RISK MANAGEMENT

ZTE's Troubles in the US Underline Importance of Compliance as the China-US Trade War Heats Up

The US's ban on Hong Kong-listed Chinese telecom supplier ZTE from buying parts and software from American firms for seven years highlights the hyper-sensitive compliance challenges that foreign competitors, particularly technology companies from mainland China, now face in the United States.  

Earlier this week, the US Department of Commerce announced the decision, saying that ZTE violated export regulations and made false statements to the US government.

The US had fined ZTE US$1.19 billion for shipping telecoms equipment to Iran and North Korea, which are under global sanction for technology exports. The company agreed to a settlement and promised to reprimand staffers involved in the illegal activities. But according to Secretary of Commerce Wilbur L. Ross, Jr., ZTE did not discipline the people involved and in fact awarded them bonuses. 

In a statement, ZTE said it is "assessing the full range of potential implications" of the US action and is "communicating with relevant parties proactively in order to respond accordingly." Trading in ZTE shares remains suspended in Hong Kong and the company has delayed the release of its quarterly earnings report. 

Huawei too

Another major Chinese telecom equipment maker, Huawei, has also been at the receiving end of negative action in the US. Huawei has been largely blocked out of the US market as US lawmakers discourage firms from buying Huawei equipment on grounds of national security.

Both ZTE and Huawei have been accused of making telecommunications equipment that poses national security threats, a US House Intelligence Committee report said in 2012.

Last month, US telecom carrier AT&T abandoned Huawei-branded smart phones under national security pressure from the US government. Best Buy, a major electronics stores in the country, also said it will no longer sell Huawei’s smartphones.

The firm now plans to refocus on existing markets after setbacks in the US, one of Huawei’s three rotating CEOs Eric Xu was quoted as saying in a Wall Street Journal report.

Tit-for-tat

ZTE arguably caused its own troubles, but it could eventually be hurt by US moves against Chinese companies anyway. The US Federal Communications Commission has just passed a measure barring wireless carriers in the US from using government subsidies to buy equipment from Chinese manufacturers. According to the Wall Street Journal, the office of the US Trade Representative is also considering retaliation for Chinese restrictions on American companies that provide cloud-computing services to the Chinese market.

China’s Ministry of Commerce responded to the ban by saying that it will take necessary measures to protect the interests of Chinese companies. The ministry added that ZTE has worked with many US firms, having contributed to job creation in the US.

Anti-trust regulators in China appear to be upping the ante by expressing "hard to resolve" concerns regarding a planned US$44-billion acquisition of NXP Semiconductors by US company Qualcomm, which derives the majority of its revenues in China. Qualcomm has already secured permission from eight other major anti-trust regulators in Europe and elsewhere. 

Fight for 5G

ZTE and Huawei are positioning to become global leaders in 5G mobile Internet networks, the next-generation technology that would allow much faster downloading of data than current 4G technology. ZTE is more vulnerable than Huawei because the US ban will cut off its access to US-made components that are needed for telecom networks. ZTE might not be able to install Google Apps, including those widely used ones such as Gmail, Google Drive, YouTube, and Maps, on its Andriod smartphones as a result of the current ban.

Gao Feng, spokesman for China's Commerce Ministry, has weighed in on the US ban on ZTE. "The action targets China," he said on April 19. "However, it will ultimately undermine the US itself." 

 

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