US bans American companies from selling to Chinese phone maker ZTE

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.” —