ZTE is on Again, But For How Long?

It’s Alive… It’s alive Dr. Frankenstein exclaimed of his brainchild monster’s awakening, and so too with jolts of reviving energy from renewed access to US chip technology, ZTE is back in the mobile smart devices manufacturing and telecom services business.

But for the company, sourcing US chips comes at a high price, and with its black market exploits gone, and no seeming guarantees for access to the lucrative US mobile communications market any time soon, the company may still have trouble finding its way back to profitability.

This past week (Thursday June 7) the US Department of Commerce, (DOC) announced that it had reached a settlement with the Shenzen, China based company (ZTE Kangxun Telecommunications Ltd.) The deal will effectively remove the sanctions that hit the company in April in the form of a denial order from the bureau of industry and security branch of the DOC. In dollar terms the cost to ZTE, a whopping $1.4B in new fines (bringing the cumulative total to $2.3B).

ZTE monster

Perhaps more significantly, the group agreed to a complete overhaul of its board of directors, and executive leadership. They’ve also agreed to allow a decade-long independent oversight of company practices using a compliance team (selected by US authorities) directed to monitor ZTE’s compliance with US export control laws on a “real-time basis.” In effect, the denial order is still in effect, but suspended for a 10 year ‘probation period’, the DOC said in its official statement.

The new ZTE compliance team will report directly to Washington in an effort to blunt the felonies and misdemeanors of the past including:

  • A multi-year conspiracy to supply, build, and operate telecommunications networks in Iran using U.S.-originated equipment, in violation of the U.S. trade embargo,
  • Committing hundreds of U.S. sanctions violations involving the shipment of telecommunications equipment to North Korea
  • Making false statements and obstructing justice by creating an elaborate scheme to prevent disclosures to and affirmatively misleading the U.S. Government

The company also has a track record of other misdeeds in the past including accusations of bribery, over-billing and international trade rule-breaking, both at home in mainland China and abroad.

zte shell companiesUse of ZTE shell companies to sell restricted technology, Source: US DOC investigation

In April, the group was barred from sourcing American-made components, critical to both ZTE’s mobile devices and back-end cellular support networking equipment. The penalties were remarkably effective, essentially shutting down world-wide operations for ZTE, which employs some 80K Chinese workers.

The US DOC is part of the executive branch of the US government, and that’s also part of this deal’s problem for ZTE. The US Congress, specifically the US Senate, initiated legislation to cancel the deal and bar the government from buying equipment from ZTE. The US Congress has oversight over government spending.

Earlier reports from US intelligence groups voiced concerns over the potential for technology developed by ZTE being used for China cyber-espionage*. Both ZTE and rival Huawei have been scrutinized due to their direct ties to the Chinese communist government with concerns of network hacking, backdoor access to sensitive data and telecommunications network security breaches.

So, the DOC has relaxed it’s restrictions for now, but by far the hardest part of this deal is for ZTE toi find new legitimate business deals rather than taking the, presumably, relatively easy money of black market technology sales. The company must convince new customers to invest in their solutions. To do so requires not only high value technology, but also trust in ZTE as a long-term player, and able to give a high degree of support, stability as well as assurances that they will be around for the long term. That’s a tall order for any company so compromised. Is there redemption for ZTE? Stay tuned… Stephen Sechrist

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Analyst Comment

* The UK government has dealt with concerns over security issues with the other big Chinese telecomm equipment provider, Huawei, by getting the company to submit equipment to the UK government’s ‘spooks’ at GCHQ who check to see if they can find ‘back doors’ etc. (BR)