It’s Official: Cisco Dumps ZTE

ZTE Corporation, China’s second largest telecom equipment maker, has confirmed that its business arrangements with Cisco (NASDAQ:CSCO) have been cancelled. ZTE is accused of selling Cisco networking gear to a state-run telecom company in Iran. This news comes on the heel of probes that led the U.S. government to suggest that ZTE and Huawei, another Chinese telecom equipment maker, be shut out from the U.S. market due to security concerns.

Cisco began its partnership with ZTE in 2005 in order to compete with Huawei, which was winning in emerging markets by offering products at a lower price point. The partnership began coming to a close in 2010 when ZTE wanted to bring products to the U.S. market, a move Cisco and other telecom companies in the country frowned upon.

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According to Reuters, a ZTE spokesperson said, “ZTE is highly concerned with the matter and is communicating with Cisco. At the same time, ZTE is actively cooperating with the U.S. government about the probe to Iran. We believe it will be properly addressed.”

ZTE and Huawei don’t do a large amount of their business in the U.S., but their influence has been growing. Combined, they make up about 7 percent of the mobile phone hardware market, up 4 percent from 2011, with carrier partners including Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint (NYSE:S). Major security concerns arise out of fears that the Chinese government may influence the companies into selling bad or bugged networking hardware. The government is a major buyer of telecom equipment, and has been accused of cutting costs at the risk of security. Companies like Alcatel-Lucent (NYSE:ALU) and Ericsson (NASDAQ:ERIC) that compete in networking infrastructure could be breathing a sigh of relief.

The Wall Street Journal reported that Huawei reached out to investment banks regarding a possible IPO. The company is seeking avenues to increase transparency and gain the trust of the U.S. market. However, mounting concerns over the economic relationship between the U.S. and China may make this difficult. The presidential campaign has exacerbated business tensions and a slow economy is not welcoming to low-cost competitors.

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