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October 16, 2012

China's ZTE Sells Subsidiary that Sparked U.S. Gov't Security Concerns

By Tracey E. Schelmetic, TMCnet Contributor

China's second largest telecommunications equipment maker, ZTE (News - Alert) Corp., has reportedly sold a subsidiary that sells surveillance systems. The timing of the sale is interesting, as ZTE is currently under fire by the U.S. government over cyber security concerns.

ZTE made a decision to sell the subsidiary, ZTEsec, in late September; at the same time a U.S. Congressional committee began investigation into ZTE and its local rival Huawei (News - Alert) Technologies Co Ltd.

The Congressional committee chose to block Huawei and ZTE from doing business in the U.S.

ZTE, based in Shenzhen, has reported in a regulatory filing that it sold its 68-percent stake in ZTEsec to 10 Chinese investment companies including Shenzhen Capital Group Co Ltd.

Reuters is reporting this week that the Congressional committee's report, published on October 8, concludes that it "cannot allay concerns that ZTE is aligned with Chinese military and intelligence activities or research institutes." For its part, ZTE has denied any such links. ZTEsec’s primary business is selling surveillance equipment to governments and law enforcement agencies. The subsidiary’s website lists Chinese military and police interests and telecom carriers as its key customers.

ZTE, which sold its stake in ZTEsec for between 360 million yuan and 440 million yuan ($57 million to $70 million), said selling the subsidiary would allow ZTE to "focus its resources on its principal businesses in line with the requirements of its strategic development,” said the company.

An investigation conducted by Reuters (News - Alert) earlier this year found that ZTE had sold to Iran's largest telecommunications firm a powerful surveillance system capable of monitoring landline, mobile and Internet communications.

Edited by Braden Becker
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