Chinese telecommunications giant ZTE, which makes smartphones, telecommunications gear, and other mobile gadgets, has had a tough time recently. Its troubles began last year with a massive fine for working around U.S. sanctions that prevented sales to Iran and North Korea. The U.S. Department of Commerce then announced a ban preventing American companies from selling components to ZTE.
American-made microchips and software, notably the Android operating system, are essential to making its products. Couple this with also being targeted by the U.S. government as a potential security threat, and ZTE’s survival has been in question. Here’s everything you need to know about the state of ZTE’s business in the U.S.
$400 million deposit
After the U.S. government temporarily lifted the ban on ZTE so that the company can resume support of already-deployed equipment and devices, stopping the company going out of business, but not so it could release new products, an announcement has been made that will see ZTE able to deal with American suppliers again.
A tweet sent out by the U.S. Department of Commerce says that once ZTE deposits $400 million into a escrow account, the ban will be lifted entirely. However, the lift itself comes with a 10-year suspended sentence clause, which along with the $400 million and a Department of Commerce appointed watchdog, is expected to keep ZTE — and other potential rule breakers — from breaking agreements again in the future.
— U.S. Commerce Dept. (@CommerceGov) July 11, 2018
The ban will only be lifted once the $400 million has been deposited, and at the time of writing this has not been announced, therefore as of July 12 ZTE’s ban is still in place.
The road to recovery
ZTE has changed in order to smooth the path towards returning to business. Immediately after the ban came into effect, ZTE issued a statement to the Hong Kong Stock exchange, ZTE saying it would “take steps to comply with the denial order. The company is making active communications with relevant parties and seeking a solution.” The actions include a committee focusing on compliance, overseen by ZTE’s CEO and experts in the matter, along with additional training for staff. ZTE said it has learned from “past experiences on export control compliance.”
This eventually led to Congress agreeing a deal allowing ZTE to resume U.S. operations in exchange for some major concessions. The company was told it would have to pay a large fine, place U.S. compliance officers at the company, and make drastic alterations to its executive team.Reuters reported that the Trump administration was considering increasing ZTE’s fine to $1.7 billion. This may be because the agreement to lift sanctions against ZTE has met with bipartisan opposition in Congress, as some consider the company a threat to national security.
The company had to also fire any leadership members tied to the case that were at a senior vice president level or above it. This would assist the Commerce Department in making the devision to drop the seven-year sales prohibition.
In a filing on June 29, the company said it had hired Li Zixue as its new chairman, and the previous board and senior management — which was led by Chairman Yin Yimin — submitted their resignation on the same day. Also elected to the new board was Cai Manli and Yumin Bao. In addition to replacing members, ZTE was told it must also hire a U.S.-appointed compliance monitor within 30 days, as part of the final agreement.
The ZTE situation reveals the degree to which today’s whiz-bang technology gadgets and gear can be influenced by geopolitics. Trade sanctions, manufacturing jobs, and security concerns have become key factors in which products are available to modern consumers and how much they cost. Similar issues mean your next washing machine will be more expensive, and tariffs on high-end goods may lead to rising television prices as well.
As the trade wars have escalated between the U.S. and key partners such as China, companies have been forced to respond. ZTE initially filed a request with the U.S. Commerce Department’s Bureau of Industry and Security for a suspension of the ban. The company also faced several other issues related to U.S. trade. Earlier in May, it was announced that Huawei and ZTE phones had been banned from military stores.
Just how reliant is ZTE on U.S products? According to the South China Morning Post, the company can’t even fix the urinals in its restrooms due to the ban. The urinal in question was apparently made by New Jersey-based American Standard, so ZTE is unable to purchase the parts needed to fix it.
Why was ZTE banned?
Last year, ZTE agreed to settle with the United States government for $892 million for violating laws that prohibit the sale of American technology to Iran and North Korea. Between 2010 and 2016, the company shipped $32 million worth of equipment to Iran that included U.S. components without authorization. The Chinese mobile giant then lied to investigators when it declared the dealings had stopped.
In addition to the fine, the company was subject to a seven-year, $300 million suspended penalty if the company violated the settlement, bringing the total penalty to about $1.2 billion. Not only did ZTE agree to participate in routine monitoring and auditing, but it was also placed on a list of companies U.S. suppliers are banned from doing business with absent government approval.
Upon pleading guilty to conspiracy to unlawful export, obstruction of justice, and making false statements to federal investigators, it appeared ZTE was committed to positive change. In a statement released amid the events, ZTE’s chief export compliance officer — U.S. lawyer Matt Bell — said the company would restructure its legal department as well as institute new policies, training, and automated tools to keep up with regulations.
Part of the agreement included letting go of four of the firm’s senior employees and disciplining 35 others by reducing their bonuses or reprimanding them, Reuters notes. But according to the Department of Commerce, ZTE rewarded its employees for the illegal conduct instead.
While the company disclosed it fired its four employees, it did not disclose that the rest of its staff received full bonuses rather than letters of reprimand. The company’s false statements were reported to the U.S. government after the Bureau of Industry and Security requested documentation showing proof that employee discipline had occurred.
The Department of Commerce determined ZTE made false statements to the Bureau of Industry and Security specifically in 2016 and 2017. The statements had been in relation to disciplinary actions the company claimed it had taken or was planning on taking toward its senior employees.
“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” U.S. Secretary of Commerce Wilbur Ross said in a statement.
Subsequently, ZTE was banned from doing business with American suppliers.
Updated on July 12: If ZTE pays $400 million into an escrow account, and follows other rules, the ban will be lifted.