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Sweden Warns EU Probe Against Huawei, ZTE Could Backfire

By Sven Grundberg Of DOW JONES NEWSWIRES STOCKHOLM -(Dow Jones)- Sweden's trade minister warned Tuesday that a planned probe by the European Commission into illegal state subsidies received by Chinese wireless network vendors risks backfiring against the European wireless network industry. Ewa Bjorling said EU officials informed European Union member states at a private meeting in Brussels last week that it had evidence that Huawei Technologies Co. and ZTE Corp. (0763.HK) have been benefiting from government subsidies. She fears Brussels could introduce tariffs against Huawei and ZTE for allegedly dumping wireless network equipment in the Europe at below cost, triggering retaliatory moves that could harm Swedish network equipment maker Ericsson (ERIC). "While Chinese companies' share of the EU's wireless equipment market is 30%, one has to remember that the EU's share of China's wireless equipment market is 45%. So if China were to hit us back with similar measures, it would hurt us more than what it would hurt them," she said. The European Commission declined to comment on the matter, but European officials have in the past alleged that subsidies are given to a broad range of Chinese companies. They include cheap credit from state-owned banks, tax breaks and generous research grants. Bjorling said it's likely the commission is correct in its criticism of Chinese state subsidies, but maintains a better way to counter them would be for the EU to take part in ongoing discussions between China and the U.S. about guidelines for state supported export-credit financing and innovations. Bjorling has sent letters to EU Trade Commissioner Karel De Gucht and discussed the matter with other EU ministerial colleagues and says she's not alone in her criticism. She noted that the EU commission has been acting on its own initiative in this matter, without having received any request for action from EU member countries or European companies. Ericsson and its European peers Paris-based Alcatel-Lucent (ALU) and Nokia-Siemens Networks, a joint venture between Nokia Corp. (NOK) and Siemens AG (SI), have all seen their profit margins squeezed by competition from China's Huawei and ZTE, who have grown with break-neck speed to become global suppliers of telecommunications equipment and services. Nokia-Siemens, which announced plans in November to cut 17,000 jobs through 2013, is in the worst shape of the three European firms. But Alcatel-Lucent in February said it may cut 1,800 jobs, and Ericsson, still the leader in the sector, reported that its first quarter gross margin fell to 33.3% from 38.5%, as it reported lower sales of network equipment and services. Neither company returned calls requesting comment for this article. Ulf Persson, who heads government and industry relations at Ericsson, said earlier this week that the company is opposed to plans by the commission to bring forward a case and potentially introduce tariffs against Chinese wireless network firms. "Ericsson is a strong supporter of free trade and we don't believe in this type of unilateral measures," he said, adding that EU faces the risk of initiating "a negative spiral" by targeting individual Chinese firms. China's fast-growing market is increasingly important for Europe's biggest corporations, making them fearful that asking the EU publicly for trade protection could provoke a backlash from Chinese authorities. The fears range from having acquisitions or business projects in the country blocked to seeing their shipments held up by Chinese customs authorities. In a recent interview EU trade commissioner Karel De Gucht told The Wall Street Journal that the commission is following a number of cases and considering whether or not to take action. He declined to discuss the China situation specifically, but said it was important to protect the European interest. "We will not accept governments putting pressure on our companies," he said. -By Sven Grundberg, Dow Jones Newswires; +46-8-5451-3098; sven.grundberg@dowjones.com; Twitter: @svengrundberg Matthew Dalton in Brussels also contributed to this story.

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