U S -China Economic and Security Review Commission Staff Report January 2011 information current as of November 2010 THE NATIONAL SECURITY IMPLICATIONS OF INVESTMENTS AND PRODUCTS FROM THE PEOPLE'S REPUBLIC OF CHINA IN THE TELECOMMUNICATIONS SECTOR by USCC Research Staff supported by Reperi LLC 1 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 2 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 o The nature of changes in the U S telecommunications supply chains and the impacts on U S national security o The technological trends in telecommunications and related technologies o 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 o The nature of the People's Republic of China's direct and indirect ownership control and influence in the U S telecommunications supply chain o The penetration of the U S marketplace by companies subject to ownership control or influence by the People's Republic of China o 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 o The trends in the marketplace that can be attributed to the influence of China's ubiquitous presence in U S supply chains o 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 o The potential vulnerabilities of critical elements of the U S telecommunications market exploitable by actors in supply chain segments o The assessment of potential cyber security impacts o The means of assessing telecommunications and supply chain vulnerabilities o The impacts of present and emerging vulnerabilities on U S defense contractors and government procurement functions 3 TABLE OF CONTENTS INTRODUCTION SECTION 1 MACRO-LEVEL PATTERNS OF CHINA'S TELECOM INVESTMENT ACTIVITIES o o o o o o o o o o o o o o o o o o o o o o o Text Box Telecommunications as a Strategic Industry in China Global Telecommunication Market Trends in 2008-2009 CHINESE TELECOM COMPANIES ENTER THE U S MARKET China Developer and Provider within China and Global Exporter of Wireless and Next Generation Networks Huawei Technologies Text Box European Controversies over Alleged State Support to Huawei Figure 1 Huawei Technologies Offices in North America Text Box Controversies Surrounding the Activities of Huawei Recent Unconsummated Huawei Deals and Potential Deals on the Horizon Text Box Concerns Regarding Potential Network Penetration by PRC Intelligence Agencies ZTE Corporation The Role of Huawei and ZTE in the U S Market Text Box Examples of U S Market Penetration by Chinese Telecom Companies The Major Chinese Domestic Telecom Corporations Text Box State-Directed Personnel Shuffling and Restructuring At PRC Telecom Corporations HUAWEI AND 3-COM A CLASSIC EXAMPLE OF CHINA'S FORAYS INTO THE U S MARKET VIA JOINT VENTURE AND ACQUISITION Text Box A Timeline History of 3Com DEALS IN THE TELECOM SECTOR AND THE ROLE OF CFIUS Text Box CFIUS and the Abortive Emcore Caofeidian Deal Figure 2 Location of Caofeidian Island Figure 3 Artist Conception of Caofeidian Island THE GROWTH STRATEGY OF CHINESE TELECOM FIRMS EXPANSION INTO DEVELOPING MARKETS THE EAST-WEST FLOW OF INVESTMENTS IN THE COMMUNICATIONS SECTOR SECTION 2 POTENTIAL VULNERABILITIES IN COMMUNICATIONS INFRASTRUCTURE AND PRODUCTS AND CHINESE INVESTMENTS IN THESE SECTORS o o o o o o o INVESTMENTS IN LONG-HAUL FIBER Text Box The Security of Optical Fiber Networks and the Case of Global Crossing and Hutchison-Whampoa Figure 4 Global Crossing Networks in 2010 ROUTERS SWITCHES AND HUBS WiMAX WiFi - NETWORK AND NETWORK CONTROL DEVICES AND PROTOCOLS FOR WIRELESS NETWORKING Text Box Huawei and the Development of LTE Standards APPLICATIONS SOFTWARE Software Controllers Drivers 6 9 10 11 12 13 13 15 15 19 20 21 23 23 24 27 28 29 30 31 32 32 33 34 36 39 39 40 41 42 44 45 46 4 o o o o o o o o o o o o o o NETWORK SECURITY PRODUCTS Security Software Text Box The Creation of Huawei Symantec HANDSETS AND SMART PHONES Figure 5 A T-Mobile UK Pulse Smartphone with Huawei Android Technology HANDSETS AND SMART PHONES POTENTIAL VULNERABILITIES Text Box The Debate Over Open vs Closed Standards WIRELESS HEADSETS EARPIECES AND BLUETOOTH Bluetooth Potential Vulnerabilities Text Box Switching Equipment and Other Networking Services - The Nortel Story Table 1 Where China's Products Are Found in the U S Communications Market Table 2 Where China's Investments Are Found in the U S Communications Market Figure 6 Sample Integrated Operational Network Model Healthy Figure 7 Sample Integrated Operational Network Model Corrupted Figure 8 Sample Integrated Operational Network Model Disabled SECTION 3 SUPPLY CHAIN INTEGRITY AND THE IMPACT ON GOVERNMENT DEFENSE CONTRACTING o o o o o o o o o Text Box Supply Chain Integrity and Cyber Security Text Box Chinese Cyber Espionage Directed vs the United States CONTROL OF MANUFACTURING PROCESSES Text Box Lenovo's Entry into the U S Computer Market and Controversies Surrounding its Government Sales MICROCHIP MANUFACTURING Key Cyber Security and National Security Risks Text Box The Defense Science Board Task Force 2005 Report on High-Performance Microchip Supply Text Box Recent Cases Involving Counterfeited Computer Equipment from China TESTING OF INTEGRATED CIRCUITS Kill Switches and Backdoors CONCLUSIONS RECOMMENDATIONS o o o o o o SUPPLY CHAIN SECURITY AND POTENTIAL IMPACTS ON GOVERNMENT CONTRACTING FOR SENSITIVE SYSTEMS RESPONSES TO SUPPLY CHAIN CHALLENGES THE CHESS GAME OF STANDARDS - THE NEW METHODS FOR OWNING SUPPLY CHAINS INNOVATION IN AMERICA AND THE SHORTAGE OF MATHEMATICIANS SCIENTISTS AND ENGINEERS Table 3 Computer Science and Engineering Bachelor's Degree Enrollments in the United States 1980-2005 PRODUCT CONTROL ISSUES IN GOVERNMENT COMMUNICATIONS SYSTEMS 46 47 48 49 49 50 54 54 54 57 58 59 60 61 62 63 65 65 66 68 69 71 72 74 75 75 76 77 78 80 80 APPENDICES o o o Appendix A What Is a Cyber Attack Appendix B Glossary Appendix C Partial Bibliography 82 85 93 5 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 6 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 7 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 8 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 strategy 10 of overseas expansion - are directly subject to direction by the Chinese Communist Party CCP to include support for PRC state policies and goals 11 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 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 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 9 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 1 Armaments 2 Power Generation and Distribution 3 Oil and Petrochemicals 4 Telecommunications 5 Coal 6 Civil Aviation 7 Shipping Heavyweight Industries 1 Machinery 2 Automobiles 3 Information Technology 4 Construction 5 Iron and Steel 6 Nonferrous Metals 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 17 Accenture Consulting China Spreads Its Wings Chinese Companies Go Global 2007 http www accenture com NR rdonlyres 1F79806F-E076-4CD7-8B743BAFBAC58943 0 6341_chn_spreads_wings_final8 pdf 10 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 11 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 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 21 WiMAX Worldwide Interoperability for Microwave Access What is WiMAX WiMAX com http www wimax com education 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 24 Bruce 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 12 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 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 st China Technology and Telecom Sector M A Report 1 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 13 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 EUR20 $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 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 35 14 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 15 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 16 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 17 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 th st Minority Interest in 3Com by Affiliates of Huawei 110 Cong 1 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 o 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 o 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 o 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 o 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 o What contracts with the Department of Defense DOD and the IC does Sprint Nextel have o Does Huawei currently supply companies with U S government contracts If so what are they o 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 o 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 o Have U S -based employees of Huawei been granted security clearances by the U S government for access to classified information 18 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 4546 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 o Please describe in detail any export licenses currently in review or approved in the past five years between any U S firm and Huawei o 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 19 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 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 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 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 20 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 21 Another major player in the Chinese networking market is ZTE Corporation Zhongxing Tongxun Gufen Youxian Gongsi 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 million 78 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 As Chinese products achieve greater acceptability 73 ZTE- Corporate information http zte com cn 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 http ezproxy library nyu edu 2076 us lnacademic results docview docview do docLinkInd true risb 21_T96643512 10 format GNBFI sort RELEVANCE startDocNo 1 resultsUrlKey 29_T9664351222 cisb 22_T9664351221 tre eMax true treeWidth 0 csi 7955 docNo 7 78 Company Description ZTE Corporation Hoovers Inc July 1 2010 79 ZTE Corporation http wwwen zte com cn en about corporate_information 74 22 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 5456 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 o o 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 wireless 85 in the United States 80 Huawei to Add Hundreds of Tech Jobs Texas Business Journal May 1 2009 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 nd core router business and that Huawei is currently the 2 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 81 23 o o o 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 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 86 24 China Mobile China Mobile Ltd Zhongguo Yidong Tongxin - 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 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 Considered one of the top three state-backed telecommunications companies in 94 China Mobile Limited Operation Data http www chinamobileltd com about php menu 1 Bruce Einhorn China Mobile Is Counting on Android Business Week August 20 2009 http www businessweek com globalbiz content aug2009 gb20090820_505265 htm 96 nd New York Times China Mobile's 2 Quarter Profit Slips August 21 2009 http ezproxy library nyu edu 2076 us lnacademic results docview docview do docLinkInd true risb 21_T97696080 77 format GNBFI sort RELEVANCE startDocNo 1 resultsUrlKey 29_T9769608080 cisb 22_T9769608079 tre 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 http ezproxy library nyu edu 2076 us lnacademic results docview docview do docLinkInd true risb 21_T97707883 95 25 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 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 In recent years it has formed strategic alliances with such companies as 63 format GNBFI sort RELEVANCE startDocNo 1 resultsUrlKey 29_T9770788366 cisb 22_T9770788365 tre eMax true treeWidth 0 csi 11314 docNo 2 103 Toh Han Shih China Telecom Expects Earnings Rebound South China Morning Post Hong Kong March 23 2010 http ezproxy library nyu edu 2076 us lnacademic results docview docview do docLinkInd true risb 21_T97705640 60 format GNBFI sort RELEVANCE startDocNo 1 resultsUrlKey 29_T9770564065 cisb 22_T9770564064 tre eMax true treeWidth 0 csi 11314 docNo 9 104 Business Company Resource Center China Telecom Corporation Ltd http ezproxy library nyu edu 2081 servlet BCRC vrsn unknown locID nysl_me_nyuniv srchtp glbc cc 2 c 1 m ode c ste 74 tbst tsCM tab 4 ccmp China Telecom Corporation Ltd mst china telecom n 25 docNum I2 501151876 bConts 9023 104 Economist '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 26 Spanish telecommunications operator Telefonica 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 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 115 108 Kevin O'Brien Telefonica and China Unicom Deepen Links International Herald Tribune September 7 2009 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 109 27 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 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 116 Kathrin Hille China Mobile in Board Shake Up Financial Times May 31 2010 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 120 Texas Instruments press release TI Completes Sale of Sensor Control Business to Bain Capital April 26 2006 117 28 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 o o o o o o o o o o 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 -- 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 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 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 29 o o o o 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 30 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 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 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 31 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 a state-owned investment bank based in Caofeidian The bank is involved in private equity investment direct investment consulting and financial advisory services 138 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 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 Tangshan Caofeidian Infrastructure Construction Dynamic Management Platform Tangshan Caofeidian Jichu Sheshi Jianshe Dongtai Guanli Pingtai Company Introduction Translation by USCC staff http www cfdjt com Integration ProjectIntro aspx 138 Daily Economic News Mei Ri Jingji Xinwen National Development Bank Goes Through Tangshan Caofeidian to March into City Development Guojia Kaifa Yinhang Jiedao Tangshan Caofeidian Zhijie Jinjun Chengshi Kaifa 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 National Development Bank Goes Through Tangshan Caofeidian to March into City Development Guojia Kaifa Yinhang Jiedao Tangshan Caofeidian Zhijie Jinjun Chengshi Kaifa March 10 2010 Translation by USCC staff http finance ce cn rolling 201003 10 t20100310_15590232 shtml 137 32 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 This may have driven much of 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 249 142 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 33 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 2830 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 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 151 34 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 153 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 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 155 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 May 25 2006 http www chinadaily com cn world 2006-05 25 content_600127 htm 156 David 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 157 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 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 35 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 161 Dow 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 161 Chinmei 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 162 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 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 164 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 165 Wall Street Journal China Ready to Place Bets on Hedge Funds June 19 2009 36 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 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 167 37 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 38 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 39 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 parts 179 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 Source Global Crossing com Hutchison Whampoa Company Logo 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 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 177 40 Europe 180 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 Figure 4 Global Crossing Networks in 2010 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 To date Hutchison Whampoa is the largest company traded on the Hong Kong Stock Exchange with a 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 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 41 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 42 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 190 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 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 43 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 194 China Daily China's telecom sector gets 3G licenses January 7 2009 http www chinadaily com cn bizchina 2009-01 07 content_7375721 htm 195 China Daily China's telecoms sector gets 3G licenses January 7 2009 http www chinadaily com cn bizchina 2009-01 07 content_7375721 htm 44 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 Standards 199 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 196 Kaiser Kuo China's 4G Master Plan February 26 2008 http digitalwatch ogilvy com cn en p 205 Kaiser 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 197 45 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 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 204 Analysis provided to the Commission by Reperi LLC AllBusiness Com Qualcomm China TechFaith Create Wireless Company March 27 2009 206 Symantec 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 205 46 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 210 Network World Invisible IPv6 Traffic Poses Serious Network Threat July 13 2009 47 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 211 Firoze 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 48 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 botnets 214 to SMiShing SMS phishing to battery draining 215 the wireless handset is one of the latest and most favored vectors for 213 Kit Eaton Lenovo Wants in on Smartphone Biz Acquiring Palm Could be the Ticket Fast Company April 19 2010 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 49 cyber attack Viewing SMiShing 216 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-a-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 50 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 According to reports Global System for Mobile Communications GSM 222 Reperi LLC information technology and telecommunications security research supported variously by other sources 223 Elinor 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 225 Elinor 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 51 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 These vulnerabilities in cell phones can be easily exploited with a computer access to a WiFi network 227 Robert McMillan Some SMS Networks Vulnerable to Attack July 28 2009 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 83011009_3-10222921-83 html 230 Elinor Mills SMS Messages Could Be Used to Hijack a Phone April 19 2009 http news cnet com 83011009_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 232 Vivian Yeo Chinese Firms Behind 'Sexy Space' Trojan July 22 2009 http news cnet com 8301-1009_310292917-83 html 233 Vivian Yeo Chinese Firms Behind 'Sexy Space' Trojan July 22 2009 http news cnet com 8301-1009_310292917-83 html 234 Vivian Yeo Chinese Firms Behind 'Sexy Space' Trojan July 22 2009 http news cnet com 8301-1009_310292917-83 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 239 David Kravets iPhone Jailbreaking Could Crash Cellphone Towers Apple Claims Wired com July 28 2009 http www wired com threatlevel 2009 07 jailbreak 52 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 240 Joan 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 53 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 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 243 Nortel com website Nortel History http www nortel com corporate corptime index html 54 -- In 2004 Nortel and China Putian Corporation 244 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 bankruptcy 247 - 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 Press release on the Nortel com website http www nortel com corporate news newsreleases 2005a 01_20_05_china_putian html 246 Nortel 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 245 55 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 56 TABLE 1 WHERE CHINA'S PRODUCTS ARE FOUND IN THE U S COMMUNICATIONS MARKET WHAT IT IS PRODUCT ZTE EV-DO Modem USB WHO MAKES IT MANUFACTURER ZTE relabeled by Verizon and other companies ZTE Smartphones 3G 4G with Qwerty keyboards LTE devices ZTE USA planned partnership with Verizon Wireless 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 Huawei - Provider to T-Mobile - in Europe - working on a deal for U S Base Station and equipment for HSDPA highspeed downlink packet access Patent for WiMAX wireless patents Huawei E583 X Modem 3G Network Equipment LTE Ready Nokia Siemens Network Nokia parent company and Huawei - patent deal 3G to WiFi Huawei Huawei WHAT IT IS USED FOR AND WHAT IT CAN DO Connecting wirelessly to 3G GSM EDGE and HSDPA High-Speed Downlink Packet Access Competes with other wireless handset providers PRESENT OR FUTURE USE Compatible with wireless networks like Verizon AT T SOURCE engadgetmobil e com Competes with Apple Blackberry RIM Motorola and other handset providers Nokia Ericsson and Samsung 3G CDMA mobile handset software applications fiercewireless c om 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 Deal covers standards relating to GSM WCDMA CDMA optical networking datacom and WiMAX Deployment in cellular GSM and wireless networks provides access to data packets Network World Standards control telecoms com It is what T-Mobile and other network providers would like to offer 4G and 3G networks - wireless Cox wireless network Mobile network connectivity for individual users Deployment in U S cities CNET SlashGear Operating software for CDMA mobile handsets http www techfaithwireles s com english products pro ducts_ApplicationSoftware htm Electronics News 03 27 2008 Wall Street Journal Network World 57 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 Fiber routes Fixed line telecommunications Internet fiber optic international cable Web hosting Undersea cable traffic to U S Hutchison Whampoa Joint venture with Global Crossing 253 50 50 Total both partners $1 2 billion Hutchison Whampoa - Singapore Telecom STT Assets of Global Crossing Asian 254 Crossing Huawei Bain Capital Partners and Huawei jointly Acquisition attempt 51 49 percent majority in Huawei 3-Com H3C 3-Com later bought out the 255 joint venture 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 Cox Com Huawei LTE and wireless base stations Leap Wireless Cricket Huawei CDMA EV-DO networking products Huawei CDMA2000 network with 1xEV-DO Rev A capable BTS base transceiver WHAT IT DOES CAN DO Provide international telecom transport - network monitoring INVESTMENT AMOUNT DATE SOURCE Aggregate joint venture value of $1 2 billion 2000 Highbeam c om Hutchison Whampoa Press Release Carry traffic between U S Asia Europe and some continental U S routes Wireless data traffic transport $250 Million Deal went forward with Singapore Telecom Only 2002 SEC 10K Unknown 2003 2007 Press Releases Undisclosed 2009 Wall Street Journal Undisclosed 2009 EETimes Asia Com Routers for DOD and federal government Broadband communicatio ns Wireless broadband modems routers Broadband data transmission 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 58 Clearwire investors Intel Sprint Nextel Google Verizon Huawei ZTE station The solutions will include Huawei's SoftX3000Softswitch Air Bridge BSC6600 UMG8900Universal Media Gateway and high-capacity BTS 3606 WiMAX 4G networks WiMAX base stations LTE USB modems High-speed broadband wireless Undisclosed 2009 Wall Street Journal Data Comm Unknown 2007 Newswire Figure 6 Sample Integrated Operational Network Model Healthy 59 Figure 7 Sample Integrated Operational Network Model Corrupted Ill'l'ElilIll'l'Ell NETWORK Battle eld Point Battle eld Point A Use BackhauIJOptional Bandwidth 80216-2004 4-6 Miles a- i tha Base Station 8358 Station f 5 Command and Control ange I Center 802 119 Router er r WiMax CPE Wi-Fi Wireless PC I Wireless LAN Switch 3 Wi Fi Access Point Ethernet Switch Wl-Fi Wireless Phone I ll ii wm Mreless 44' Phone Deskto PC's Sq I 51 Fiber Optic i 3 WiMax CPE W119 WiMax OPE - Ops Srte ata Center Wi-Fi Wireless Phone Ops Site A z 302-119 i W're ss LAN Mess Point W're'ess 162004 7 502' was Wireless PC 0 5 Wireless PC Router Wi-Fi Access Point Ethamel Emu Ethernet Switch 7L7 Wireleen Router TalernedicinolErnergency Triage Center Copyright 2007 Repen' LLC all rights reserved 60 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 61 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 o o o 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 62 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 o o o 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 o o 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 CBS News 60 Minutes Cyber War Sabotaging the System November 8 2009 http www cbsnews com stories 2009 11 06 60minutes main5555565 shtml 259 63 o o 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 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 263 House 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 261 64 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 65 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 The company grew steadily over the last decade 268 Reperi - General conclusion from the Defense Science Board Task Force on High-Performance Microchips Supply February 2005 pp 29-32 269 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 66 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 272 Kevin 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 67 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 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 280 68 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 Gosler 284 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 69 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 70 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 71 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 72 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 o 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 o 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 o 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 73 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 74 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 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 305 Reperi internal research on trends in the global communications supply chain 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 306 75 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 76 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 o o o 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 309 David 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 77 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 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 310 Thomson Reuters 2008 Global Innovation Study March 24 2009 http science thomsonreuters com press 2009 innovation_study 78 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 arts 312 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 311 Michael 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 79 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 o o o 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 80 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 81 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 82 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 attack 320and 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 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 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-15minutes html 83 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 361 322 Stephen 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 84 APPENDIX B GLOSSARY GLOSSARY 1G 2G 3G 4G ANDROID ASIC BACKBONE BACKDOOR BASIS-OFTRADE BBP BLUETOOTH BRIC Analog cellular wireless -- in essence the first generation of cellular wireless standards introduced in 1981 Digital cellular wireless the second generation of cellular wireless standards introduced in 1992 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 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 Google's operating system for mobile devices Application-Specific Integrated Circuit 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 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 Relative trade or import export strengths and weaknesses a nation or other entity has in relation to others and the marketplace in general A phone's Baseband Processor - the processor chipset that is designed to process signals for the telephone handset or system 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 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 85 BROADBAND CDMA2000 CFIUS CHIPSETS CIC CNA CNCI CND CNE CNO CONUS CPU CYBER SECURITY DATACOM DDOS DNS DRAM DSL 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 An Internet connection with a much larger capacity than dial-up or ISDN typically greater than 200 kilobits per second 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 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 A set of specialized chips in a system's main peripheral or expansion circuitry China Investment Corporation headquartered in Beijing http www chinainv cn cicen 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 Comprehensive National Cybersecurity Initiative http www whitehouse gov cybersecurity comprehensive-nationalcybersecurity-initiative Computer Network Defense - The use of computer networks to protect monitor analyze detect and respond to unauthorized activity within information systems and computer networks Computer Network Exploitation - Enabling operations and intelligence collection through computer networks to gather data from target systems or networks Computer Network Operations - encompasses Computer Network Attack CNA Computer Network Defense CND and Computer Network Exploitation CNE 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 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 Security against electronic attacks such as cyber warfare and other forms of hostile CNO Data Communications 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 Domain Name Server Dynamic random access memory - a type of random access memory that stores each bit of data in a separate capacitor within an integrated circuit A family of technologies that provides digital data transmission over the wires 86 DSP EDGE ELECTROOPTICAL ESSENTIAL PATENTS ETHERNET EV-DO FAR FIB FIREWALL FREQUENCY DIVISION FREQUENCYHOPPING SPREADSPECTRUM FTP GPS GSE GSM HACKER HOTSPOT 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 Digital signal processing--a specialized microprocessor with an architecture optimized for digital signal processing 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 Pertaining to effects of an electric field on the optical properties of a material 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 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 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 The U S government's Federal Acquisition Regulation - the principal set of rules in the Federal Acquisition Regulation System Focused-Ion-Beam Part of a system or network designed to block unauthorized access while permitting authorized communications Frequency-Division Duplexing FDD means that the transmitter and receiver operate at different carrier frequencies 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 File Transfer Protocol - A standard Internet protocol implemented in FTP server and client software and most web browsers to transfer data reliably and efficiently The U S Global Positioning System 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 Global System for Mobile Communications - a wireless mobile telephone standard in use broadly on a worldwide basis 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 A physical site that offers Internet access over a wireless local area network 87 HSDPA HTTP HUB IC IDS IEEE INFOCON INTERNET IP ADDRESS IP TELEPHONY IPS IPV4 Hotspots are typically based on WiFi technology High-Speed Downlink Packet Access Hypertext Transfer Protocol - The message format and exchange standard used by web browsers and web servers 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 Integrated Circuit 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 Institute of Electrical and Electronics Engineers 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 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 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 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 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 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 88 IPV6 ISP IW IXP JAILBREAKING LAN LAST-MILE LEGACY LMR LTE MACRO LEVEL MICROCHIP MIIT MOTHERBOARD 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 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 128 38 32-bit address IPv6's new address space supports 2 about 3 4x10 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 Internet Service Provider 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 Internet Exchange Point IX or IXP - a physical infrastructure through which Internet service providers exchange Internet traffic between their networks 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 Local Area Network - an interconnection of computers that are in relatively close proximity to one another such as within a building The last mile or last kilometer is the final leg of delivering connectivity from a communications provider to a customer Systems or applications that continue to be used beyond intended service life because users do not want to replace or redesign them 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 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 Characterizes societies or systems as a whole rather than parts meso- or microlevels 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 The Ministry of Industry and Information Technology of the People's Republic of China http www miit gov cn The main or central circuit board in modern computers that holds many crucial system components and provides connectors for other accessory system 89 MPU NBA NIPRNET NODE OBEX OCONUS OUTSOURCING PBX PHOTODETECTOR PROGRAMMABLE LOGIC ARRAY RENMINBI RMB REPEATER RFC ROOTKIT ROUTER SAFE SERVICE FOOTPRINT SMART PHONES components and peripherals Microprocessor Unit - a term occasionally used to describe a CPU Central Processor Unit Network Behavioral Analysis - intrusion detection systems that detect and model network traffic to discern and analyze violations of known benign activities 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 Typically the individual devices or computers on a network 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 Outside of the geographic boundary of the contiguous 48 states of the United States In essence the opposite of CONUS Transfer of a potentially internal business function to an external service provider 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 Any device used to detect electromagnetic radiation Programmable devices used to implement combinational logic circuits The renminbi is the official physical currency of the People's Republic of China whose principal unit of account is the yuan JPY 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 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 Request for Comments an IETF Internet Engineering Task Force memorandum on Internet systems and standards 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 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 The State Administration of Foreign Exchange SAFE a Chinese government body that manages China's foreign exchange reserves http www safe gov cn An area of services coverage Typically the geographic area within which a service may be provided 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 90 SMS SPYWARE SRAM STRUCTURED ASIC SUPPLY CHAIN SWITCHES TIME DIVISION TROJAN USB UV WAN WCDMA WiFi WiMAX WIRELESS CHARGING WORM YUAN 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 Malware intended to be installed on a user's system to surreptitiously collect incremental information about users 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 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 Systems of organizations people technology activities information and resources involved in moving products or services from suppliers to customers users 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 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 Non-self-replicating malware that appears to perform desirable functions for users but instead facilitates unauthorized access to user computer systems Universal Serial Bus - a serial bus standard for connecting devices Ultraviolet 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 Wideband Code Division Multiple Access UMTS-FDD UTRA-FDD or IMT2000 CDMA Direct Spread - a wireless interface standard in 3G mobile telecommunications networks A wireless local area network model based on the IEEE 802 11 standards and the most widely used WLAN technology today 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 Inductive Charging - a technology using the electromagnetic fields to transfer energy between objects Self-replicating malware computer programs that use computer networks to potentially automatically autonomously and or surreptitiously send copies of themselves to other nodes systems A cause of some confusion a yuan 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 may also be used in some circumstances to refer to the currency units of Japan and Korea and also to 91 ZERO-DAY translate the currency unit of a dollar relative to yuan 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business worldbusiness 21iht3com 1 10258216 html Whelan Carolyn China's New Frontier Fortune June 25 2009 CNNMoney com http money cnn com 2009 06 23 technology china_telecom_latin_america fortune index htm Wilson Richard China Goes for 4G LTE in a Big Way Electronicsweekly com July 29 2009 http www electronicsweekly com Articles 2009 07 29 46620 china-goes-for-4glte-in-a-big-way htm WiMAX Worldwide Interoperability for Microwave Access What is WiMAX WiMAX com http www wimax com education XChange Huawei 'It' Vendor 2010 January 8 2010 http www von com articles 2010 01 huawei-it-vendor-of-2010 aspx Xiaobei Cheng How to Stimulate Domestic Consumption China Today February 25 2009 http www chinatoday com cn ctenglish se txt 2009-02 25 content_180244 htm Xiaohong Ouyang China's Sovereign Wealth Fund Favors Real Economy Economic Observer March 2 2009 http www eeo com cn ens finance_investment 2009 03 06 131432 shtml Yeo Vivian Chinese Firms Behind 'Sexy Space' Trojan CNet com July 22 2009 http news cnet com 8301-1009_3-10292917-83 html Zachary G Pascal See No Evil - How American businesses collaborate with China's repressive government ThirdWorldTraveler com November 2005 http www thirdworldtraveler com Transnational_corps See_No_Evil_China html 102 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 Universitat 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 103 This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu