ZTE, a Chinese technology firm, has been hit with U.S. sanctions that threaten to cripple the company. Two lessons can be drawn from this experience. First, that companies disregard U.S. laws at their peril. Second, that a global supply chain is inherently risky and every effort should be made to promote nationally developed technology. It looks as though China will focus on the second. That is the wrong approach.
ZTE is China’s second-largest manufacturer of telecommunications equipment, with a stock market value of $20 billion before its recent troubles. About 60 percent of its revenue comes from network business and 32 percent from consumer business. It is the fourth-largest seller of smartphones in the United States.
In Japan, it has partnered with Softbank and NTT Docomo, seeking to claim a 10 percent share of the SIM market. The company has about 200 employees in Japan, some of whom work at a Tokyo research and development center that is focused on 5G and other next-generation network technologies that Japan will roll out for the 2020 Summer Olympic Games in Tokyo. Reportedly, those facilities are too small and the company is planning to expand to accommodate between 500 to 600 engineers.
Those plans may now be on hold. Last year, the U.S. Commerce Department wrapped up a two-year investigation of ZTE by concluding that it had violated U.S. law by illegally shipping telecommunications equipment to Iran and North Korea. The company was charged with — and subsequently admitted to — violating U.S. sanctions to obtain “hundreds of millions of dollars in contracts” with Iranian enterprises, including the government, from 2010 to 2016.
As a result, the U.S. imposed a combined civil and criminal penalty and forfeiture of $1.19 billion on the company, the largest penalty ever levied in an export control case. In addition, ZTE agreed to a seven-year suspended denial of export privileges, which could come into effect if any aspect of the agreement was not met or if the company committed additional violations.
ZTE also said it would fire four senior employees and punish dozens of others who were involved. Earlier this month, it was discovered that ZTE had misled the U.S. Commerce Department by making false statements, obstructing justice and “affirmatively misleading” the government in regard to those punishments. ZTE had dismissed the four senior employees as promised, but had not disciplined 35 others by either reducing their bonuses or reprimanding them.
U.S. Commerce Secretary Wilbur Ross was blunt: “ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”
This breach triggered the seven-year ban, along with a ruling that prohibits U.S. companies from selling to ZTE for the same period of time. That, some analysts have concluded, could put the company out of business, since it is estimated that as much as 30 percent of the components in ZTE equipment originates in the U.S. Not only companies but financial institutions — in and out of the U.S. — are going to consider ZTE to be radioactive and avoid doing business with the firm.
The U.S. penalty is not ZTE’s only problem. Also this month, the head of Britain’s national cyber security center sent a letter to that country’s telecommunications organizations warning that “the national security risks arising from the use of ZTE equipment or services within the context of the existing U.K. telecommunications infrastructure cannot be mitigated.” Other governments should be similarly concerned.
ZTE called the U.S. decision “unacceptable” and has sought to provide additional information to modify the U.S. Commerce Department ruling.
The Chinese government also criticized U.S. penalties against its companies, saying that it will protect the interests of Chinese firms and urged Washington to deal with the issue in accordance with the law.
That is the issue. ZTE agreed to accept a penalty and then lied about its implementation. Beijing should be worried that its companies disregard not only the law, but their promises to national legal authorities. Beijing agreed to sanctions against Iran and North Korea and ZTE’s actions undercut them. Beijing should have been pressing the company to comply with the trade restrictions, rather than outsourcing enforcement of its international obligations to Washington. This is a worrying indicator of Beijing’s thinking about the rule of law and how it will promote international peace and security.
China’s seeming indifference to those obligations is troubling, but more disturbing is the conclusion that the best course of action is to develop a high-tech industry that would make the country’s technology independent. China has plans to develop a national semiconductor industry to reduce foreign vulnerability. This is part of a larger plan to not only develop Chinese national champions across a range of cutting-edge technologies, but to insulate its economy from foreign pressure.
That is worrisome for many reasons, not least being the balkanization of national communications markets, with competing standards and reduced interoperability. For Japanese companies whose supply chains span the Asia-Pacific, the prospect is harrowing.