Verizon dropping plans to sell phones from China's Huawei: sources

[NEW YORK] Verizon Communications has dropped all plans to sell phones by Chinese manufacturer Huawei Technologies, including the new Mate 10 Pro, under pressure from the US government, according to people familiar with the matter.

The move follows AT&T's decision earlier this month not to introduce the Mate 10 Pro to the US market. Huawei devices still work on both companies' networks, but direct sales would've allowed them to reach more consumers than they can through third parties.

The government's renewed concern about Chinese spying is creating a potential roadblock in the race between Verizon and AT&T to offer 5G, the next generation of super-fast mobile service. Huawei is pushing to be among the first to offer 5G-capable phone, but the device may be considered off-limits to U.S. carriers who are beginning to offer the next-generation service this year in a few cities.

5G networks are expected to be used in everything from phones to self-driving cars and artificial intelligence. U.S. security agencies and some lawmakers fear that 5G phones made by companies that may have close ties to the Chinese government could pose a security risk.

The perceived threat has prompted the Trump administration to consider plans to not just keep Chinese equipment off the network, but also to nationalize the construction of a 5G system like the U.S. did with interstate highways in the 1950s. The idea was roundly blasted by industry leaders and lawmakers from both parties on Monday.

"Your phone is the ultimate Trojan horse," said Roger Entner, an analyst with Recon Analytics LLC. "If someone has control of your phone, they can do a lot with it. In a nightmare scenario, they can turn on the microphone or the camera and, - if you working for a defense contractor or chipmaker - they can obtain sensitive info." Huawei and Verizon declined to comment.

Read more: U.S. bid to build 5G network opposed by FCC, industry Phones are just the latest lightning rod for a much broader conflict between the U.S. and China that dates back more than a decade.

Huawei came under U.S. scrutiny in 2003, when Cisco Systems Inc. sued its China-based rival, accusing it of stealing software code for its network routers. Huawei denied the charges and pulled some products. The company went on to dominate networking gear sales in China and is now the world's top networking equipment supplier, even though it has made nearly zero inroads in the U.S.

The incident fed perceptions that companies in China have certain advantages over the U.S. because of government support, cheap labor and a loose regard for intellectual-property rights. Huawei has spent the past decade fighting those perceptions in an effort to gain access to U.S. market.

Under Pressure Huawei makes both handsets and network equipment. No major American carrier uses equipment from Huawei or another Chinese manufacturer, ZTE Corp., in its network. But Verizon, AT&T and smaller carriers T-Mobile US Inc. and Sprint Corp. all have been selling phones from the two suppliers in the U.S. for several years.

ZTE plans to introduce a 5G-capable device in the U.S. at year-end or in early 2019, Lixin Cheng, chief executive officer of the company's mobile-device business, told Bloomberg News this month. Thus far, ZTE hasn't met the same level of pushback from the U.S. government as Huawei has.

AT&T's decision not to carry the Mate 10 Pro came amid political pressure and just weeks after regulators received a letter urging an investigation into China-made equipment. The Mate 10 Pro, which is aimed at being a direct rival to Apple Inc. and Samsung Electronics Co., is expected to have 5G versions available by 2019, according to a person familiar with the plans.

Huawei, China's largest maker of telecommunications equipment, was founded in 1988 by former Chinese army officer Ren Zhengfei. Speaking at a CES event earlier this month, Richard Yu, Huawei's consumer products chief, defended his company's record. "We serve 170 countries, and for 30 years we've proven our quality and we've proven our privacy and security protection," Yu said.

Too Slow Trump's national security team looked for ways to to accelerate the deployment of American 5G networks, "apparently concluding that the current deployment plans are too slow and too limited for national security purposes," Blair Levin, a policy adviser to New Street Research, wrote in a note.

White House Press Secretary Sarah Sanders said at Monday's briefing that discussions about a national 5G network are at an early stage and that no decision has been reached.

The plan's chances of success are "are significantly below 50 percent," in part due to industry opposition, Levin said.

Any such national effort would make U.S. 5G leadership not just an economic goal, but also a national security objective, creating "a potentially powerful new dimension to the 5G debate, perhaps with unforeseen consequences," Paul Gallant, a Washington-based analyst with Cowen & Co., said in an note. Carriers may need to reshape their message to show how they support national security, Gallant said.

Probe Sought U.S. lawmakers in December asked Federal Communications Commission Chairman Ajit Pai to begin an investigation of Huawei's plans to sell consumer gear in the U.S., according to text of a congressional letter obtained by Bloomberg News. The text cited concerns from intelligence committees in Congress, and didn't list which lawmakers signed the letter. Tina Pelkey, an FCC spokeswoman, declined to comment on whether such a probe had begun.

In 2012, Huawei and ZTE landed on a blacklist. The House Intelligence Committee urged U.S. companies to steer clear of the Chinese manufacturers on concerns that the government in Beijing could install malicious hardware or software. Huawei suffered one of its biggest setbacks when it was the subject of two policy-recommendation letters that labeled the company a spy threat. The charges cost Huawei a contract to sell equipment to Sprint.

Since then, the spying accusations have continued from both sides.

In 2013, as the U.S. was raising concerns about possible China-sponsored cyber-espionage, National Security Agency contractor Edward Snowden leaked information about the U.S. government's own campaign. The Snowden leak pointed to spy work the U.S. was doing on Huawei and surveillance on foreign citizens.

In the wake of Snowden's revelations, Cisco came under fire from state-run media outlets when its internet equipment in China was singled out as a potential security threat. An editorial in the Global Times newspaper urged Chinese companies to buy from domestic technology companies.

BLOOMBERG