US bans Amer­i­can com­pa­nies from sell­ing to Chi­nese phone maker ZTE

Business World - - THE WORLD -

LON­DON/NEW YORK — The US Depart­ment of Com­merce has banned Amer­i­can com­pa­nies from sell­ing com­po­nents to Chi­nese tele­com equip­ment maker ZTE Corp. for seven years af­ter break­ing an agree­ment reached af­ter it was caught il­le­gally ship­ping goods to Iran, US of­fi­cials said on Mon­day.

The US ac­tion, first re­ported by Reuters, could be dev­as­tat­ing to ZTE since Amer­i­can com­pa­nies are es­ti­mated to pro­vide 2530% of the com­po­nents used in ZTE’s equip­ment, which in­cludes smart­phones and gear to build telecom­mu­ni­ca­tions net­works.

The ban is the re­sult of ZTE’s fail­ure to com­ply with an agree­ment with the US gov­ern­ment af­ter it pleaded guilty last year in fed­eral court in Texas to con­spir­ing to vi­o­late US sanc­tions by il­le­gally ship­ping US goods and tech­nol­ogy to Iran, the Com­merce depart­ment said.

The Chi­nese com­pany, which sells smart­phones in the United States, paid $890 mil­lion in fines and penal­ties, with an ad­di­tional penalty of $300 mil­lion that could be im­posed.

“If the com­pany is not able to re­solve it, they may very well be put out of busi­ness by this. Many banks and com­pa­nies even out­side the US are not go­ing to want to deal with them,” said Eric Hirschhorn, a for­mer US un­der­sec­re­tary of com­merce who was heav­ily in­volved in the case.

As part of the deal, Shen­zhen­based ZTE Corp. promised to dis­miss four se­nior em­ploy­ees and dis­ci­pline 35 oth­ers by ei­ther re­duc­ing their bonuses or rep­ri­mand­ing them, se­nior Com­merce Depart­ment of­fi­cials told Reuters. But the Chi­nese com­pany ad­mit­ted in March that while it had fired the four se­nior em­ploy­ees, it had not dis­ci­plined or re­duced bonuses to the 35 oth­ers.

ZTE, whose Hong Kong and Shen­zhen shares were sus­pended on Tues­day, said it was as­sess­ing the im­pli­ca­tions of the US de­ci­sion and was com­mu­ni­cat­ing with “rel­e­vant par­ties.”

The Com­merce depart­ment or­der quoted a ZTE of­fi­cial’s let­ter ad­mit­ting it “had not ex­e­cuted in full” some dis­ci­plinary mea­sures and that there were “in­ac­cu­ra­cies” in a 2017 let­ter. But, the or­der said, ZTE “ar­gued that it would have been ir­ra­tional for ZTE to know­ingly or in­ten­tion­ally mis­lead the US gov­ern­ment in light of the se­ri­ous­ness of the sus­pended sanc­tions.”

Un­der terms of the ban, US com­pa­nies can­not ex­port pro­hib­ited goods, such as chip sets, di­rectly to ZTE or via an­other coun­try, be­gin­ning im­me­di­ately.

Shares of big US ZTE sup­pli­ers fell sharply on the Com­merce ban. Op­ti­cal net­work­ing equip­ment maker Aca­cia Com­mu­ni­ca­tions Inc., which got 30% of its to­tal 2017 rev­enue from ZTE, tum­bled 35%, hit­ting a near two-year low. Aca­cia said it was sus­pend­ing af­fected transactions and as­sess­ing the im­pact.

Shares of op­ti­cal com­po­nent com­pa­nies in­clud­ing Lu­men­tum Hold­ings Inc. fell 8.9% and Fin­isar Corp. dropped 4.0%. Oclaro Inc., which got 18% of its fis­cal 2017 rev­enue from ZTE, lost 14.1%.

Dou­glas Ja­cob­son, an ex­ports con­trol lawyer who rep­re­sents sup­pli­ers to ZTE, called the ban highly un­usual and said it would se­verely af­fect the com­pany.

“This will be dev­as­tat­ing to the com­pany, given their reliance on US prod­ucts and soft­ware,” said Mr. Ja­cob­son. “It’s cer­tainly go­ing to make it very dif­fi­cult for them to pro­duce and will have a po­ten­tially sig­nif­i­cant short- and long-term neg­a­tive im­pact on the com­pany.” —

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