Huawei, ZTE in the Eye of a Trade Storm

Leaked disclosures about a probe into possible Iran transactions by Huawei clearly show that China's big two telecom vendors are in the eye of the US-China trade storm.

A week after ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) was penalised for breaching penalties imposed for sanctions violations, Huawei Technologies Co. Ltd. is now reported to be under investigation by the FBI and two other US government agencies regarding illicit sales to Iran. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

Quoting an unnamed source, Bloomberg said the criminal inquiry by the DoJ grew out of the earlier ZTE sanctions case.

The Treasury Department's sanction unit, Office of Foreign Assets Control (OFAC), and the Department of Commerce are investigating Huawei's transactions. (See US Investigating Huawei for Sanctions Violations – Report.)

The report says the FBI and OFAC investigations have been underway "since at least early 2017."

Huawei appears to be the company referred to in ZTE documents as a rival firm also selling gear to Iran.

If charged with wrongdoing, Huawei could face a hefty financial penalty and most likely other sanctions.

ZTE accepted a $892 million fine in 2017 for repeated breaches of sanctions against Iran.

But the Commerce Department has now banned the firm from importing US components after finding ZTE had failed to take appropriate steps. Among other things, it appears to have promoted executives who were responsible for the illicit sales.

The embargo effectively halts ZTE's production lines, leaving the state-owned vendor in "shock," according to chairman Yin Yimin.

In a statement issued yesterday, ZTE hinted at possible legal action against the Commerce Department, declaring it would "take certain actions available" to it under US law.

But while China's two biggest electronics exporters might be the target of the US agencies, they are not the ultimate objective.

These trade blows are part of a belated attempt by the US to push back against China's state-driven, quasi-protectionist industry policies, where local champions are subsidised and foreign companies are forced to transfer technologies.

Telecom executives point to the still-closed $190 billion services market, a breach of China’s 2001 WTO commitments.

It may be an astute move by Washington to leverage China's reliance on foreign chips. Last year, the country imported $260 billion in semiconductors -- more than it spent on oil -- and exported just $93 billion worth of chips.

The US side may be hoping this all plays out in the same way as its efforts to tame North Korea -- a few wild punches thrown, followed by talks.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

But the clock is running for the Trump administration, which, unlike Chinese leaders, faces an election at the end of the year. If the embargo on ZTE remains, its suppliers in the US look certain to let the world know as they shutter plants and lay off staff.

The timing of the news about the 16-month-old Huawei probe is also designed to add to the pressure on Beijing negotiators. A Huawei spokesman said there was no confirmation of an investigation.

For all the brave talk in China about building up its own chip sector, Beijing will no doubt be willing to make concessions to ensure ZTE's factories are supplied -- but are they going to change the way they manage their economy?

China has a good deal of leverage of its own: Market access, purchasing power, and its role in the center of the US supply chain. The factories supplying Apple may find themselves closed down for a couple of weeks.

As Tom Holland, an economics commentator for the South China Morning Post, writes: "Washington's attempts to get China to open its markets and adopt international best practices are likely to achieve exactly the opposite. Instead of scrapping subsidies and opening up, Beijing will double down on centrally planned mercantilism."

This is uncertain, uncharted territory for all parties.

— Robert Clark, contributing editor, special to Light Reading

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mendyk 4/28/2018 | 8:14:06 AM
Re: Would that it were, but it ain't Thanks, Iain. Your graciousness is exceeded only by your commitment to accuracy.
iainmorris 4/27/2018 | 2:11:08 PM
Re: Would that it were, but it ain't Give it up, Dennis. We'll let you off for not realising there were elections this year.
mendyk 4/27/2018 | 9:09:00 AM
Re: Would that it were, but it ain't Any party elected to office is going to tailor its decisions to a pending election, regardless of which branch specifically is facing the voters. -- Normally, yes. We are far past normal. But back to the original point: All that was needed was a quick edit for accuracy. It's too bad your editor wouldn't help you out with that.
R Clark 4/27/2018 | 4:56:36 AM
Re: Would that it were, but it ain't Any party elected to office is going to tailor its decisions to a pending election, regardless of which branch specifically is facing the voters.

Interesting point that the ZTE components ban may not hit US electronics jobs, but China has other points of leverage. Beijing responded to the steel and aluminium tariffs by targeting Boeing and soybeans, so its next move may not involve electronics at all. That said, Qualcomm lobbyists are likely putting in long hours right now.

mrblobby 4/27/2018 | 12:57:10 AM
Re: No US jobs will be lost over this OK, let me change that to "no net US job losses after a transition period of a few months".
Joe Stanganelli 4/26/2018 | 6:06:08 PM
Re: Would that it were, but it ain't @mendyk: True enough, but they are typically seen as a pseudo-referendum, in part, on White House approval. And, of course, in this particular case, a shift in Congressional majority could pave the way toward impeachment.

That said, this article does seem to overstate it. The Administration faces the election insofar as the results will have implications for the President, his policies, etc. -- but it's not the President's own election, which is the intuitive way to read the way the article phrases it IMHO.

*I* know what he's talking about, *you* know what he's talking about, and *he* knows what he's talking about. But I don't think it's pedantic, as Iain indicates, to suggest that it was a little confusingly put.
DanJones 4/26/2018 | 3:33:47 PM
Re: No US jobs will be lost over this No US Jobs? Really?
DanJones 4/26/2018 | 3:31:42 PM
Re: Would that it were, but it ain't t sould be more accurate to say it could stymie the Trump administration in significant ways. i.e. See the way that a Republican house hampered the Obama administration.

Losing the house didn't kill Obama's presidency though.


Besides, Trump has a lot of power around trade, especially if national security is invoked, witness the decree that blocked Broadcom from buying Qualcomm.
James_B_Crawshaw 4/26/2018 | 2:51:41 PM
Re: Would that it were, but it ain't Oi, you leave the house of lords out of it! You'll be attacking the Queen's corgis next. Grrr
mendyk 4/26/2018 | 2:40:58 PM
Re: Would that it were, but it ain't It seems that fact-checking has been outsourced to CNN. Good move.
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