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Huawei, ZTE face new hurdles to their U.S. phone ambitions

Will consumers or carriers shy away from their products now that a congressional panel considers the Chinese companies a security risk?

The U.S. Capitol, quiet on the outside, has seen a flurry of activity regarding Huawei and ZTE on the inside.
Shara Tibken/CNET

Congress just made Huawei and ZTE's goal of winning over U.S. consumers a whole lot tougher.

A report released by the House Intelligence Committee today claimed the two Chinese telecommunications manufacturers pose a risk to national security and urged U.S. companies to avoid working with them.

While the report deals mostly with the companies' large-scale networking equipment and corporate customers, the trickle-down effect on their consumer-facing handset businesses can't be good. Huawei and ZTE have long been dogged by concerns that they could snoop on companies and individuals, and today's report only solidified those fears. CNET visited Huawei in China to directly review the security concerns.

The report's release comes as Huawei and ZTE are working to build up their presence in the U.S. smartphone market. The companies have so far made small strides, initially breaking in through the lower end prepaid market and moving up to a few carrier-branded devices with the national wireless providers. Huawei, in particular, kicked off a get-to-know-you campaign over the summer, culminating in several commercials aired during the Olympics.

But accusations that the two companies pose a national security threat may stall any momentum Huawei and ZTE have built up over the past few years. Neither company is a household name, and the potential first impression left by today's report is even more damaging to their efforts.

"Brand awareness is a big deal and you don't want any negative association with your brand, suggesting that Huawei and ZTE may now have more stigma to overcome," said Mark Sue, an analyst at RBC Capital.

That's an big issue, given that neither Huawei nor ZTE can boast much U.S. market share. The two companies combined to make up 7 percent of the U.S. mobile phone market, small, but up from 4 percent a year ago, according to Strategy Analytics.

While Huawei has been more proactive about building its own brand image to date, ZTE has instead opted to lets its carrier partners do the marketing for its products.

Huawei, for its part, doesn't believe the "political distraction" of the report will affect its business in the U.S. The company still railed against the conclusions, which it said weren't based on reality and lacked specific evidence to back up the charges.

"Huawei is a world-trusted company with products globally proven to be secure. Those are the facts today and those will be the facts tomorrow," Bill Plummer, vice president of external affairs and the usual public face of the company in the U.S., told CNET. He added he doesn't believe the ruling will affect the consumer business.

CNET has contacted ZTE for a comment, and we'll update the story when the company responds.

William Power, an analyst at Robert W. Baird, said the lack of brand recognition in the U.S. may actually work in favor of these companies. The news may go over the heads of most consumers, and many of Huawei and ZTE's products don't carry their actual logos.

At the same time, these companies have dealt with the same concerns for years, and have continued to expand, said Strategy Analytics analyst Neil Mawston.

Still, it could have a negative effect on how readily the carriers will want to use either company.

"It's possible the U.S. carriers who support those handsets today could pull back on sales and support to avoid a potential negative stigma," Power said.

Huawei and ZTE already have a tough row to hoe with U.S. carriers. The wireless providers generally only want affordable, mass-market phones from the two Chinese vendors, so the handset makers have had little chance to shine with high-end flagship devices, despite showing off a few at conferences around the world.

The report does make clear that the concerns don't involve the consumer mobile device business, something U.S. Representative Mike Rogers (R-Mich.) reiterated today at a press conference hosted by the committee.

"We're not talking about handsets," Rogers said. "Only those devices that involve the processing of data on a large scale."

Unfortunately, the damage may have already been done.

Updated at 10:41 a.m. PT: to include additional data on Huawei and ZTE's combined market share.