BRUSSELS—The European Union is under pressure to curb the rapid growth of Chinese telecommunications-equipment makers, amid mounting complaints that they have seized a big chunk of Europe's market with goods that critics say are unfairly subsidized by Beijing.
European labor unions and a tech company say two firms that produce a range of telecommunications equipment, China's Huawei Technologies Co. and ZTE Corp., have suppressed prices thanks to government tax breaks, research grants and cheap loans from state-owned banks.
The allegations mark the latest European expressions of concern about China's growing muscle in industries from steel to green-energy technology to sophisticated telecommunications equipment. China has steadfastly denied charges that it unfairly subsidizes its industries, arguing that Europe's allegations are a cover for its own protectionism.
China's growing export domination will take center stage in meetings that begin Wednesday in Brussels between EU and Chinese officials and business leaders. But trade experts say little movement is likely from either side.
Beijing is expected to resist efforts to brake its companies' growth in the EU, China's biggest export market. "These subsidies are embedded in the Chinese economy and the way it operates for the last 20 to 30 years. They're not going to change just because the EU asks," says Duncan Freeman, senior research fellow at the Brussels Institute of Contemporary China Studies.
Europe's top telecommunications-equipment firms, meanwhile, are expected to resist open openly confronting the Chinese, whose market is vital to their own growth.
Less restrained are unions and a small EU-based company, which are raising a cry over Chinese companies' entry into increasingly sophisticated industries where they hadn't traditionally been major players.
"I have no problem when the Chinese produce toasters. We can give that away. Hair-dryers, OK. Vacuum cleaners, OK," said Peter Scherrer, General Secretary of the European Metalworkers' Federation, or EMF, which represents workers from European telecommunications-equipment makers. "But when it comes to very important industries, we should be much more aware."
The commission was responding to complaints by Option SA, a Belgian company that says its European market share shrank to 5% last year from 70% in 2006 in the face of competition from Huawei and ZTE.
Option's complaint alleges that Huawei and ZTE are both controlled by the Chinese government, giving them special access to a mix of tax breaks and large research grants. The companies also received cheap credit from two state-owned banks, China Development Bank and the Export and Import Bank of China, the complaint alleged.
Huawei, the complaint says, signed a cooperation agreement in September 2009 with the China Development Bank valued at $30 billion—above its 2009 revenue of $22 billion and the sort of funding line the complaint said wouldn't be extended in a market economy. It said the bank gave ZTE, with 2009 revenue of $8.4 billion, got a $15 billion credit line in March 2009.
The complaint says these and other financing deals were provided with favorable terms, including three-year moratoriums on interest payments.
Such terms, Option says, allow Chinese companies to sell wireless modems in Europe for as little as €20 ($27) each. Option would have to charge more than twice as much, it says, to earn a profit of 10% to 15% on its sales.
A person who answered the telephone at ZTE, which is majority-owned by the Chinese government, said a spokesman wouldn't be available to comment due to Chinese holidays this week.
Huawei isn't controlled by the Chinese government or military, according to Tim Watkins, Huawei's vice president for Western Europe. He said Huawei has beaten Option by anticipating a sharp rise in demand for the modems and providing superior service to large telecommunications firms.
"We were ahead of the curve in the developing the quality, function, speed and performance of these devices," Mr. Watkins said, adding that the official support Huawei receives is comparable to subsidies that other governments provide.
Complicating Option's complaint is the fact that it has a small factory in China that is part of the manufacturing process. Huawei says this calls into question whether Option's modems are even European; Option says only a small percentage of its products' value is added in China.
Labor unions are growing anxious about the same two companies in the far larger market for network infrastructure.
Three big European companies—Telefon AB L.M. Ericsson, Nokia Siemens Networks and Alcatel-Lucent—are increasingly losing out to the Huawei and ZTE in contracts to supply European telecommunications companies. China's share of the network-infrastructure market in Europe, the Middle East and Africa rose to 31% in 2010 from 12% in 2008, according to company figures compiled by the European metalworkers' federation.
The unions also say Huawei and ZTE benefit from unfair subsidies, but they aren't considering a complaint like Option's yet. They are asking the EU to push telecommunications companies to take workers' rights and environmental practices into account when purchasing equipment. They also say the EU should consider the security threats of allowing greater penetration of Chinese firms into the network-equipment market.
"The European trade commissioner needs to take a very strong stance against market penetration by Chinese players," said Caroline Jacobsson of the metalworkers' federation, after a meeting of union leaders from the three European companies last week. "It is worrying that the commission isn't more concerned about protecting jobs in this sector."
The EU trade commissioner's office says it has repeatedly discussed telecommunications issues with the Chinese government. "Telecommunications are a European cutting-edge technology, and it is exactly for that reason that we put particular emphasis on this," said John Clancy, spokesman for commissioner Karel De Gucht.
Unions fear a repeat of what happened to Option, which in 2006 was a leading global supplier of wireless wide area network, or WWAN, modems. Profits were strong.
"Then all of a sudden we were confronted with a brutal force," said Option chief executive Jan Callewaert.
That force was Huawei, which started making the modems in 2005. Huawei has since grown to be the world's second-largest telecommunications equipment maker after Ericsson and sells about half of the world's wireless modems. Option has since laid off two-thirds of its once 750-person work force.
Option executives witnessed the growing presence of Chinese firms a few months ago from the windows of their half-empty headquarters in Leuven, just outside Brussels. Belgacom SA, Option's network provider, replaced wireless Internet equipment on its property made by Nokia Siemens with gear from Huawei. "Our parking lot is packed with Huawei equipment," Mr. Callewaert said.
China's Ministry of Commerce responded angrily to the anti-dumping investigation the EU launched following Option's complaints, calling the move protectionist, counterproductive to the EU's economic recovery and harmful to China's interests.
The big three European network-equipment makers aren't likely to bring trade complaints any time soon. All three operate in China and want to maintain good relations with Beijing.
"We are as much a Chinese company or an Indian company as we are a Western European company," said Ben Roome, spokesman for Nokia-Siemens. "As a genuinely global company we look to make sure that competition is fair in all the countries we operate."
While Huawei and ZTE have made major inroads into the European market, the U.S. market remains largely shut. The reason is a U.S. law that allows the government to block foreign investment due to national security concerns.
Most recently, eight Republican senators raised concerns with the Obama administration about a Sprint Nextel contract for which Huawei was reportedly a bidder, citing the Chinese government's push to develop cyber-warfare capabilities.
—Loretta Chao and Jason Dean in Beijing contributed to this article.