US threatens trade war on ZTE over exports to Iran

08 March 2016 | Alan Burkitt-Gray


A trade war between China and the US is on the verge of breaking out over the US Department of Commerce’s new rules that could cripple ZTE’s exports to many – if not all – parts of the world.

The DoC has unearthed alleged ZTE documents that date back to 2011 in which the Chinese telecoms vendor apparently describes how to set up a series of shell companies in order to evade restrictions on exporting equipment containing US hardware and software to Iran.

The Chinese Foreign Ministry hit back sharply, with official spokesperson Hong Lei criticising the US in his daily press conference in Beijing. “The Chinese side is firmly opposed to the US using domestic laws to place sanctions on Chinese companies,” said Hong. “The Chinese side urges the US side to call off the wrong action lest it should jeopardise economic cooperation and relationship between China and the US.”

The DoC is saying that ZTE included components from US companies including chipmakers Qualcomm and Intel in the equipment it supplies to TIC, the Iranian Ministry of ICT’s Telecommunications Infrastructure Company.

An Intel spokesperson said: “I can confirm that ZTE is an Intel customer but other than that we have nothing to add.” Qualcomm has not yet responded to a request for comment.

Senior executives of ZTE and TIC have been contacted and said they would comment, but have not yet done so. Other companies that face being affected include Broadcom and IBM.

ZTE suspended trading of its shares on the Hong Kong and Shenzhen exchanges on Monday in response to the reports. They are still suspended.

The DoC lists ZTE and three other related entities as being subject to its sanctions: Beijing 8 Star International Co, based in the Chinese capital, Shenzhen-based ZTE Kangxun Telecommunications, and Tehran-based ZTE Parsian. All four are covered by the US Export Administration Regulations (EAR) and the DoC says there is a “presumption of denial” of any request for an export licence from the US authorities.

The DoC says: “The US Government has determined that the four entities are acting contrary to the national security or foreign policy interests of the United States.”

Its statement adds: “The EAR imposes additional licensing requirements on, and limits the availability of most licence exceptions for, exports, reexports, and transfers (in-country) to those listed.”

That seems to imply that all use of US hardware and software by ZTE is now covered by the DoC’s regulations – and not just in kit destined for Iran. That could severely hurt ZTE’s export business, at least until it is able to source hardware and software from other sources, including Chinese industry.

Two documents from 2011 leaked to Reuters in Hong Kong immediately before the DoC’s new restrictions seem to show that ZTE set up a structure of shadow companies.

One document states: “As our overseas businesses have grown rapidly in recent years, so have US export control risks. Following director Tian and director Qiu’s instructions, our company should immediately form a company-level export control project team to study, handle, and respond to our company’s current export control risks.” Tian Wenguo, identified as a signatory of the document, is executive vice president of ZTE; the other signatory is Guo Xiaoming, chief legal officer of the company. Shi Lirong, the CEO, is identified as having approved the document on 2 September 2011.

The other document explicitly warns that if ZTE violates US restrictions, the US government “might carry out civil and criminal punishments against US suppliers, which will lead to increased difficulty for our company to obtain the relevant US technologies and components”.

It is not immediately clear whether the English versions of the documents – which are also available in Chinese – are officially from ZTE.

The 2011 document explains that the DoC classifies countries into a number of categories, including group Z which are said to be “state sponsors of terrorism”. The ZTE document says: “Our company is conducting large amount of business in Z group countries such as YL and GB” – believed to be codes for Iran and Cuba.

Ironically, since the document was produced, the US has eased its relations with both countries. The US and Cuba restored diplomatic relations in 2015 and telecoms links and air travel are being restored. The US lifted nuclear-related sanctions on Iran in early 2016 although other sanctions have not yet been lifted.

And doubly ironically, the move comes at a time when ZTE’s rival company, Huawei, appears to be becoming closer to US network operators. Huawei has not yet commented on the moves by the DoC, which do not mention Huawei in any way.

The US action against ZTE appears primarily focussed on network equipment, but ZTE has become a successful supplier of smartphones. It is believed to be the fourth largest supplier of smartphones into the US market, with an 8% share in mid-2015, according to IDC.