The U.S. government is seeking oversight of network-equipment purchases as a condition for approving Softbank Corp.'s 9984.TO +1.29%$20 billion acquisition of U.S. phone carrier Sprint Nextel Corp., S +1.99%a move that appears to be aimed at keeping out Chinese suppliers like Huawei Technologies Co., people familiar with the matter said.

U.S. treatment of those suppliers has inflamed tensions between the U.S. and China, which are already sparring over accusations of computer hacking and trade issues. After the House intelligence committee concluded in October that Huawei and Chinese rival ZTE Corp. 000063.SZ -0.26%pose national-security risks because their equipment could be used for spying, China's Commerce Ministry lashed out, saying the report violated the U.S.'s free-market principles and warning it could undermine cooperation between the countries.

Negotiations are continuing on the U.S.'s conditions for blessing the Sprint deal, but the government is expected to require the companies to notify it when they plan to buy equipment for the core of their network and to cooperate if any national-security or public-safety considerations arise, the people familiar with the matter said.

Because of concerns about violating trade rules, any constraints wouldn't specifically exclude gear from Huawei, which Softbank has used in its home market of Japan, or ZTE, a person familiar with the process said. Nor would they explicitly give the government a veto, this person said. But U.S. officials have made no secret of their distrust of the Chinese companies and are aiming to make sure their equipment doesn't become a core part of U.S. telecom infrastructure, the people said.

"You have to find a way to say, 'Don't buy from the Chinese,' without saying, 'Don't buy from the Chinese,' " said a person who has spoken with Sprint.

Sprint and Softbank both declined to comment Wednesday. In interviews when their deal was announced in October, chief executives at both companies acknowledged U.S. concerns about Chinese suppliers.

Both companies are willing to forgo use of Huawei and ZTE gear in the core of their U.S. network, said the person who has spoken with Sprint.

Huawei and ZTE have repeatedly denied they would let the Chinese government use their gear for surveillance. Huawei spokesman William Plummer said all vendors rely on global supply chains, and the company's products are used in nearly 150 markets, including almost every country in Europe.

"The adoption of such a policy would seem little more than a market-distorting political or protectionist exercise," Mr. Plummer said, referring to a review of equipment purchases that could exclude Huawei.

"It's a pity that U.S. carriers cannot use our equipment," said ZTE spokesman David Dai Shu. "We realize that the situation is complicated, but we are trying to prove that ZTE's equipment is safe and poses no threat to U.S. security."

U.S. carriers are concerned that their options are shrinking as the Western telecom-equipment industry struggles. Huawei is the world's second-largest telecom-equipment provider behind Sweden's Ericsson, ERIC-B.SK -0.25%and ZTE is the sixth, according to technology-research firm IDC.

Much of the rest of the industry is under stress, with Alcatel-Lucent SA ALU.FR +2.05%of France burning through cash and Nokia NOK1V.HE +0.79%Siemens SI +0.27%Networks having cut nearly a quarter of its workforce to stay competitive. Nokia Siemens Networks is a joint venture of Finland's Nokia Corp. and Germany's Siemens AG.

Huawei, which grew quickly by being a low-cost supplier, is now outspending most of its rivals on research and development, making it increasingly competitive on the technology front. While smaller U.S. operators such as Leap Wireless International Inc. LEAP +1.04%use the Chinese company's equipment, the U.S. government has waved off major U.S. carriers.

In 2010, then-Commerce Secretary Gary Locke warned Sprint away from awarding Huawei part of a contract worth billions of dollars. Mr. Locke called Sprint CEO Dan Hesse directly to remind him of the U.S. government's security concerns, people familiar with the matter said at the time.

Now, U.S. officials are using this latest round of consolidation in the telecom industry to formalize their oversight of such deals.

The negotiations between Sprint, Softbank and the government are part of the national-security review required when a foreign company tries to buy control of a U.S. company.

Deutsche Telekom AG's DTE.XE +0.74%T-Mobile USA unit and MetroPCS Communications Inc. PCS +3.66%went through the process earlier when seeking approval for their merger. When the Federal Communications Commission approved that deal in March, the companies agreed to give the departments of Justice and Homeland Security 30 days notice before using a new vendor for network equipment. They also agreed to work out any national-security concerns the departments raise.

An FCC official said the language was requested by the departments of Justice and Homeland Security. The two departments declined to comment.

The FCC reviews all deals involving wireless carriers. But in cases involving a foreign buyer, the review is widened to a group including representatives of the departments of Justice, Defense and Homeland Security and the Federal Bureau of Investigation.

Such deals also must be cleared by the Committee on Foreign Investment in the U.S., or Cfius, a secretive panel headed up by the Treasury. Analysts expect the government to approve Softbank's deal to take control of Sprint.

"We would be compliant with the policy of the U.S. government," Softbank CEO Masayoshi Son said in an October interview when asked about using Huawei gear. He added that more than 90% of the company's total capital spending involves suppliers other than Huawei and ZTE.

A Treasury spokeswoman declined to comment, citing the confidentiality around Cfius cases.

The merged company also will likely have to create a subsidiary that handles Sprint's classified work for the government and agree to allow inspections of company facilities, isolate foreigners from certain sensitive parts of the network and require certain employee screenings, said people familiar with Cfius reviews.

The growing sensitivity toward Chinese equipment was evident in a little-noticed addition to a government-funding law signed Tuesday, in which Congress effectively banned federal dollars from being spent on information technology from companies "owned, directed or subsidized by the People's Republic of China."

At a daily press briefing on Thursday, Chinese Foreign Ministry spokesman Hong Lei urged the U.S. "to abandon this approach."

"The law uses Internet security as an excuse and discriminates against Chinese firms," Mr. Hong said. "This doesn't help mutual trust between the U.S. and China, and interferes in the trade and economic relationship between the two countries."

One issue for Sprint and Softbank is that Clearwire Corp., CLWR -0.51%a wireless company that Sprint is in the process of acquiring, uses some Huawei radio base stations to transmit phone calls and data.

Clearwire Chief Technology Officer John Saw said Huawei accounts for a small part of Clearwire's infrastructure, the company is reducing its use of Huawei gear and that every LTE base station will be tested to for security weaknesses and threats. "It is important to point out that there are no longer any domestic suppliers for radio base station infrastructure equipment," he said. "Clearwire is committed to ensuring that our network and our customers' data are secure."

By: DocMemory
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