risks already etched into the silicon used to make the microchips. 

As an example, encryption in today’s systems is often done through integrated circuits 

dedicated to this function.

It is possible to add a code during the manufacture of the integrated circuit that will 

disable the encryption function when the code is received from an outside source. The 

circuit could also be altered through the addition of transistors that will disable encryption 

at a set time. Not knowing that encryption has been disabled, the user could continue to 

send sensitive or classified messages that would be readable by a hacker representing a 

hostile nation or a criminal enterprise.304

Flash memory could be added to networked printers that result in saving image files of every 

document printed and forwarding those images to a third party. Kill switches could be 

embedded into DOD systems to bring the systems down at a predetermined time or upon 

receipt of external instructions or codes. The potential for harm is enormous, extending from 

simple identity theft by criminal enterprises to disrupting networks and defense systems vital to 

national security.

 303 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch. 304 Sally Adee, “The Hunt for the Kill Switch,” IEEE (Institute of Electrical and Electronics Engineers) Spectrum (May 

2008). http://www. spectrum.ieee.org/semiconductors/design/the-hunt-for-the-kill-switch.
75

CONCLUSIONS & RECOMMENDATIONS

SUPPLY CHAIN SECURITY AND POTENTIAL IMPACTS ON 

GOVERNMENT CONTRACTING FOR SENSITIVE SYSTEMS

The discussion of market segments and products discussed previously in this report 

demonstrates how enormously intertwined are the technology supply chains between the United 

States and China in the communications market and how varied the considerations are when 

assessing the relevant issues and impacts. An ever-growing multitude of components (hundreds 

of thousands, or perhaps millions) now constitute an integrated U.S. supply chain supporting 

communications and information exchanges on a global basis.

Analysis of China’s technology integration is not so different from the analysis of the trade 

dynamics of any international resource: tracing trade routes, purchases, and ports of call 

reveals a great deal of information, some of which may be useful evidence in forming 

conclusions about source-derived risks. In technology, networks constitute global information 

“trade routes,” with switches, routers, hubs, handsets, and computers becoming the ports of 

call. Numerous foreign manufacturers contribute to the supply chain in the U.S. 

communications sector. If foreign suppliers do not already provide the majority of products in 

these trade routes (either directly under their own brand names or indirectly under U.S. brand 

names), it is only a matter of time for this to become true if present trends continue.305

Diligent analysis of communications supply chains, such as switches, routers, modems, 

handsets, LANS, WANs, etc., reveals very few areas where supply chains did not have at least 

some integration with Chinese manufacturers as well as manufacturers from many other global 

points of origin. This is due in great part to sourcing strategies adopted by U.S. manufacturers 

and service providers. Outsourcing is one of the key ways in which U.S. product manufacturers 

have been able to achieve greater efficiencies in their business models, satisfying shareholder 

demands for ever-increasing profits and consumer demands for ever-improving value-to-price 

ratios.

However, as the extent of manufacturing outsourcing increases, the abilities of a nation to 

mitigate risks in its high-technology supply chain are further eroded. High-technology risks have 

accelerated in parallel with the dramatic development of telecommunications and information 

technologies. Vulnerabilities in the communications supply chain have the potential to be 

enormous given the complex number of manufacturers, mergers, acquisitions, and general 

globalization of the technology supply chain. A network architecture, whether in space or on the 

ground, might have thousands of suppliers and hundreds of thousands of subcomponents.

In many cases, U.S. government tracing of products or components to points of origin often 

consists of looking at product lines and “country of origin” based on 50 percent cost and point of 

“manufacture” rules (such as in the Buy America Act, or substantial transformation rules such as 

those found in the Trade Agreements Act).

306

 305 Reperi internal research on trends in the global communications supply chain.

 Although components and subcomponents may 

be made in other countries, they may still be eligible to be sold as completed domestic products 

in the United States. Hypothetically, a U.S. buyer may not realize that a product designated as 

domestic under Buy America and Trade Agreements Act rules, and purchased from a domestic 

306 Reed Smith LLP, “New Amendment Rationalizes Country-of-Origin Preferences for Defense and Civilian 

Acquisitions,” Client Bulletin 03-03, January 2003. http://www.reedsmith.com/_db/_documents/bull0303.pdf.
76

U.S. company, may still be partly or largely sourced from an overseas supplier. A meaningful 

attempt to trace product or component origins in the telecommunications and technology supply 

chains would be a monumental undertaking, requiring extraordinary levels of interaction and 

cooperation with both foreign and domestic businesses.

Using the U.S. Department of Defense as an example, tracing product origins adds layers of 

new complexity to an already complex supply chain environment. In a 2004 estimate, the 

Department of Defense maintained an inventory of supplies and equipment worth more than 

$80 billion across multiple services and organizations, many of which use different automated 

supply systems.307 Simply unifying and streamlining inventory management systems and 

methods is a difficult task that may take years to succeed, even without adding checks and 

balances based on considerations of electronic and information security risks based on product 

or component country of origin. In many cases, government procurement officials simply rely on 

established standard practices and do not examine products to a fine enough level to be 

meaningful for determining countries of origin at component levels.

According to the Defense Science Board Task Force, “The Defense Department does not 

directly acquire components at the integrated circuit level. Individual circuits are most often 

specified by designers of subsystems; even system primes have little knowledge of the sources 

of the components used in their system level products."

308 This is a particularly important point 

when considering government options: How will a government buyer know what it is procuring 

within the context of foreign supplier security risks at the integrated circuit level, if the prime 

manufacturer from whom they are purchasing does not know what it is selling?

RESPONSES TO SUPPLY CHAIN CHALLENGES

Shaping the rate of change of supply chains and technologies will be a major challenge of the 

21st century. We may have to cope both with technological change happening too fast (the 

tempo of technological developments producing new risks faster than the rate of effective 

response) or too slow (the tempo of innovation no longer being competitive). Are there ways 

constructively to change either the pace of technological change or the willingness of the U.S. 

market to be meaningfully selective in deciding which new technologies should be developed 

and adopted? Where supply chains are transforming too quickly or too slowly, how may their 

rate of change be influenced beneficially?

Government buyers and commercial providers must develop both a keener sense of 

component-level make-ups and capabilities/risks of telecom and technology products being sold 

to the U.S. government, and work together to mitigate or limit risks. U.S. government 

organizations must also become adept at tracking the dynamics of the global telecom and 

technology markets, to include maintaining a watchful eye on mergers, acquisitions, technology 

trends, and other business context changes that may have profound strategic meaning for 

government business.

 307 Daniel W. Engels et al., "Improving Visibility in the DOD Supply Chain," 

http://www.almc.army.mil/alog/issues/mayJun04/alog_supple%20chain.htm. 308 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics, Report of the Defense 

Science Board Task Force on High-Performance Microchip Supply (Arlington, VA: Department of Defense, February 

2005), p. 5. http://www.acq.osd.mil/dsb/reports/ADA435563.pdf.
77

In trying to determine the acceptability of risks resulting from further Chinese involvement in vital 

U.S. supply chains, issues such as Collingridge’s “control dilemma” complicate the decisionmaking process.309 That is to say, by locking in a technologically exclusionary policy too soon, 

the United States may irrevocably harm its own global competitiveness; However, delaying 

decision-making long enough to better understand the potential risks involved may result in 

limited options and lost opportunities, or in the worst cases, irrevocable harm if catastrophic 

consequences occur.

Globally, innovation in the communications industry is not uniform, unilateral, or symmetric, but 

it is rapid. The changing nature of innovation and sourcing is another conundrum that decision

makers must wrestle with: how can policy frameworks account for the continuous nature of 

technological evolution and the vast and ever-evolving array of options for obtaining or providing 

new communications technologies? New thinking and a pluralistic institutional approach is 

called for that will provide appropriate mechanisms to:

• monitor new Chinese technologies and supply-chain risks to provide meaningful early 

warnings of unacceptable risks;

• spur American technological and supply-chain innovations that will enable means for 

responding to early warnings or mitigating the impacts of such risks when early warning 

surveillance fails; and

• provide effective implementation for appropriate technological or supply-chain 

responses, when such actions are warranted.

The rapid pace of change in the communications market, the profound impacts of these

continual changes, and the way in which individual market segments play into the overall 

communications supply chain all warrant continual surveillance. How the U.S. government (and 

commercial vendors used by the government) may suffer from increased national security risk 

exposure, the erosion of the national industrial base, and other potential future liabilities and 

outcomes must be reassessed on an ongoing basis.

THE CHESS GAME OF STANDARDS –

The New Method for Owning Supply Chains

Large parts of the supply chain have gone to China – a transfer brought about by business 

evolution rather than revolution, with China filling a void created by a manufacturing base in 

America that, for many products, has been globally less competitive on a per-unit cost 

production basis. In many ways, China’s presence in the U.S. supply chain has fulfilled vital 

needs of American companies and has been a “good marriage” for many. By all indications, 

Chinese companies have gone to considerable lengths to earn a seat among global technology 

giants such as IBM, Alcatel-Lucent, and other respected companies. On current growth paths, 

companies like Huawei should overtake the largest technology companies in the world. This is 

not surprising when we acknowledge that companies like Huawei have gone to great lengths to 

identify, understand, and emulate the most successful global business models they encounter.

 309David Collingridge, “The Social Control of Technology,” (Birmingham, England: University of Aston, Technology 

Policy Unit, 1980). The fundamental dilemma of technological governance is that, during early manifestations of 

technological evolution, there are many paths for advancement that may seem appropriate, but not enough is known 

to allow choosing the best paths forward. By the time enough is known about the impacts of a technological evolution 

for best paths to become apparent, society is already locked in, has vested its interests, and is left with limited 

options.
78

U.S. businesses looking to reduce labor costs have increasingly moved parts of their production 

chain to China. Initially, this involved preprocessing of raw materials and basic manufacturing to 

reduce costs and make companies more competitive. Over the years, this process has 

expanded to include much of the product development, design, and production cycles and is an 

expanding phenomenon fueled by circumstances within both the United States and China. 

Creating a technology product, such as a cell phone, or wireless broadband equipment like 

WiMAX (a standard much like the WiFi routers in our homes and offices – only designed to 

cover miles of distance) requires numerous manufacturers of all of the parts to agree on how 

those pieces are going to interoperate or work together. Numerous working groups exist to 

create standards so that wireless networks can operate on frequencies that are different in each 

country.

Eventually, standards are adopted and thousands of product parts are made to support that 

standard; for example, 3Com must design routers for wireless Internet protocols. For devices to 

talk to each other in the United States or globally, international bodies must agree on the 

standard that 3Com will use to guide its design process. Because the United States has been 

the technology leader of the world, most standards have been influenced by North American

companies such as IBM, Intel, Cisco, 3Com, Qualcomm, Microsoft, Nortel, and Motorola. 

However, this is changing: In 2007, Intel received approval to perform chip manufacturing in 

China and is investing in research and development and production with Chinese 

manufacturers. This move was necessary to compete with Advanced Micro Devices and other 

manufacturers. As more products are manufactured overseas, supply chains have followed. In 

the wireless market, routers, cell phones, power supplies, peripherals, software, control devices, 

and semiconductors are produced in China. With China’s ready supply of design engineers, 

innovative Chinese companies have spawned new, unique products.

Throwing a population of more than 1.5 billion potential consumers at the wireless market, then 

adding manufacturing for North America, South America, and Europe to the equation, gives 

China the ability to dominate standards--in other words, determine product specifications for 

next-generation products. In the communications world, that means the protocols for how 

networks will communicate will likely be heavily influenced by China, and manufacturers outside 

of the China market may begin to lose global market share in dramatic fashion.

INNOVATION IN AMERICA, AND THE SHORTAGE OF 

MATHEMATICIANS, SCIENTISTS, AND ENGINEERS

The Thomson Reuters' 2008 Global Innovation Study showed that on the basis of the total 

number of unique inventions issued in granted patents and published patent applications, 70 

percent of the top ten innovators in the United States were non-U.S. companies. Meanwhile, 

U.S. companies are conspicuously absent from Asian and European top ten lists. 310

 310 Thomson Reuters, 2008 Global Innovation Study, March 24, 2009. 

http://science.thomsonreuters.com/press/2009/innovation_study/.

 When we 

further examine the surge of patent filings in China (the number of patent filings is one of the 

classic indicators of the levels of innovation in a country), as of 2007 China was well ahead of 

the United States in the number of filings annually and may soon overtake the United States in 

the number of patents issued annually. Based on 2006 statistics, patent filings in China were 
79

increasing at a rate of 20 percent per year, with Huawei Technologies standing as the single 

largest filer of 20-year patents.311

This comparative view offers an indication that innovation in China may be outpacing innovation 

in the United States and that the patent-seeking environment for multinational and U.S. entities 

is now dramatically more complicated. Earlier patent filings in China may represent prior arts312

to a later patent filing in the United States. With China also offering ten-year intermediate 

patents (“utility model”) that do not require the same robust level of effort and proofs that are 

necessary to obtain a full-fledged 20-year invention patent (comparable intermediate patents 

are not available in the United States), American innovators may find themselves at a profound 

disadvantage in seeking intellectual property protections.

While the manufacturing supply chain has shifted to Chinese and overseas markets for a range 

of communications products, so have design and engineering. For America to remain 

competitive and generate future innovations, as well as to maintain control over technology 

standards, it is essential to provide incentives for continued development of the U.S. scientific 

and engineering workforce. Such an effort cannot be modest. It must be a commitment on a 

grand scale in order to reverse course and regain headway. Such measures would be akin to 

developing public-private partnerships that shift program dollars into funding tuition for math, 

science, and engineering.

Outsourcing the control of manufacturing and manufacturing processes also has the unintended 

consequence of making domestic revival of those processes more difficult. If a U.S. enterprise 

attempts to bring back some outsourced activities – even in an effort to reduce potential 

vulnerabilities – it may find that the necessary capabilities are difficult to reconstitute, due not 

just to a loss of physical plant facilities but also to an erosion in relevant skills among the 

workforce.

313 Outsourcing can also affect future prospects for technological innovation: As the 

outsourcing trend continues, it has already been shown that the number of students enrolling in 

engineering and computer science disciplines in the United States has been declining for 

several years. This trend will continue as long as the potential job market and pay structures 

offer fewer job opportunities. Talent will shift to where the leading-edge research and 

development is taking place.

The figure below illustrates how the loss of science and engineering graduates in America 

continues to contribute to this problem.

 311Michael Orey, “Patent Filings Surge in China,” Bloomberg Businessweek, June 3, 2008. 

http://www.businessweek.com/bwdaily/dnflash/content/jun2008/db2008063_332712.htm?chan=top+news_top+news

+index_technology. 312 In patent law, “prior art” is “all information that has been made available to the public in any form before a given 

date that might be relevant to a patent's claims of originality... If an invention has been described in prior art, a patent 

on that invention is not valid.” See Wikipedia, “Prior Art.” http://en.wikipedia.org/wiki/Prior_art. 313 Reperi – General knowledge based on experience. Also, http://www.engtrends.com/IEE/1005E.php. Computer 

science and engineering saw declining student interest in the early 2000s. Relative undergraduate enrollments 

("computer" fraction of engineering) began to decline in the late 1990s, and total undergraduate enrollments began to 

decline in the early 2000s. Data now show that graduate enrollments are being affected.
80

Table 3: Computer Science and Engineering Bachelor's Degree 

Enrollments in the United States, 1980-2005

Source: Engineering Trends website, "What Is Happening to Computer Science and Engineering?"

Report 1005E, October 2005. http://www.engtrends.com/IEE/1005E.php.

Without necessary talent and processes in place, the United States could find itself at a 

disadvantage in dealing with foreign suppliers who may or may not be willing to supply the 

resources needed during a national emergency. Incentives are needed to stimulate 

development of next-generation technology solutions as well as alternatives that reduce 

dependency on foreign manufacturers. Developing such alternatives will require investment and 

the funding of continued technological innovation. 

PRODUCT CONTROL ISSUES IN GOVERNMENT COMMUNICATIONS 

SYSTEMS

The government should develop vulnerabilities models for assessing present and future supply 

chain vulnerabilities and their impacts on national security and network security, in tandem with 

supply chain testing of individual components. When risks are well quantified, reasonable 

actions should be taken to address any unacceptable impacts in the telecommunications and 

communications sector. This must be done particularly with an eye toward protecting critical 

elements of the defense industrial base and secure critical communications infrastructure. Such 

steps might include the following:

• Developing incentives for returning critical vulnerable supply chain elements back to the 

United States for manufacturing by U.S. companies.

• Asking vendors, in acquiring commercial network services from commercial providers, to 

inventory and certify vital networks to the component and individual component level, 

identifying which subelements were manufactured by foreign manufacturers either inside 

or outside of the United States, regardless of brand identity.

• Eliminating or reducing the number of non-U.S. vendors who receive government funds 

for contracting and/or subcontracting work on sensitive systems. (This has been difficult 

to accomplish, primarily due to the global nature of manufacturing and resource
81

acquisitions, as well as to government pressures to reduce costs. Turning the situation 

around and moving against the stream will cost ever more as time progresses and be 

ever more difficult to implement.)

In gaining a broad and deep view of the infusion of outsourced technologies and products, we 

see signs of momentum that are potentially irresistible. The American economy must learn how 

to thrive in the avalanche zone of the global telecom and technology marketplaces. America 

must learn to emphasize and export those areas of business where America offers a better 

value, and efficiently and safely import in those areas where America does not offer better 

value.

It will be important to observe China’s strategic investments in technology throughout the 

communications supply chain. An appropriate, multifaceted approach would include a review of 

each layer of the supply chain based upon historical facts covering mergers and acquisitions, 

technology architectures, technology evolutions, and supply chain consolidations. Without being 

unduly alarmist, decision makers in both government and industry should nevertheless take an 

objective look at the potential security vulnerabilities posed by dependence upon Chinese 

corporations for electronics components and/or telecommunications services and work toward 

solutions that appropriately balance U.S. economic and national security interests.
82

APPENDIX A

WHAT IS A CYBER ATTACK?

Most personal computers are now networked and have access to other systems throughout the 

Internet and/or private networks managed or leased by government agencies and business 

enterprises. The ready linkages between personal computers have facilitated the spread of 

malicious code often referred to as viruses or malware. (The term "computer virus" is 

sometimes used as a catch-all phrase to include all types of malware, including computer 

viruses, worms, Trojan horses, most rootkits, backdoors, botnets, and other malicious and 

unwanted software, including true viruses.314)

Network services such as the Internet; e-mail; instant messaging; and file-sharing systems, 

such as social networking sites, can all be used to propagate malware. It is easy to load 

malware to a system from a compact disk, USB (universal serial bus) storage device, or many 

similar means. Furthermore, new devices and external links are constantly introduced to wireline and wireless networking environments. We live in a networked world, and almost every 

device accessing those networks can pose a potential cyber security risk.

Antivirus software is used to prevent, detect, and remove malware, including computer viruses, 

worms, and Trojan horses. A variety of strategies are typically employed to thwart malware. 

Signature-based detection involves searching for known malicious patterns in executable code. 

However, it is possible for a user to be infected with new malware for which no remedy yet 

exists. To counter such “zero-day” threats, heuristics (a heuristic is a mental shortcut that 

allows people to solve problems and make judgments quickly and efficiently) can be used. One 

type of heuristic approach, generic signatures, can identify new viruses or variants of existing 

viruses by looking for known malicious code (or slight variations of such code) in files. Some 

antivirus software can also predict what a file will do if opened/run by emulating it in a sandbox

(a “firewalled” application space that allows an operating system to safely run a program as a 

test, to see if it might be hostile before allowing it to run in the system’s main memory space)

and analyzing what it does to see if it performs any malicious actions. If it does, this could mean 

that the file is malicious.

315

Unlike other exploits, distributed denial of service (DDOS) attacks are not used to gain 

unauthorized access or control of a system; instead, they are designed to render the system

unusable. One common method of attack involves saturating the target (victim) machine with 

external communications requests such that it cannot respond to legitimate traffic or responds 

 314 A computer virus is a computer program that can copy itself and infect a computer without the permission or 

knowledge of the owner. A computer worm is a self-replicating computer program. It uses a network to send copies 

of itself to other computers on the network, and it may do so without any user intervention. A Trojan horse is a 

program that disguises itself as another program. Similar to viruses, these programs are hidden and usually cause 

an unwanted effect, such as installing a backdoor into the system that can be used by hackers. Rootkits allow the 

concealment of a malicious program that is installed on a system by modifying the host operating system so that the 

malware is hidden from the user. Rootkits can prevent a malicious process from being visible in the system's list of 

processes or keep its files from being read. A backdoor is a method of bypassing normal authentication procedures. 

Once a system has been compromised (by one of the above methods or in some other way), one or more backdoors 

may be installed. Backdoors may also be installed prior to malicious software, to allow attackers entry. In order to 

coordinate the activity of many infected computers, attackers have used coordinating systems known as botnets. In a 

botnet, the malware allows the attacker to give instructions to all the infected systems simultaneously. Botnets can 

also be used to push upgraded malware to the infected systems, keeping them resistant to antivirus software or other 

security measures.

315 Peter Szor, The Art of Computer Virus Research and Defense,(Addison-Wesley, 2005), pp. 474–481.
83

so slowly as to be rendered effectively unavailable. In general terms, DDOS attacks are 

implemented by either forcing the targeted computer(s) to reset, consuming its resources so 

that it can no longer provide its intended service, or obstructing the communication media 

between the intended users and the victim so that they can no longer communicate 

adequately.316

On two occasions to date, attackers have performed domain name server (DNS) backbone 

distributed denial of service attacks on the overall Internet DNS root servers. Since this class of

DNS provides baseline DNS service to the entire Internet, these two DDOS attacks might be 

classified as attempts to take down the entire Internet; however, it is unclear what the attackers' 

true motivations were. The first occurred in October 2002 and disrupted service at nine of the 

13 root servers. The second occurred in February 2007 and caused disruptions at two of the 

root servers.317

In the weeks leading up to the five-day 2008 South Ossetia war, a DDOS attack directed at 

Georgian government sites containing the message “win+love+in+Rusia" effectively overloaded 

and shut down multiple Georgian servers. Websites targeted included the website of the 

Georgian president, Mikhail Saakashvili, (which was rendered inoperable for 24 hours), and the 

National Bank of Georgia. The Russian government was widely suspected of orchestrating the 

attack through a proxy, the St. Petersburg-based criminal gang known as the Russian Business 

Network, or R.B.N. However, the Russian government denied the allegations, stating that it was 

possible that individuals in Russia or elsewhere had taken it upon themselves to start the 

attacks.318

During the 2009 Iranian election protests, foreign activists seeking to help the opposition 

engaged in DDOS attacks against Iran's government. The official website of the Iranian 

government (ahmedinejad.ir) was rendered inaccessible on several occasions.319

Analysis by researchers indicates that the United States is highly vulnerable to cyber 

attack320

 316 CERT Coordination Center, Software Engineering Institute, Denial of Service Attacks (Pittsburgh, PA: Carnegie 

Mellon University . http://www.cert.org/tech_tips/denial_of_service.html.

and that China has been working hard to develop cyber warfare capabilities for 

approximately 20 years. In the event of a major conflict with the United States with a cyber 

dimension, an attacker might concentrate some of its most devastating attacks on American 

317 Wikipedia, “Distributed Denial of Service Attacks on Root Nameservers.” 

http://en.wikipedia.org/wiki/Distributed_denial_of_service_attacks_on_root_nameservers. The reference does not 

identify who runs the root servers that were attacked. Further research shows that in the February 2007 attack, at 

least six root servers were attacked but only two of them were noticeably affected: the “g-root,” which is run by the 

U.S. Department of Defense and is physically based in Ohio, and the “l-root,” run by the Internet Corporation for 

Assigned Names and Numbers (ICANN), which is physically based in California. Reference: 

http://www.icann.org/en/announcements/factsheet-dns-attack-08mar07.pdf.

October 2002 - The 13 domain name service root servers are designated "A" through "M." The most affected servers, 

according to Matrix NetSystems, were the "A" and "J" servers owned by VeriSign Global Registry Services in 

Herndon, Va.; the "G" server owned by the U.S. Department of Defense Network Information Center in Vienna, Va.; 

the "H" server at the U.S. Army Research Lab in Aberdeen, Md.; the "I" server, located in Stockholm; the "K" server, 

located in London; and the "M" server, located in Tokyo. This reference identifies seven of the nine servers: 

http://news.cnet.com/Assault-on-Net-servers-fails/2100-1002_3-963005.html?tag=mncol. 318 John Markoff, “Before the Gunfire, Cyberattacks,” New York Times, August 12, 2008. 

http://www.nytimes.com/2008/08/13/technology/13cyber.html?ref=world.

319 Noah Shachtman, "Activists Launch Hack Attacks on Tehran Regime,” Wired, June 15, 2009. 320 Alex Spillius, "Cyber Attack 'Could Fell US Within 15 Minutes’,” Telegraph (UK), May 7, 2010. 

http://www.telegraph.co.uk/news/worldnews/northamerica/usa/7691500/Cyber-attack-could-fell-US-within-15-

minutes.html.
84

energy interests within the United States and abroad.321 However, proving that a nation, such 

as China, is the source of such an attack would be very difficult, if even possible, due to the 

extremely fluid and dynamic nature of cyberspace.

A key fear among analysts is that the potential impact of cyber attacks remains poorly 

understood and potentially underestimated.322 There are issues with how cyber attacks are 

classified and dealt with by decision makers: For example, cyber espionage is a form of attack 

but does not require the same type of response as a cyber intrusion that is perpetrated in order 

to create a cascading failure of a nation’s power infrastructure or a malware attack intended to 

destroy data.

Comprehensive analysis has been done on China’s cyber warfare capabilities, with conclusions 

indicating a mature capability with comprehensive doctrine and global reach:

In a conflict with the US, China will likely use its CNO [computer network 

operation] capabilities to attack select nodes on the military’s Non-classified 

Internet Protocol Router Network (NIPRNET) and unclassified DoD and civilian 

contractor logistics networks in the continental US (CONUS) and allied countries 

in the Asia-Pacific region. The stated goal in targeting these systems is to delay 

US deployments and impact combat effectiveness of troops already in theater.

No authoritative PLA open source document identifies the specific criteria for 

employing [a] computer network attack against an adversary or what types of 

CNO actions PRC leaders believe constitutes an act of war. Ultimately, the only 

distinction between computer network exploitation and attack is the intent of the 

operator at the keyboard: The skill sets needed to penetrate a network for 

intelligence gathering purposes in peacetime are the same skills necessary to 

penetrate that network for offensive action during wartime. The difference is what 

the operator at that keyboard does with (or to) the information once inside the 

targeted network. If Chinese operators are, indeed, responsible for even some of 

the current exploitation efforts targeting US Government and commercial 

networks, then they may have already demonstrated that they possess a mature 

and operationally proficient CNO capability. 323

 -- Northrop Grumman Corporation

 321 Daniel Ventre, "China's Strategy for Information Warfare: A Focus on Energy,” Journal of Energy Security (May 

18, 2010). http://www.ensec.org/index.php?option=com_content&view=article&id=241:critical-energy-infrastructuresecurity-and-chinese-cyber-threats&catid=106:energysecuritycontent0510&Itemid=361. 322Stephen M. Walt, "Is the cyber threat overblown?" Foreign Policy (March 30, 2010). 

http://walt.foreignpolicy.com/posts/2010/03/30/is_the_cyber_threat_overblown?obref=obnetwork. 323 Northrop Grumman Corporation, Capability of the People’s Republic of China to Conduct Cyber Warfare and 

Computer Network Exploitation (study performed on behalf of the U.S.-China Economic and Security Review 

Commission), October 16, 2009. 

http://www.uscc.gov/researchpapers/2009/NorthropGrumman_PRC_Cyber_Paper_FINAL_Approved%20Report_16

Oct2009.pdf.
85

APPENDIX B

GLOSSARY 

GLOSSARY

1G Analog cellular wireless -- in essence, the first generation of cellular wireless 

standards introduced in 1981.

2G Digital cellular wireless, the second generation of cellular wireless standards 

introduced in 1992.

3G

The third generation of cellular wireless standards, introduced in 2002, based 

on International Mobile Telecommunications-2000, or “IMT-2000,” also known 

as 3G or 3rd generation. In essence, 3G provides multimedia support, spread 

spectrum transmission, and at least 200 kbit/s broadband bandwidth. 3G is 

based on a family of standards for mobile telecommunications meeting 

specifications established by the International Telecommunication Union 

(ITU). 3G includes UMTS, CDMA2000, DECT (Digital Enhanced Cordless 

Telecommunications – a digital communication standard principally used for 

creating cordless phone systems), and WiMAX (Worldwide Interoperability for 

Microwave Access).

4G

The fourth generation of cellular wireless standards and a successor to the 

1G, 2G, and 3G families of standards. In essence, 4G refers to all-IP-packetswitched networks, mobile ultrabroadband access (gigabit speed), and 

multicarrier transmission. Pre-4G technologies such as mobile WiMAX 

(available since 2006 – the proposed 802.16m standard) and 3G Long-Term 

Evolution (available since 2009 – LTE is considered a “3.9G” standard).

ANDROID Google's operating system for mobile devices.

ASIC Application-Specific Integrated Circuit.

BACKBONE

Primary transit networks or series of networks designed to carry data between 

different WANS or LANS. Backbones usually have greater data carrying 

capacity, or “bandwidth,” than the networks they are interconnecting. The 

Internet Backbone is the interconnection of high-speed networks, primarily 

government, commercial telecommunications, and academic, that route data 

for Internet users.

BACKDOOR

A method of gaining remote control of a victim’s computer through the use of 

a surreptitious means of entry built into a legitimate software or system. In 

essence, backdoors are created by configuring installed legitimate software to 

allow backdoor access, or through the installation of a specialized program 

designed to allow access under attacker-defined conditions. Trojan horse 

programs and rootkits often contain backdoor components.

BASIS-OFTRADE

Relative trade or import/export strengths and weaknesses a nation or other 

entity has in relation to others and the marketplace in general.

BBP A phone's Baseband Processor – the processor chipset that is designed to 

process signals for the telephone handset or system.

BLUETOOTH

Bluetooth is an open wireless technology standard for creating personal area 

networks (PANs) with high levels of security, and exchanging data over short 

distances using short-length radio waves from fixed and mobile devices. 

Bluetooth uses frequency-hopping spread spectrum, which breaks apart data 

being sent and transmits portions of it on up to 79 bands of 1 MHz width in the 

range 2402-2480 MHz, which is in the globally unlicensed Industrial, 

Scientific, and Medical (ISM) 2.4 GHz short-range radio frequency band.

BRIC

BRIC nations (Brazil, Russia, India, and China) in market analysis. An 

acronym used by Jim O'Neill during his time as head of global economic 

research at Goldman Sachs in 2001. According to a Goldman Sachs paper in 

2005, Mexico and South Korea are comparable to the BRICs but were 
86

excluded initially because their economies were considered to be more 

developed already. Goldman Sachs argued that due to rapid development in 

the BRIC, by 2050 their combined economies might eclipse the combined 

economies of the current richest nations. Combined, the BRIC accounts for 

more than 25 percent of the world's land area and more than 40 percent of 

global population.

BROADBAND An Internet connection with a much larger capacity than dial-up or ISDN 

(typically greater than 200 kilobits/per second).

CDMA2000 A family of 3G mobile technology standards that use CDMA channel access to 

send voice, data, and signaling data between mobile phones and cell sites.

CFIUS

Committee on Foreign Investment in the United States – an interagency 

committee of the U.S. government that reviews national security implications 

of foreign investments in U.S. companies or markets. 

http://www.treas.gov/offices/international-affairs/cfius

CHIPSETS A set of specialized chips in a system’s main, peripheral, or expansion 

circuitry.

CIC China Investment Corporation, headquartered in Beijing. http://www.chinainv.cn/cicen.

CNA

Computer Network Attack – The use of computer networks to disrupt, deny, 

degrade, or destroy information resident in computers and computer networks 

or the computers and networks themselves.

CNCI

Comprehensive National Cybersecurity Initiative. 

http://www.whitehouse.gov/cybersecurity/comprehensive-nationalcybersecurity-initiative.

CND

Computer Network Defense – The use of computer networks to protect, 

monitor, analyze, detect, and respond to unauthorized activity within 

information systems and computer networks.

CNE

Computer Network Exploitation – Enabling operations and intelligence 

collection through computer networks to gather data from target systems or 

networks.

CNO

Computer Network Operations – encompasses Computer Network Attack 

(CNA), Computer Network Defense (CND), and Computer Network 

Exploitation (CNE).

CONUS

Continental United States. Typically refers to being geographically located 

within the boundaries of the 48 contiguous states of the United States. 

CONUS does not typically include Hawaii and Alaska or the outlying territories 

(Guam, Puerto Rico, etc.).

CPU

Central Processing Unit – the central processor portion of a computer system 

that carries out the main instructions of a computer program and is the 

primary element carrying out the computer's functions.

CYBER 

SECURITY

Security against electronic attacks, such as cyber warfare and other forms of 

hostile CNO.

DATACOM Data Communications.

DDOS

Distributed Denial of Service (DDOS) attacks – attacks that consume 

computing or communications resources by engaging many intermediate (or 

proxy) computers simultaneously to attack one or a few victims with a flood of 

traffic and system requests. The purpose is to flood target systems with so 

much traffic and/or so many computational requests that no other traffic can 

get through or no other useful functions can occur. Intermediate or proxy 

systems used in DDOS attacks have often been previously compromised and 

are under the control of hostile actors.

DNS Domain Name Server.

DRAM Dynamic random access memory – a type of random access memory that 

stores each bit of data in a separate capacitor within an integrated circuit.

DSL A family of technologies that provides digital data transmission over the wires 
87

of a local telephone network. This is typically a terrestrially based technology 

for providing broadband services over legacy copper-wire infrastructures of 

PSTNs (Public Switched Telecommunications Network).

DSP Digital signal processing--a specialized microprocessor with an architecture 

optimized for digital signal processing.

EDGE

Enhanced Data rates for GSM Evolution (EDGE) – also known as Enhanced 

GPRS (EGPRS), IMT Single Carrier (IMT-SC), or “Enhanced Data rates for 

Global Evolution.” A backward-compatible digital mobile phone technology 

allowing improved data transmission rates on top of standard GSM.

ELECTROOPTICAL

Pertaining to effects of an electric field on the optical properties of a material.

ESSENTIAL 

PATENTS

Patents that disclose and claim one or more inventions that are required to 

practice a given industry standard. Standardization bodies often require that 

members disclose and grant licenses to patents and pending patent 

applications that they own and that cover a standard that the body is 

developing. If standards bodies fail to get licenses to all patents that are 

essential to practicing a standard, then the owners of those unlicensed 

patents can often demand royalties from those who ultimately adopt the 

standards.

ETHERNET

A set of network cabling and network access (CSMA/CD) protocol standards 

for bus topology computer networks invented by Xerox Corporation and now 

managed by the 802.3 subcommittee of the IEEE (Institute of Electrical and 

Electronics Engineers).

EV-DO

“Evolution-Data Optimized” or “Evolution-Data Only,” abbreviated as EV-DO 

or EVDO and often EV, is a 3G telecommunications standard for the wireless 

transmission of data through radio signals for broadband Internet access.

FAR The U.S. government’s Federal Acquisition Regulation – the principal set of 

rules in the Federal Acquisition Regulation System.

FIB Focused-Ion-Beam.

FIREWALL Part of a system or network designed to block unauthorized access while 

permitting authorized communications.

FREQUENCY 

DIVISION

Frequency-Division Duplexing (FDD) means that the transmitter and receiver 

operate at different carrier frequencies.

FREQUENCYHOPPING 

SPREADSPECTRUM

A method of transmitting radio signals by rapidly switching a carrier among 

many frequency channels using pseudo-random sequences known to 

transmitter and receiver pairs or groups.

FTP

File Transfer Protocol - A standard Internet protocol implemented in FTP 

server and client software and most web browsers to “transfer data reliably 

and efficiently.”

GPS The U.S. Global Positioning System.

GSE

Government-sponsored enterprises–-a group of financial services 

corporations created by the United States Congress. GSEs' function is to 

enhance the flow of credit to targeted sectors of the economy and to make 

those segments of the capital market more efficient and transparent. 

Residential mortgage borrowing is the largest of the borrowing segments in 

which the GSEs operate, in which they hold approximately $5 trillion worth of 

mortgages.

GSM Global System for Mobile Communications – a wireless mobile telephone 

standard in use broadly on a worldwide basis.

HACKER

An individual using computer technology in hostile or nefarious ways generally 

not originally intended by the publisher or manufacturer. In essence, people 

who attack others using computers or networks.

HOTSPOT A physical site that offers Internet access over a wireless local area network. 
88

Hotspots are typically based on WiFi technology.

HSDPA High-Speed Downlink Packet Access.

HTTP Hypertext Transfer Protocol – The message format and exchange standard 

used by web browsers and web servers.

HUB

An unintelligent device for connecting multiple twisted pair or fiber-optic 

Ethernet devices together and making them act as a single network segment. 

Hubs work at the physical layer (layer 1) of the OSI model. Hubs are a form 

of multiport repeater.

IC Integrated Circuit.

IDS

Intrusion Detection System – A computer or network monitoring system 

capable of matching observed phenomenon to patterns of known or 

suspected unauthorized activity and using this as a basis for intercepting 

penetrations by hostile users or applications.

IEEE Institute of Electrical and Electronics Engineers.

INFOCON

Information Operations Condition – INFOCON classifications mirror those 

used in the Defense Conditions (DEFCON) Alert System and are a uniform 

system of five progressive readiness conditions (INFOCON 5 thru INFOCON 

1). INFOCON 5 indicates nominal conditions at normal levels of readiness. 

INFOCON-1 indicates a maximum level of high alert due to impending severe 

threat or attack. As INFOCON levels increase, elements of network 

functionality or services deemed lower priority or at high risk of attack may be

temporarily suspended. Offensive CNA tools used by hostile attackers that 

might be effective during an INFOCON-5 normal state of readiness may be 

rendered ineffective if the services or applications they exploit are turned off.

INTERNET

Global networks of computers that communicate using Internet Protocol (IP) 

and Border Gateway Protocol (BGP) to identify the best paths to route 

communications between end-points.

IP ADDRESS

Internet Protocol Address – a number assigned to each computer's or other 

device's network interface(s) that are active on a network supporting the 

Internet Protocol.

IP TELEPHONY

Voice over Internet Protocol (VoIP) is a general term for a family of 

transmission technologies that deliver voice communications over IP networks 

(the Internet or other packet-switched networks). Other terms frequently 

encountered and synonymous with VoIP are “IP Telephony,” “Internet 

Telephony,” Voice Over Broadband (VoBB), “Broadband Telephony,” and 

“Broadband Phone.” Communications services (voice, facsimile, and/or 

voice-messaging applications) that are transported via the Internet rather than 

the public switched telephone network (PSTN).

IPS

Intrusion Prevention System – an inline system or software that applies IDSstyle logic and approves or rejects network traffic, program and data access, 

hardware use, etc. Where an IDS is designed to detect intrusions that are in 

progress and intercept/manage them before they progress too far, an IPS is 

designed to prevent intrusions from gaining any penetration whatsoever.

IPV4

Internet Protocol version 4 is the fourth revision in the development of the 

Internet Protocol and the first version of the protocol to be widely deployed. A 

connectionless protocol for use on packet-switched Link Layer networks such

as Ethernet. IPv4 operates on a “best effort” delivery model that does not 

guarantee delivery, proper sequencing, or duplicate delivery. Delivery and 

data integrity are addressed by TCP (Transmission Control Protocol), an 

upper-layer transmission control protocol – hence the common acronym 

“TCP/IP”. IPv4 uses 32-bit (four-byte) addresses, limiting address space to 

4,294,967,296 possible unique addresses. Some are reserved for special 

purposes, such as private networks (~18 million addresses) or multicast 

addresses (~270 million addresses), reducing the number of addresses that 

potentially can be allocated for routing on the public Internet. IPv4 address 
89

shortages have been developing and will eventually result in exhaustion of 

IPv4 address space, which has led to development of the IPv6 protocol as a 

long-term solution.

IPV6

Internet Protocol version 6 is an Internet Protocol version that is designed to 

succeed IPv4. IPv6 was defined in December 1998 by the IETF (Internet 

Engineering Task Force) with publication of RFC 2460. IPv6 has a larger 

address space than IPv4 due to the use of a 128-bit address versus IPv4’s 

32-bit address. IPv6’s new address space supports 2128 (about 3.4×1038) 

addresses. This dramatic expansion provides flexibility in allocating 

addresses and routing traffic and eliminates the widespread need for network 

address translation (NAT). IPv6 is a vastly improved protocol standard that 

incorporates many new enhancements over IPv4 in addition to a vastly 

increased address space. New routing techniques, expanded protocol 

capabilities, enhanced security, and other improvements are available in IPv6.

ISP Internet Service Provider.

IW

Information Warfare – Efforts to achieve information superiority by affecting 

adversary information, information-based processes, information systems, 

and computer-based networks while defending one’s own resources.

IXP Internet Exchange Point (IX or IXP) – a physical infrastructure through which 

Internet service providers exchange Internet traffic between their networks.

JAILBREAKING

A process that allows iPad, iPhone, and iPod Touch users to run any software 

code on their devices, as opposed to only code authorized by Apple. Once 

jailbroken, device users are able to download many extensions and themes 

previously unavailable through Apple’s App Store, via pirated or unofficial 

means.

LAN Local Area Network – an interconnection of computers that are in relatively 

close proximity to one another, such as within a building.

LAST-MILE The "last mile" or "last kilometer" is the final leg of delivering connectivity from 

a communications provider to a customer.

LEGACY Systems or applications that continue to be used beyond intended service life 

because users do not want to replace or redesign them.

LMR

Land Mobile Radio – a wireless communications system intended for use by 

terrestrial users in vehicles (mobile) or on foot (portable). LMR is typically 

used by emergency first responder, public works, or companies with large 

numbers of vehicle or field staff. LMR systems may be independent but often 

are connected to other fixed systems such as the public switched telephone 

network (PSTN) or cellular networks.

LTE

Long-Term Evolution), also known as "3.9G," is the trademarked project name 

of a high-performance air interface for cellular mobile telephony. It is a project 

of the 3rd Generation Partnership Project (3GPP), operating under a name 

trademarked by the European Telecommunications Standards Institute. The 

current generation of mobile telecommunication networks are collectively 

known as 3G (for "third generation"). Although LTE is often marketed as 4G, 

LTE is actually a 3.9G technology (pre-4G). LTE does not fully comply with 

IMT Advanced 4G requirements. As a pre-4G standard, LTE is evolving into 

“LTE Advanced,” a 4th generation standard (4G) radio technology.

MACRO LEVEL Characterizes societies or systems as a whole, rather than parts (meso- or 

microlevels).

MICROCHIP

An integrated circuit (also known as IC, microcircuit, microchip, silicon chip, or 

chip). Miniaturized electronic circuits that consist mainly of semiconductor 

devices and other passive components and that are manufactured in the 

surface of thin substrates of semiconductor materials.

MIIT The Ministry of Industry and Information Technology of the People’s Republic 

of China. http://www.miit.gov.cn.

MOTHERBOARD The main or central circuit board in modern computers that holds many crucial 

system components and provides connectors for other accessory system 
90

components and peripherals.

MPU Microprocessor Unit – a term occasionally used to describe a CPU (Central 

Processor Unit).

NBA

Network Behavioral Analysis – intrusion detection systems that detect and 

model network traffic to discern and analyze violations of known benign 

activities.

NIPRNET

Nonclassified Internet Protocol Router Network. A network of the U.S. 

Department of Defense providing unclassified Internet access and 

interconnectivity to DOD users and facilities.

NODE Typically, the individual devices or computers on a network.

OBEX

OBEX (OBject EXchange), and IrOBEX (Infrared OBEX), is a communications 

protocol facilitating exchange of binary data between devices. The OBEX 

standard is managed by the Infrared Data Association and has also been 

adopted by the Bluetooth Special Interest Group and the SyncML wing of the

Open Mobile Alliance (OMA).

OCONUS Outside of the geographic boundary of the contiguous 48 states of the United 

States. In essence, the opposite of CONUS.

OUTSOURCING Transfer of a potentially internal business function to an external service 

provider.

PBX

Private Branch Exchange – a telecommunications switching system, usually 

physically located at a customer's place of business, providing internal 

communication between users and access to outside (trunk) telephone lines.

PHOTODETECTOR Any device used to detect electromagnetic radiation.

PROGRAMMABLE 

LOGIC ARRAY

Programmable devices used to implement combinational logic circuits.

RENMINBI (RMB)

The renminbi is the official physical currency of the People's Republic of 

China, whose principal unit of account is the yuan (“¥” or “CNY”). The 

currency is legal tender in mainland China but not in Hong Kong and Macau. 

Renminbi translates as people's currency. The renminbi is issued by the 

People's Bank of China, the monetary authority of the PRC. In practice, use 

of “renminbi” is analogous to the use of “sterling” within the United Kingdom, 

where sterling is the actual physical currency but the Pound is the official unit 

of account by which sterling are denominated.

REPEATER

An electronic device that receives a signal and retransmits it at a higher level 

and/or higher power, or onto the other side of an obstruction, so that the 

signal can cover longer distances.

RFC Request for Comments, an IETF (Internet Engineering Task Force) 

memorandum on Internet systems and standards.

ROOTKIT

Software used by a second or third party after gaining access to a computer 

system in order to conceal alteration of files, file systems, or processes 

without the user's knowledge.

ROUTER

Telecommunications devices that direct packets of information using OSI 

layer 3 (network layer) information. Also describes Internet devices that 

connect local area networks to form larger Internets.

SAFE

The State Administration of Foreign Exchange (SAFE), a Chinese government 

body that manages China's foreign exchange reserves. 

http://www.safe.gov.cn.

SERVICE 

FOOTPRINT

An area of services coverage. Typically, the geographic area within which a 

service may be provided.

SMART PHONES

Mobile phones that offer more advanced computing abilities and connectivity 

than basic “feature phones.” Some feature phones are able to run simple 

applications based on generic platforms such as Java; smart phones allow 

much more advanced applications. Smart phones run complete operating 

systems and provide platforms for application developers. They may be 

considered handheld computers with mobile telephone capabilities.
91

SMS

Short Message Service is the text communication service component of 

mobile communication systems. Standard communications protocols allow 

the exchange of SMS messages between mobile phone devices.

SPYWARE Malware intended to be installed on a user's system to surreptitiously collect 

incremental information about users.

SRAM

Static Random Access Memory – semiconductor memory where, unlike 

dynamic RAM (DRAM), it does not need to be periodically refreshed. SRAM 

uses bistable latching circuitry to store each bit.

STRUCTURED 

ASIC

Structured ASIC design (also “Platform ASIC”) has a variety of contextual 

meanings. The basic premise infers that both manufacturing cycle time and 

design cycle time are reduced compared to cell-based ASIC. Predefined 

metal layers reduce manufacturing time, and precharacterization of what is on 

the silicon reduces design cycle time.

SUPPLY CHAIN

Systems of organizations, people, technology, activities, information, and 

resources involved in moving products or services from suppliers to 

customers/users.

SWITCHES

Network switches are computer networking devices that connect network 

segments. The term commonly refers to network bridges that process and 

route data at data link layers (layer 2) of the OSI model. Switches that 

additionally process data at the network layer (layer 3 and above) are often 

referred to as Layer 3 switches or multilayer switches. The term network 

switch does not generally encompass unintelligent or passive network devices 

such as hubs and repeaters.

TIME DIVISION

Digital or analog multiplexing in which two or more signals or bit-streams are 

transferred simultaneously as subchannels in one communication channel 

while physically taking turns on the channel.

TROJAN Non-self-replicating malware that appears to perform desirable functions for 

users but instead facilitates unauthorized access to user computer systems.

USB Universal Serial Bus – a “serial bus” standard for connecting devices.

UV Ultraviolet.

WAN

Wide Area Network – computer networks covering large geographic areas 

and that can refer to several buildings in a city or several cities. A WAN can 

also refer to a group of LANs connected by dedicated long-distance links.

WCDMA

Wideband Code Division Multiple Access, UMTS-FDD, UTRA-FDD, or IMT2000 CDMA Direct Spread – a wireless interface standard in 3G mobile 

telecommunications networks.

WiFi A wireless local area network model based on the IEEE 802.11 standards and 

the most widely used WLAN technology today.

WiMAX

Worldwide Interoperability for Microwave Access – a telecommunications 

technology providing wireless data, voice, and video over long distances. 

Currently provides fixed and fully mobile Internet access up to 40 Mbit/s based 

on the IEEE 802.16 standard and is expected to offer up to 1 Gbit/s fixed 

speeds with the IEEE 802.16m update.

WIRELESS 

CHARGING

Inductive Charging – a technology using the electromagnetic fields to transfer 

energy between objects.

WORM

Self-replicating malware computer programs that use computer networks to 

(potentially) automatically, autonomously, and/or surreptitiously send copies of 

themselves to other nodes/systems.

YUÁN

A cause of some confusion, a “yuan” (“元” or “CNY”) is the base unit of a 

number of modern Chinese currencies. Distinction between the yuan and a 

renminbi (a name also used for the Chinese currency) can be viewed as 

analogous to that between the pound and sterling in Great Britain. The yuan 

is the unit of account, and a renminbi is the actual physical scrip or change of 

currency. The symbol for the yuan “元” may also be used in some 

circumstances to refer to the currency units of Japan and Korea and also to 
92

translate the currency unit of a dollar relative to yuan. The U.S. dollar is called 

Měiyuán or American yuan, in Chinese. When used in English in the context 

of the modern foreign exchange market, the Chinese yuan most commonly 

refers to the renminbi but may be indicated by the simple symbol of a yuan 

(CNY).

ZERO-DAY

Zero-day (or zero-hour or day-zero) attacks or threats are attempts to exploit 

system or application vulnerabilities that are currently (at the time of attack) 

unknown or undisclosed to software developers and users.
93

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103

Additional information derived from selected studies, papers, transcripts, lectures, 

conversations, and collaborations with sources, public and private:

The University of Oxford, Stanford University, Harvard University, Reperi Analysis 

Center, Trends Digest, RAND Corporation, Carnegie Endowment for International 

Peace, U.S. Department of Commerce's National Telecommunications and Information 

Administration, U.S. Federal Communications Commission, National 

Telecommunications Cooperative Association, U.S. National Institute of Standards and 

Technology, U.S. National Defense University, U.S. Department of Energy Idaho 

National Laboratory, U.S. Federal Bureau of Investigation, U.S. Department of 

Homeland Security, U.S. Department of State, U.S. Air Force Space Command, U.S. 

National Science Foundation, U.S. Department of Commerce National Technical 

Information Service, U.S. Department of the Army Foreign Military Studies Office, U.S. 

Library of Congress, Asia Programme at the Royal United Services Institute for Defence 

Studies in Whitehall London, Technische Universität Berlin, The Heritage Foundation, 

Council on Foreign Relations, Foreign Policy Research Institute, APICS Association for 

Operations Management, European Organization for Nuclear Research, MITRE 

Corporation, Jawaharlal Nehru University, Institute for Defence Studies and Analyses in 

New Delhi, Regional Center for Strategic Studies in Sri Lanka, and various other private 

corporations, universities, individuals, and government institutions.

Other useful publicly available information sources:

The Republic of China Government Information Office (Taiwan), Fudan University, 

Zhejiang University, Shanghai Academy of Social Sciences, Lanzhou University, 

Shanghai Center for International Studies, Ministry of Foreign Affairs of the People’s 

Republic of China, China Investment Corporation, China Academy of Military Science, 

and various other Republic of China (Taiwan) and People's Republic of China sources of 

publications available as English translations through the U.S. Department of 

Commerce’s National Technical Information Service or other open source translations.

Special thanks to those individuals, including business executives and outside subject-matter 

experts, who volunteered time, thoughtfulness, and energies to contribute to this report.