ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'

ZTE hits back at US Dept. of Commerce's 'denial order' that bans US component firms from selling to the Chinese vendor for seven years, raises prospect of 'judicial measures' and questions its own survival.

April 20, 2018

4 Min Read
ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'

ZTE has hit back at the US Department of Commerce's 'denial order' that bans US component firms from selling to the Chinese vendor for seven years, calling the decision "unfair," saying it will "severely impact the survival and development of ZTE" and stating it could "take judicial measures to protect the legal rights and interests of our Company, our employees and our shareholders." (See ZTE Hits Back at US Dept. of Commerce Over 'Denial Order' and US Govt. Bans Domestic Component Sales to ZTE.)

Quite what those "judicial measures" could entail, though, is not clear: The key message here appears to be that ZTE will be seeking what it regards as justice, and to redress a situation it that it regards as unfair. "It is unacceptable that BIS [the Commerce Department's Bureau of Industry and Security] insists on unfairly imposing the most severe penalty on ZTE even before the completion of investigation of facts," states the vendor.

It added that it will "not give up its efforts to resolve the issue through communication," and it seems likely that any "judicial measures" would revolve around an appeal against the severity of the sentence: After all, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) does not deny that it failed to reprimand and financially penalize staff involved in past export violations (most notably sales to Iran) or that it made false statements to the US government. Indeed, the South China Morning Post reports that Cheng Gang, ZTE's chief compliance officer and chief legal officer, has been removed from those roles as a result of its failings.

And there are industry commentators that believe the Department of Commerce decision could be reviewed. George Notter at Jefferies stated in a research note earlier this week that there's a reasonable chance that the seven-year term of the ban might be reduced. "We note that the newly-imposed, 7-year ban is an incredibly harsh punishment … It may be possible that the order serves as a starting point for further negotiations between the US government and ZTE."

What is crystal clear, though, is that the denial order has the Chinese vendor concerned for its own future. It states that the decision will "severely impact the survival and development of ZTE," which sounds rather dramatic but also highlights just how reliant the Chinese firm is on component technology from US firms.

ZTE was due to report its first-quarter financials on Thursday but has delayed that announcement: Trading in ZTE's shares on the Hong Kong Stock Exchange has been suspended.

The company also highlights an issue that will be of much greater concern to the US business community -- that the seven-year ban will "cause damages to all partners of ZTE including a large number of US companies." As we've already seen, that is undeniable. (See Acacia Hit Worst by ZTE Components Ban.)

While the US government appears to be hell bent on punishing ZTE, it should surely consider the potential impact of its decision on the financial performance of, and headcount at, US companies that sell their goods to ZTE. Its hard to see how US jobs would not be lost if the ban remains in place.

The decision is also likely to spur technology R&D efforts in China and other markets that want to do business with large companies such as ZTE, which in 2017 generated revenues of US$17.3 billion. US firms such as Acacia, Qualcomm, Oclaro and Finisar have won business with ZTE because they have the most suitable tech components for ZTE's device and network system products. Now ZTE, or what's left of it come 2019 and beyond, will source components elsewhere: The Commerce Dept.'s move could spur a new era of technology R&D investment in China that, in turn, would spawn new international competitors for the US companies.

Might the US authorities have been wiser to impose a major financial penalty on ZTE as a punishment, rather than imposing trading restrictions that penalize a broader community of companies?

Add to this the measures now being taken by Qualcomm to appease the Chinese regulators as it tries to acquire NXP and it's hard to see how anyone is going to gain from the Commerce Department's decision. (See Qualcomm Cuts Jobs as It Seeks Chinese Approval for NXP M&A.)

— Ray Le Maistre, Editor-in-Chief, Light Reading

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