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Nortel: Casualty of Outsourcing or Cyber Espionage?

The polemic over outsourcing manufacturing to China received plenty of attention after the final presidential debate. But while this issue may weigh heavily on Americans who are out of work, its impact was even more profound on North American telecom equipment company, Nortel, who went bankrupt in 2009, perhaps due to its contract manufacturer, Huawei.

The claim that many Canadians are making, including Nortel's former senior systems security adviser Brian Shields, is that Huawei used cyber espionage to steal core technologies and business strategies to drive Nortel out of world markets.

But where was the real downfall? If Huawei really did steal corporate secrets, was Nortel's mistake in outsourcing to this particular Chinese manufacturer? Or was it instead its decision to outsource at all?

History suggests the latter, as Nortel seems to follow the same path as American television companies took in the 1960s.

In 1960, RCA, the creator of broadcast and color television and the leader among the 29 American television companies, decided to outsource manufacturing to unknown Japanese companies. Among them was a little known outfit named Sony, which, like other Japanese manufacturers, used the cash flow and engineering experience from the US to eventually take over the market.

Now Nortel, like RCA and the 28 other American television companies, is no longer in business as China takes a page out of Japan's playbook. Soon, Japanese manufacturers may face the same fate of their long-gone American counterparts.

For Nortel, the problem began in the 1980s, when new executives came from business backgrounds instead of manufacturing. Despite high quality and low costs in North American factories, executives elected to spin off the dirty jobs to manufacturing contractors overseas.

But the outsourcing didn't stop there – much of the engineering went to Huawei along with the manufacturing, which may shed light on how hackers were able to break into Nortel's corporate network. Engineers could have included backdoors through which their company could access Nortel's designs and marketing plans.

The US House Intelligence Committee investigated Nortel's claims, many of which Huawei failed to refute. The committee strongly recommends that US companies avoid doing business with Huawei, but due to concerns with similar companies and their ties to the Chinese government, perhaps a stricter warning should have been made.

Full story at Assembly Magazine


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