US Bans Companies From Selling to Chinese Phone Maker ZTE

The United States has been sounding the alarm over the use of equipment from Chinese companies like Huawei and ZTE for several years now. The rationale behind these decisions hasn’t always been clear, but a new set of sanctions aimed at ZTE does have a public rationale behind it. Last year, the Chinese firm pled guilty to violating US sanctions by shipping goods and technology produced in the US to Iran. At the time, ZTE paid $890M in fines and penalties, with an additional $300M penalty that could be imposed. One of the key agreements was a seven-year suspended denial of export privileges, meaning that the penalty had already been incurred, but the US was willing not to enforce it if ZTE kept its nose clean in the future.

As part of its penalty, ZTE agreed to fire four senior employees and to discipline 35 others. In March, however, the company admitted that while it had fired the four employees, it had not disciplined or reduced bonuses to the other 35. When asked for additional information, the company admitted making false statements to the United States.

The letter from Secretary of Commerce Wilbur Ross lays out these findings, while the denial order itself notes:

Under the terms of the settlement, ZTE agreed to a record-high combined civil and criminal penalty of $1.19 billion, after engaging in a multi-year conspiracy to violate the U.S. trade embargo against Iran to obtain contracts to supply, build, operate, and maintain telecommunications networks in Iran using U.S.-origin equipment, and also illegally shipping telecommunications equipment to North Korea in violation of the Export Administration Regulations… ZTE also admitted to engaging in an elaborate scheme to hide the unlicensed transactions from the U.S. Government, by deleting, destroying, removing, or sanitizing materials and information.

ZTE’s position in the United States and its mindshare here are arguably outsized compared with its overall market share. Huawei and ZTE are generally known as major Chinese OEMs, but there’s a cavernous gap between the two. In 2017, ZTE reported total revenue of CN¥ 108.8 billion. Huawei’s revenue for the same period was CN¥604 billion.

But while ZTE isn’t the size of Huawei, the blanket ban on US companies selling it hardware is going to cripple the company’s product lines — and seriously affect some manufacturers in our own country as well. Qualcomm, after all, is a major US firm and a key smartphone supplier. Others, like Acacia Communications, have seen their stocks tumble on the news. Reuters reports that 34.7 percent of Acacia’s business came from ZTE. Other impacted companies include Lumentum Holdings, Finisair Corp, and Oclaro Inc, all of which do (or did) substantial business with ZTE. Altogether, US companies are thought to account for 25-30 percent of the components ZTE typically uses in a smartphone.

The findings could strain relations between Washington and Beijing further, during the opening salvos of what has all the markings of a trade war. On the one hand, ZTE is far from the largest Chinese telecommunications company, and the Chinese government might choose to overlook the findings — or it could argue that the penalties assessed against ZTE represent a further disrespect of China and its role on the international stage. But ZTE also seems to have been caught red-handed here — it was both selling equipment to Iran and North Korea in violation of US law and attempting to hide that fact when caught. This is a situation that could break in either direction and it’s not clear yet what the Chinese response will be.

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