Written by Stephen Morgan.

Big Chinese companies face tough scrutiny when they go overseas. None in the past year has had it tougher than the telecom giants Huawei and ZTE Corp, ranked globally the second and fifth largest telecom equipment firms in the world. Huawei in particular has copped it badly.

Politicians in Australia, Europe and the USA have accused Huawei of being an agent of Chinese security services, their equipment alleged to harbor secret backdoors that allow stealth entry into government and corporate networks. It was blocked last year from competing for a slice of Australia’s national high-speed network and ruled out as a supplier of telecom gear for US government networks.

Winning the contract for New Zealand’s 4G network earlier in May was a nice bit of positive new. Huawei’s CEO Ren Zhengfei used the occasion to make a rare foray into the media, defending his US$35 billion company as never having been involved in cyber-security issues.

Bad news, though, has followed quickly enough. The EU is now to investigate Huawei for violating anti-dumping and anti-subsidy rules in Europe’s telecom market. This case has been simmering in the background for a year or more.  But EU’s competition czar, Trade Commissioner Karel De Gucht, has decided to act .

The case is somewhat unusual. The EU is launching the matter ex-officio, that is, as executive action rather than in response to a complaint from a company or group of firms. They had warned last year they might do so. What is intriguing is that EU officials have singularly failed this past year to convince any of the major European telecom firms to join in the action. They are scared. Ericsson – the world’s largest maker of telecom equipment – has publically opposed the move.

So what’s the story here? The European firms might still have the technology edge (for the immediate future) and a huge bagful of patents, but the Chinese firms have the process manufacturing capability to tie the pieces together better than their European rivals. Increasingly, they also have the business capability to deliver viable technology packages for customers, such as the firms building the new 4G mobile networks.

The latter is the real rub for the EU competition czars. They see recent business success as a product of cheap capital from government sovereign funds or quasi-commercial lending institutions that allow Huawei and ZTE to out bid their European (and American) rivals. And there is probably a little truth in that:  Huawei has captured 25% of the European telecoms market.

But some of Europe’s large firms have similarly benefited in the past when competing for projects around the world. France’s EDF (Électricité de France S.A.) became the largest electricity utility firm in the world when it was still a state-owned firm from using cheap state funds to gobble up many of Europe’s electricity utilities that were privatized over the past two or more decades.

The EU’s threats against Huawei and ZTE have many historical similarities to the US threats against Japanese firms in the 1980s. American firms then found it hard to compete again the price and quality of Japanese cars, electronics and other consumer products. And US congressmen demanded action – and staged stunts such as smashing up a Japanese car with sledgehammers.

But one sees in the European response a little more subtlety. Huawei and ZTE may well be singled out as a device to force China to agree to a wide range of trade and investment agreements. China after all is the EU’s second largest trading partner after the USA; Europe would like to attract more Chinese money looking for a home abroad.

But if trade and investment is to deepen, something must be done to resolve the many EU-China trade disputes on the table. Picking on the telecom giants might be part of a larger game plan to pressure China for concessions as well as trying to sure up flagging EU businesses in the face of China’s rise. China is pushing back however with its own threat of action again European firms. And the likes of Ericsson must be a little worried about what it all means for them in trying to get a slice of the contracts for China’s new super-fast networks that Huawei and ZTE will undoubtedly have the inside running.

Professor Stephen L. Morgan is Dean of Social Sciences at the University of Nottingham Ningbo China and Professor of Chinese Economic History at the School of Contemporary Chinese Studies.