US Export Ban Leaves ZTE Fighting for Survival in Mobile Market

NEWS ANALYSIS: Chinese technology company ZTE says it will do what it can to reverse sanctions and the U.S. Department of Commerce has agreed to accept information that could reverse decision.

ZTE Export Ban

Chinese technology company ZTE has issued a statement strongly objecting to the U.S. Commerce Department’s decision to place export controls on the company. 

In an April 20 email statement to eWEEK, the company said it has reflected on its lessons in export control compliance and was taking steps to get the decision reversed. 

On April 16 the Commerce Department announced that U.S. products, including electronic components and software, could no longer be sold to ZTE because of violations of a consent agreement involving ZTE’s sales of prohibited items to Iran and North Korea. ZTE officials said his action would hurt ZTE significantly. 

One way ZTE could get the Commerce Department to lift the sanctions would be to provide additional information about its recent steps to comply with export regulations. According to reports in the Wall Street Journal and China Daily, the Commerce Department has agreed informally to accept this information. 

“Since April 2016, ZTE Corporation has continuously reflected on lessons from its past experience in Export Control Compliance and has attached great importance to Export Control Compliance. Within ZTE, compliance is regarded as the foundation and bottom-line of the Company’s operation.” 

The company said it had assembled a team of compliance experts and engaged what it called “world-class counsel” to help in the process. The company also said that the export ban ignored the progress the company has made to clean up its act. 

“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,” the company’s statement said. “The Denial Order will not only severely impact the survival and development of ZTE, but will also cause damages to all partners of ZTE including a large number of U.S. companies,” ZTE warned. 

ZTE “will not give up its efforts to resolve the issue through communication, and we are also determined, if necessary, to take judicial measures to protect the legal rights and interests of our Company, our employees and our shareholders,” the statement concluded. 

Unfortunately for its employees and shareholders, it will be difficult for ZTE to convince U.S. regulators to lift the export ban. The Commerce Department took the action it did because of a pattern of deceptive behavior that included a series of false statements spanning years and a history of ignoring compliance rules, which included knowingly selling prohibited items to Iran and North Korea. 

To make matters worse for ZTE, the company will lose its market for networking and carrier equipment when the Federal Communications Commission begins enforcing rules that stop federal Universal Service Fund financial support to carriers that use gear from ZTE and also from fellow Chinese telecom company Huawei. Federal procurement officers are already prohibited from buying equipment, including smartphones, tablets and laptops, from those and other Chinese companies. 

Of course, ZTE has other markets besides the U.S., so the inability to sell equipment to carriers in the U.S. won’t necessarily put it out of business. But the export limits will prevent ZTE from making anything that contains products made in the U.S. Considering that some critical products such as processors and modem chips are made by American companies, LTE has grounds for worry. 

And it could get worse yet. There are rumors that Google may move to cancel ZTE’s license to use Android. While those rumors aren’t confirmed, if true, such an action could prevent ZTE from continuing as mobile technology company. While ZTE is largely state-owned, that doesn’t guarantee ZTE’s existence. In fact, Quartz is reporting that internal memos within the agency responsible for the company are chiding ZTE for embarrassing China. 

So now the question is whether the additional information that ZTE provides the Commerce Department will be enough to lessen, or even cancel the sanctions against it. At this point ZTE’s public statements aren’t particularly convincing, since they don’t provide anything new that wasn’t already known to the department before the sanctions were announced. 

The only possible chance ZTE has to convince regulators that they should roll back the export sanctions is if the company could make a case that U.S. companies will be hurt by the action, perhaps by being unable to sell parts to ZTE, but that’s going to be a tough case to prove. 

The problem for ZTE is that the company’s disappearance would make barely a ripple on the global commerce scene. The hole they leave in the smartphone industry will be immediately filled by other smartphone makers ranging from Samsung to Nokia. The networking and carrier business would likely be taken over by Huawei, which has only a small share of the U.S. networking business, but it is a bigger force in Asia and South America. 

Either way, those components made in the U.S. are going to be used to satisfy market demand somewhere and the fact that the label on the box doesn’t say ZTE won’t matter at all. In effect, ZTE’s pleas for clemency probably don’t even matter much to the Chinese government, which apparently sees ZTE as a liability because of the company’s conduct. Once the public relation campaign is over, ZTE really won’t matter very much at home or abroad and that doesn’t speak well for its chances of long life as a going concern.

Wayne Rash

Wayne Rash

Wayne Rash is a freelance writer and editor with a 35 year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He covers Washington and...