ZTE crisis teaches Chinese firms a lesson

By Chen Qingqing Source:Global Times Published: 2018/4/23 18:08:40

Tech equipment provider acted ‘stupidly and passively,’ damaging the reputations of other companies: SASAC report

A view of a ZTE building in Shanghai Photo: IC

Chinese telecom equipment provider ZTE Corp said on Sunday in a public filing that it is seeking a solution to its recent ban in the US, which has already put the company's business into a coma. The company said it has learned from its past experiences in export control compliance and will attach great importance to the work. A recent report from China's top watchdog of State-owned enterprises has also criticized ZTE for its "stupid and passive" moves on the matter, which could function as a big lesson for other Chinese firms operating internationally.

A photo showing Hou Weigui, founder of Chinese telecom company ZTE Corp, at an airport in China has been widely circulating on social media platforms in recent days.

The 76-year-old veteran engineer, accompanied by two ZTE senior executives, was reportedly about to catch a flight to the US to deal with an export ban that would severely impact the company's survival.

Headquartered in Shenzhen, South China's Guangdong Province, ZTE, which is among some of the top telecom equipment vendors worldwide, has been struggling with an existential crisis over the past week after the US Department of Commerce activated a denial order on April 16 (US time) against the Chinese company.

US Secretary of Commerce Wilbur Ross announced that American companies will be banned from exporting components to ZTE, which produces smartphones and other telecommunications equipment, as the firm allegedly lied to the US government about disciplining employees who violated US sanctions against North Korea and Iran.

Over the past week, ZTE has issued several statements, insisting that the US' penalty is "unfair" and that the company has already corrected its wrongdoings related to US export control. The firm also held a 10-minute press conference on Friday at its headquarters in Shenzhen to fire back at US regulators.

"ZTE resolutely opposes this unfair and unacceptable punishment as well as the act of politicizing trade," ZTE Chairman Yin Yimin told the press conference.

Some industry analysts see the US' latest action against ZTE as part of the ongoing tit-for-tat China-US trade dispute. "The issue has to be part of negotiations between the Chinese and US governments," Xiang Ligang, chief executive of telecom industry website cctime.com, told the Global Times.

It is widely believed that the US ban could be catastrophic for ZTE, as 30 to 40 percent of its components are imported from the country, with the sanction likely to keep the company in a coma.

"However, things could go in a different direction," Xiang said.

The US Commerce Department has accepted ZTE's request to submit more evidence in the case, Reuters reported on Saturday, citing a senior official within the department.

There is no appeals process, but the authority has "exercised discretion" to let ZTE present additional evidence through an "informal procedure," according to Reuters.

"Also, US Treasury Secretary Steven Mnuchin is reportedly going to travel to China to discuss the trade issues, so the ZTE crisis could be solved if the discussion between the two countries is effective," Xiang said.

Still, the company has lessons to learn from this crisis, particularly in terms of the management of its international business, said Liu Kun, vice general manager of the IC Industry Research Center at Beijing-based CCID Consulting.

Regulated business

In a report released by a research center under the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) that was seen by the Global Times on Sunday, ZTE was harshly criticized for the way it responded to the US investigations of its export compliance program.

ZTE handled the issue in a "very stupid and passive way" and the US sanction has had a negative influence not only on ZTE itself, but also on other State-owned enterprises, the report said.

When the US Attorney's Office for the Northern District of Texas opened its grand jury investigation of ZTE's alleged sales of equipment to Iran in 2012, ZTE began circumventing regulations by selling those products to a new third-party company, which then sold to Iran, the report showed.

In addition, the report said that the firm made false statements to US authorities and ended up paying a whopping fine of $892.4 million. The firm subsequently failed to discipline and to reduce bonuses for 35 employees who had sold the equipment, which has led to the current seven-year ban.

"The SASAC report has offered lessons to companies like ZTE, particularly when it comes to their international businesses, which should always follow the rules and regulations of foreign markets," Liu said. 

The ZTE crisis is also partially due to the lack of surveillance in China, with the company's legal affairs department playing little role in the matter, the SASAC report said.

Furthermore, some documents about the firm's Iran-related business deals were found on the chairman's secretary's laptop when stopped by US customs, demonstrating the lack of confidentiality within ZTE's operations. 

Bigger impact

The SASAC report also noted that the ZTE incident has also set alarm bells off for other telecom equipment providers, especially as more and more countries show concerns over network privacy and safety.

Along with ZTE, other major Chinese tech companies Huawei Technologies and Lenovo have also been dragged into the spotlight after another report was released by the US-China Economic and Security Review Commission on Thursday, which accused Chinese tech companies of espionage that was supported by the Chinese government.

Jean Baptiste Su, principal analyst at Atherton Research, said the US market is no longer part of Huawei's global strategy, as US officials have repeatedly called to ban products from Huawei and ZTE over national security concerns, according to his most recent analysis published by Forbes.

"It's fake news that Huawei is going to exit the US market," the company's spokesperson told the Global Times on Sunday, without further responding to the US' tough stance on Chinese telecom equipment providers.

As a major market in the global telecommunications industry, the US has full growth potential, Xiang said. "Especially in the 5G era, cooperation between countries has become very important," the executive said.

As Huawei always holds a practical attitude toward its international operations, it is likely to trim down its business scale in the US, but giving it up completely will not even be an option, Xiang noted.


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