ZTE is facing potentially damaging trade restrictions by the US Commerce Department because of its allegedly embargo-busting business relationships with a network operator in Iran, according to a Reuters report published Sunday.
The news agency says it has seen documents that suggest ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) is about to face severe export restrictions that will make it all but impossible for the Chinese vendor to source hardware and software made by US companies, restrictions that would have a severe impact on ZTE's supply chain.
ZTE sources technology components, which are used to produce its extensive range of communications network, enterprise infrastructure and mobile handset products, from multiple international companies, including a number of major US players, such as Intel, IBM and Microsoft.
The move by the US Commerce Department is linked to a long-standing investigation into ZTE's shipments of technology, including packet inspection products, to the Telecommunication Company of Iran (TCI) , a business relationship that was being investigated as long ago as 2012. (See ZTE Defends Iran Position and FBI Investigates ZTE.)
The Reuters report resulted in the suspension of trading in ZTE's shares on the Hong Kong and Shenzhen stock exchanges: The Hong Kong exchange issued this statement:
- At the request of ZTE Corporation (the "Company"), trading in the H shares of the Company on The Stock Exchange of Hong Kong Limited will be halted with effect from 9:00 a.m. on 7 March 2016 pending the release of an inside information announcement in respect of the United States Commerce Department's proposal to implement export restrictions on the Company.
ZTE has not yet published a statement regarding the Reuters report. However, the expectation is that the Chinese government, rather than ZTE, will issue a statement regarding the US Commerce Department's position at some point Monday.
UPDATE 7.00 a.m. EST: In his Monday briefing with the media, Chinese Foreign Ministry spokesman Hong Lei, responding to a question about the planned export restrictions, stated that China opposes any use of domestic laws to impose sanctions on Chinese companies. In addition, he said China hopes that restrictions won't be imposed, as they could "harm Sino-US economic and trade cooperation and bilateral relations." The press briefing then moved on to other matters, such as cooperation between Asian countries at sea, trade with North Korea and the death of Nancy Reagan. ZTE has still not yet issued an official statement.
The news comes only weeks after ZTE announced significant financial success during 2015: According to its preliminary unaudited results, the vendor increased its revenues by 23.8% year-on-year to 100.8 billion yuan renminbi (US$15.5 billion) and boosted its net profits by 43.7% to RMB3.78 billion ($580 million). (See ZTE Set to Report Profit Hike for 2015.)
— Ray Le Maistre, , Editor-in-Chief, Light Reading