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The bad news never seems to end for embattled telecoms equipment makers Huawei and ZTE (HKEx: 763; Shenzhen: 000063), which have become magnets for attacks from global rivals seeking to curb their gains into the lucrative US and European markets. The latest move has seen the European Union launch an anti-dumping probe against the Chinese pair over allegations that they receive unfair subsidies from Beijing, according to foreign media reports. (English article; Chinese article) It’s not surprising that this investigation is coming in Europe, since most of Huawei’s and ZTE’s biggest global rivals are based there, including Ericsson (Stockholm: ERICb), Nokia Siemens Networks and Alcatel Lucent (Paris: ALUA). All those companies have complained for years that Huawei and ZTE can offer lower prices partly due to strong support from Beijing, which indirectly subsidizes them through policies like export rebates. From my perspective, the fact that the EU has launched this investigation is not surprising at all. What is more interesting is the timing of the move, as well as the broader implications of the probe for a recent major push by Huawei and ZTE into the faster-growing and less controversial smartphone sector. In terms of timing, this anti-dumping investigation is the latest in a recent series of government probes in the US and Europe against not only Huawei and ZTE but also a growing number of other Chinese firms in up-and-coming sectors. Both companies have been largely locked out of the US network-building market to date over concerns their equipment could be used for spying by Beijing. ZTE received a major setback on that front early last year when Sprint (NYSE: S), one of the top 4 US wireless carriers, rejected its bid to help build a new 4G telecoms network (previous post); Huawei received a similar setback months later when it was blocked from bidding for US government contracts to upgrade some of the nation’s emergency telecoms networks. (previous post) Even top Chinese mobile carrier China Mobile (HKEx: 941; NYSE: CHL) has gotten caught up in the fray, with US regulators earlier this month citing security concerns as a reason for potentially vetoing the carrier’s application to offer service between China and the US. (previous post) This latest EU move is unrelated to security concerns, but is rather based on accusations of unfair subsidies from Beijing, which has become another popular tool for Western firms to slow down the advance of aggressive Chinese rivals into their markets. Both the EU and US regularly launch anti-dumping investigations against Chinese sectors, though most of those have usually targeted low-end manufacturing areas like construction materials and auto parts. But the unfair trade attacks moved into the high-tech space last year when the US has launched a high-profile investigation against China’s solar panel industry, which could soon result in big punitive tariffs. (previous post) This new series of attacks against such higher tech companies could quickly become a major obstacle for China as it tries to move away from its traditional strength as a low-end manufacturing powerhouse to higher-tech products that command bigger profit margins and rely less heavily on the cheap labor. From the perspective of Huawei and ZTE, equally worrisome is the prospect that the US and Europe could soon turn their attention to the companies’ smartphone units, which they are aggressively building up as a less controversial alternative to their traditional networking equipment businesses. If the EU believes the 2 companies’ networking equipment business is unfairly subsidized, it should logically believe the same is true for their cellphones. At the end of the day, I suspect there is some truth to the anti-dumping and possibly even the security concerns, which Chinese companies will need to address if they really want to become global players. At the same time, however, I do believe that much of this activity also represents foreign rivals’ attempts to stop encroachment into their home markets by Chinese firms — a reality that Huawei, ZTE and other aspiring Chinese high-tech firms will have to learn to deal with more effectively if they really want to become top global players.

Bottom line: An EU anti-dumping probe against Huawei and ZTE is the latest move by their global rivals to try and keep them out of lucrative Western markets.

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