Overdependence on ZTE in India

In 2008, ZTE, a China based telecom company, set up a research centre in India after starting operations in 2003. The sales revenue of the company at the time in India was 750 million USD compared to 100 million USD in 2004.¹ By 2013, the research center was shut down. The research centre was a component of ZTE, but the reason for scaling down was because contracts had started to dry up and the network gear sales had dropped at the time. A lot of top executives dealing with various telecom operators in India put in their papers. The Chinese workers were asked to relocate to other countries where the company had its presence. ²

In 2014, ZTE made a comeback to the Indian market by announcing its plan to open a global network operations center (GNOC). To put it in a nutshell, a GNOC is a ‘central location where a telecom operator’s network is managed and controlled. It handles any abnormality, fault handling, and network problems. It also serves as an interface for internal departments such as customer services and external parties’. Investment details of this project were never shared. The GNOC is based out of Gurgaon, Haryana in India. ³ Reliance Jio decided to procure around two lakh handsets from ZTE as a part of rolling out 4G Technology and give its subscribers access to 4G internet speed through this device by the end of 2015.⁴

Return of ZTE

By mid-2016 Reliance Jio, Bharti Airtel and Idea Cellular started to consider ZTE’s Gigabit Passive Optical Network (GPON). GPON would have helped these three telecom operators to roll out technology which would support integrating services that require higher bandwidth for live TV broadcasts or operating Internet Protocol Television (IPTV). While negotiating a deal to expand the 4G rollout all over India, ZTE was already in-charge of Idea Cellular’s operations in Bangalore, Karnataka and Airtel’s 4G network in Punjab, Haryana, and Kolkata. ZTE also signed a Memorandum of Understanding (MoU’s) with Haryana, Gujarat and Andhra Pradesh State governments to generate revenue through the Smart City initiative. ⁵ Even Tata Teleservices handed out a 15 million USD contract to Huawei to provide network gear for upgrading the company’s wireline network. At the time, Huawei also bagged significant agreements from Vodafone India (150 million USD), Bharti Airtel (60 million USD) and Idea Cellular (60 million USD). ⁶

By September 2017, Bharti Airtel had selected Huawei and ZTE to roll out Multi-Input Multi Output (MIMO) technology. This technology is helping the augment current 4G internet speeds and acts as a precursor to 5G internet speeds.⁷ ZTE, by the end of 2017, was added as an associate member of the Cellular Operations Association of India (COAI) and joined the ranks of Google India, Huawei Technologies, Ericsson India, and Facebook India Online Services, among many, which are undertaking manufacture, support and research, or are developing mobile communication services in India. ⁸

As far as the smartphone market in India is concerned, one of the biggest market shares is held by Xiaomi. Ratan Tata acquired 0.0024 percent stake in Xiaomi corporation, which was about one million USD in 2015. Tata has doubled his investments in Xiaomi which is approximately 2.1 million USD (at Xiaomi’s valuation of 90 billion USD). India is Xiaomi’s second-biggest market after China and operates six manufacturing plants in India. While Xiaomi’s sales have stagnated in other markets, its three-year investment of 500 million USD has paid off, and the company now earns profits from its sales in India.⁹

Expanding Indian Market

The Indian smartphone and telecom market is growing at a rapid pace. Indian telecom operators have to decide on how to provide services at low prices to capture more market share. When Reliance Jio launched its 4G services by mid-2016 in India, it claimed to have added 16 million subscribers, thus creating a world record. This service was first of its kind where Reliance offered its customers unlimited voice calls, free-roaming charges and high-speed internet (capped at four gigabytes, going beyond the limit the speed reduced to 128 kilobytes per second (kbps)).¹⁰ This led to competitors like Vodafone India, Bharti Airtel, Idea cellular coming up with similar plans.

While internet speeds have gradually increased the tariffs placed on the customers to avail this feature was removed, and no additional costs were imposed on the customers. Phone makers like Xiaomi, who have Indian backers like Tata have made smartphones affordable and tailor-made for Indian customers. It is because Indian Telecom operators are catering to the demands of their customers while ensuring that their profits do not get affected, they prefer Chinese Telecommunication gear makers over their western counterparts. This has led to a two-front problem, first, which could compromise India’s communication networks, and second, an over-reliance of India’s telecom operators on Chinese companies, who for some time now have been under scrutiny by the United States.

US Action on ZTE and Huawei

In 2012, the Permanent Select Committee on Intelligence came up with a report on Huawei and ZTE’s links with the Communist Party of China. Neither company came up with concrete evidence suggesting otherwise. The committee came up with five recommendations:-

• The United States Intelligence community should be vigilant and should keep a strict eye on Chinese Telecommunication companies penetrating US telecommunication market. The Committee on Foreign Investment in the United States (CFIUS) was advised to block any business transactions like a merger, acquisition or a takeover from any Chinese telecommunication company. Sensitive information regarding national security should not be transmitted through any device which has components made by either of the two companies.
• Private businesses in the US were asked to look for alternative vendors and not to have any business transaction with these two companies.
• The US Executive Branch was asked to open investigation on the activities of these two companies due to Chinese unfair trade practices in the telecommunications sector.
• In the fourth recommendation, Huawei was explicitly asked to be more transparent and receptive towards their legal obligations if they want to conduct business in the US. Both ZTE and Huawei were asked to list themselves in western stock exchange as the pre-required criteria for these two entities would be to be more transparent, and also allow third party evaluators to go through their finances and cyber-security processes.
• The final recommendation was for the US Congress to pass legislation, which would give more teeth to CFIUS in light of the risk posed by telecommunication companies with state ties and for being untrustworthy for undertaking critical infrastructure work in the US, and give CFIUS the power to review purchasing agreements. ¹¹

By 2018, the US Federal Communications Commission unanimously voted to ban Huawei and ZTE from doing any business with any American telecommunications company which provided them with hardware and software required to assemble their products.¹² The Pentagon also issued advisories against Huawei and ZTE smartphones and banned them to be used in US bases all over the world. ZTE took a massive hit after the ban, although now the ban has been lifted from ZTE to continue doing business in the US and with its suppliers after paying a hefty fine.¹³ While the report came out in 2012, the Trump administration took the initiative to take these recommendations seriously after he took charge as President in 2017.

The newly reformed National Defense Authorisation Act (NDAA) has clearly stated that no US Government agency will use any equipment made by ZTE or Huawei. Further on, any entity that does business with the US Government will also not be allowed to have any dealings with these two companies. No security related equipment made by other Chinese companies will be used, especially those having any connection with the Chinese Government. This proposal in the Act enjoys bipartisan support and is in line with the recent ban by Federal Communications Commission.¹⁴ The companies which own ZTE have a history of proliferation. On a number of occasions, those stakeholders who hold ZTE have sold high-grade weapons to Pakistan and sanctions have been imposed by the US Treasury on multiple occasions on China Precision Machinery Import-Export Corp (CPMIEC). ¹⁵

American ban on ZTE has put a bigger question on the European and South Asian telecom operators as their operations did get disrupted.¹⁶ Other than China, ZTE’s biggest market is India. Indian telecom operators need to take into consideration other suppliers of telecom gear and not be overly reliant on ZTE and Huawei, who are themselves dependent on supplies from the US. While the US finally banned ZTE on charges of avoiding American sanctions and dealing with the North Korea and Iran, it was also mentioned that ZTE and Huawei products pose a threat to US national security.

Issues for India

Indian telecommunications companies’ 4G operations are dependent on ZTE for network gears and spare parts. These include Indian Government-owned Bharat Sanchar Nigam Limited (BSNL) awarding a 400 million USD contract to ZTE and Nokia.¹⁷ In Italy, ZTE had to abandon a deal with a telecom operator (already half-way) which led them to approach Sweden based Ericsson to provide them with the telecom gear necessary to upgrade their technology. ¹⁸ While the Indian telecom companies did not suffer such setbacks regarding upgradation of network gear, but the America’s on the Chinese telecom companies should be taken into serious consideration.

The Huawei Cyber Security Evaluation Centre (HCSEC) set up by the United Kingdom (UK) Government, in its recent report submitted to the National Security Adviser of UK stated that, “identification of shortcomings in Huawei’s engineering processes have exposed new risks in the UK telecommunication networks and long-term challenges in mitigation and management.”¹⁹ In 2017, the HCSEC, when it visited the Huawei facility in Shenzen, highlighted that Huawei was failing to keep a watch on the usage of third-party components while making network gear. The HCSEC is overseen by UK security officials, including officials from Government Communications Headquarters (GCHQ).²⁰ The HCSEC was created right after Huawei started entering into telecommunications infrastructure business and has over time become a major supplier to BT group and other telecom operators there like Vodafone group.

Huawei is trying to assure that it’s willing to let governments have oversight over its operations, but the debate still rages on in Australia as it is now considering banning Huawei from their 5G projects in light of US ban of ZTE and Huawei and recent HCSEC reports. Meanwhile, New Zealand, Canada, and Germany have assured that they have safeguards in place to ensure that there are no mechanisms in place to access user information/ data or to monitor them.²¹

The Indian defence establishment has taken some steps by issuing advisories against certain Chinese applications which were recommended to be uninstalled, and Chinese smartphones are being phased out as per the orders issued by the Indian Air Force.²² The Government of India has issued no such advisory to Indian telecommunications companies dealing with the Chinese counterparts that were banned and faced severe limits in the US. In fact, the same companies have been awarded contracts as mentioned earlier to help roll out 5G services in India.²³ It becomes increasingly necessary for the Telecom Regulatory Authority of India (TRAI) and by extension, the Government of India, to issue advisories for the Indian telecommunication companies to be careful while dealing with their Chinese counterparts and open investigation as to whether these devices pose a threat to cybersecurity.

There is no doubt that Chinese smartphones and telecom gear are cheaper in the market as compared to their western counterparts. But the recent ban and the report presented to the US House of Representatives in 2012 gives a clear indication of the links of these Chinese companies to the Chinese Government, which is now planning to run a modern surveillance state. With China increasingly becoming assertive militarily in Asia and economically all around the world, its companies should be scrutinised more by the Indian telecommunication companies. For that to happen, the Indian Government should issue an advisory through TRAI, to be careful while dealing with the Chinese companies and not be dependent on them, in case a ban like this is imposed again. Indian Telcos should keep in mind that the prohibition against ZTE still looms as the US Senate is against the executive decisions taken by President Trump to overturn the ban which he had earlier imposed on ZTE. ²⁴ This could prove to be disruptive for the customers as well as the telecom companies in India, as it was in Europe and other parts of South Asia.

The Indian Telcos and Chinese smartphone customers in India are in a Catch-22 situation. They are reliant on Chinese companies to provide cheaper products and services. These products and services, in turn, give companies in India a higher profit margin and reasonable price to the customers for the same specifications as compared to Korean, Western smartphone makers. This has helped companies like Xiaomi, Oppo, Vivo and so on to have a large market share in India. But these services, products and profitability do not take into consideration the possibility of the impact on India’s information communication technology. The Government of India needs to take steps to ensure that the Chinese companies operating in India, especially in this sector should be made accountable and at the same time go through a considerable amount of investment scrutiny, as the CFIUS does, or oversight on operations like the HCSEC conducts.

References

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