ZTE Faced with Major Global Complications Following U.S. Export Restrictions
On April 16, the U.S. Department of Commerce implemented a seven-year ban on U.S. companies from exporting to Chinese telecommunications equipment manufacturer ZTE, effectively crippling the company’s ability to obtain critical product components from U.S. manufacturers.
The new restrictions were imposed after U.S. authorities determined that ZTE violated the terms of a 2017 settlement regarding criminal and civil charges for illegal shipments to Iran and North Korea of U.S. telecommunications equipment. A ban on the company’s export privileges resulted from false claims made by the company that it would implement a new compliance program and hold key executives accountable for these sanctions violations. Instead, ZTE actually rewarded the responsible individuals for their violations.
U.S. components account for approximately 10–15 percent of ZTE’s critical high-end materials. The newly implemented ban creates a number of market complications for ZTE’s commercial operations:
- ZTE had the trading of its shares suspended on both the Hong Kong and Shenzhen exchanges;
- ZTE could face similar market disruptions from international suppliers out of fear of reputational damage and possibly even penalties from US authorities;
- ZTE may no longer have access to key intellectual property licenses (potentially restricting it from components of the Android Operating System as well as 3G and 4G technologies); and
- in 2017, ZTE relied on Qualcomm for some 65 percent of its phone shipments that have now been suspended.
ZTE’s U.S.-based component suppliers have also faced some negative blowback from these new U.S. sanctions. The share prices of key ZTE suppliers, such as Acacia Communications, Inc. (ZTE accounts for 30% of its total revenue) and Oclaro, Inc. (18% of its revenues) fell by 34.7 percent and 18 percent, respectively. The United States is ZTE’s biggest consumer market (approximately 11.2% of total U.S. market share).
Simultaneously, the UK’s National Cyber Security Center (NCSC) a member of the UK’s communications intelligence agency, has warned UK telecommunications firms to avoid buying ZTE components for their telecom infrastructure. However, no tangible directives have been issued to address this issue beyond British Telecom’s assurances that it maintains no active commercial partnership with the company other than a few research initiatives. Notably, the UK continues to maintain close ties with ZTE competitor, Huawei — another telecommunications manufacturer with close ties to the Chinese intelligence community and PLA.