Israel Avoids Trade Wars, but Keeps Chinese and Russia Tech Companies at Arm’s Length

Unofficial ban prevents China’s Huawei and ZTE and Russia’s Kaspersky from supplying products for critical infrastructure

File photo: A visitor passes the Kaspersky Lab pavilion at the CeBIT 2017 tech fair in Hannover, Germany, on Tuesday, March 21, 2017.
Bloomberg

Israel has sought to stay neutral in the trade war U.S. President Donald Trump is waging against China, in particular its technology ambitions, and hasn’t formally joined in Western boycotts against Russian companies.

But behind the scenes, conversations with industry figures make clear that Israel has an undeclared policy not to use equipment made by Huawei and ZTE, two major Chinese companies, in telecoms networks – although they can and do sell end-user equipment like smartphones. Likewise, the Russian cybersecurity and anti-virus provider Kaspersky Lab has been kept at arm’s length.

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“It’s well known, something very basic, that even though you will never see it written in any document, critical equipment used in operating telecoms networks and no key supplier will ever get approval to buy from a Chinese company,” said the CEO of an Israeli cellular company, who asked not to be identified.

“For peripheral equipment like antennas they won’t bother you, but there’s usually a compatibility problem with the core technologies, so we don’t buy antennas either. It’s common knowledge and no one challenges it. I have tested it when we order new equipment,” he said.

Several weeks ago Pelephone, the cellular subsidiary of Bezeq, Israel’s biggest telco, reportedly instructed Allot, which supplies its anti-virus software, to remove Kaspersky products from its suite. Pelephone declined to comment on the issue or say whether the decision was taken independently or because the government told it to.

Western countries have become much more wary about using Russian and especially Chinese equipment out of concern their governments use it to spy on users.

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Australia, last month, barred Huawei and ZTE from bidding on next-generation 5G cellular contracts. In February, six U.S. law enforcement and intelligence agencies warned the American public about using the two companies’ products. Britain’s cyber-security watchdog urged telecommunications companies not to deal with ZTE, citing “potential risks” to national security.

In Israel, the situation is more complicated. No Chinese company has ever won a contract to supply network equipment to an Israeli telco provider. Even though Chinese prices are relatively low, the European companies Nokia and Ericsson have always been awarded the work.

On the other hand, a Hong Kong company, Hutchison, controlled the Israeli mobile company Partner Communications. Huawei and ZTE both sell smartphones and other end-user equipment in Israel, although ZTE has never been a major player and Huawei has only a 3% market share. (It has changed importers and is now trying to boost that.)

Ironically, some of the Chinese technology that Israel discourages companies from using was developed in Israel. Huawei bought the Israeli startup Toga networks for $150 million two years ago and turned into a 200-person research and development center. The same year it also bought the Israeli cybersecurity company HexaTier for $40 million.

Israel has never sought to loudly impose a ban on Chinese equipment because it values the Israel-China relationship too much. Last year, China accounted for 8% of all Israeli exports, or 11.5 billion shekels ($3.2 billion at current exchange rates) while importing 23 billion shekels of Chinese goods.

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Prime Minister Benjamin Netanyahu has visited China twice in recent years and is encouraging trade and investment, especially in high-tech. Israel has six economic attaches to the country. The only public sign that Israel might be cracking down on Chinese investments were remarks last July by Avi Simhon, Netanyahu’s economic adviser, about plans to monitor foreign investment, which was understood to be mainly Chinese foreign investment.

The informal ban that there is enforced by the Shin Bet security service. Although formally, it’s the Communications Ministry that awards companies telecoms licenses, the Shin Bet also can quietly grant or withhold a license.

That is reported what the upstart cellular company Xfone learned back in 2011. The company announced it was be seeking 3G frequencies in a joint venture that would be 10% each owned by India’s Tata and China’s ZTE. ZTE, it was understood, was taking the stake in order to win contracts to supply Xfone with equipment.

What happened next was never made public, but the two companies were dropped from then joint venture. Reports had it that Xfone’s controling shareholder, Hezi Bezalel, was informed by the Shin Bet that the two companies would not be allowed to be shareholders. Bezalel declined to comment.

Kaspersky has also been in Western crosshairs, A year ago, the U.S. Department of Homeland Security barred federal agencies from using its products. The New York Times reported that the ban came after Israeli intelligence discovered that Russia government hackers were using Kaspersky’s worldwide customer base of 400 users to spy on U.S. intelligence.

Despite that Kaspersky products are still widely used in Israel; the market research firm STKI says it’s the No. 4 supplier of anti-virus software in the local market. Last year, Kaspersky opened a Jerusalem R&D center.

However, an ex-Shin Bet official told TheMarker that the company’s products were barred in certain applications. “It’s pretty sensitive, but Kaspersky isn’t found and doesn’t bid in tenders in certain places,” he said, referring to a few score companies deemed to play a critical role in national infrastructure. He declined to name them.

In response, Kaspersky said, “In order to stick to the facts, Kapersky Labs invites any organization in Israel to contact the appropriate authorities and to check whether there is any impediment in the installation of Kaspersky Lab [products].”