US overseers, new board and $2.3bn fines mean ZTE is back

20 June 2018 |

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ZTE has agreed to the toughest terms as a condition for getting back into business. Analysis by Alan Burkitt-Gray

ZTE will be working with embedded US overseers monitoring its every action for the next 10 years. Appointed by a unit of the US Department of Commerce (DoC), they will be there to ensure the Chinese vendor never again smuggles its equipment and software to telecoms operators in Iran and North Korea. 

This was probably the most humiliating – for ZTE – part of the settlement, announced in early June, that will allow the company to get back to work after April’s denial order. That earlier proclamation meant no one was allowed to facilitate “the acquisition or attempted acquisition by a denied person of the ownership, possession, or control of any item” that requires a US licence. ZTE’s staff and agents were all declared to be denied persons.

Now that ZTE is back in business, the DoC itself admits that this is the first time it has “achieved such stringent compliance measures in any case”. Commerce secretary Wilbur Ross said: “We will closely monitor ZTE’s behaviour. If they commit any further violations, we would again be able to deny them access to US technology.” 

Last year, in an earlier settlement, ZTE agreed to pay $1.19 billion in penalties, $892 million in cash and $300 million suspended for seven years as a guarantee of future good behaviour. June’s deal means the total penalties will reach $2.29 billion if it fails to honour the latest agreement. 

Oh, and it has to replace the entire board of directors and senior leadership within 30 days. That’s after it had already replaced many of those whose signatures were on the infamous 2011 documents – marked “top secret, highly confidential” – that set out in detail how ZTE proposed to smuggle goods and services to embargoed countries. The DoC leaked those to the world in 2016 when it started its action against the company.

It’s clear that ZTE was stupid and arrogant – stupid for setting down its detailed plans on paper in 2011 to break the embargoes, and for getting the signatures of the then CEO, Shi Lirong, and other leaders on them. 

Arrogant for believing that, once it had won a settlement from the DoC in 2017, it could ignore conditions beyond that $892 million fine. They were relatively mild: disciplinary action against 39 officials and executives, in the form of reprimands plus cancellation and withdrawal of their bonuses. 

That’s what ZTE ignored – and now the whole company of 80,000 people has been reprimanded before the telecoms world and humiliated by having those US observers in place until 2028. 

Contrast the position of ZTE’s bigger rival, Huawei. Both are banned from supplying kit to major US carriers, but Huawei appears so far to have escaped the scrutiny of the DoC. It was mentioned in those leaked 2011 documents – codenamed F7, but with enough evidence to identify it positively – and in April 2018 there were rumours of a DoC investigation. 

Incidentally, Huawei people refer to ZTE as “number 26”, not just because of Z’s position in the alphabet but also because of a Mandarin pun: according to a Chinese-speaking colleague, “26” is pronounced “er-liu”, which also means “second class”: 

A senior official from Huawei, based at the head office in Shenzhen, China, told Capacity in April: “Huawei complies with all applicable laws and regulations where it operates, including the applicable export control and sanction laws and regulations of UN, US and EU.” 

But even the fact that Capacity was able to get a comment from a Huawei official illustrates how it approaches the world differently from ZTE. Huawei talks to people and responds to questions. It runs conferences for telecoms executives in major cities around the world. It holds receptions and concerts in European capitals to which it welcomes the great and the good (and the media, including representatives of Capacity). 

ZTE, on the other hand, tends to be opaque and unapproachable – and not just over the last two years of its existential dispute with the US. It’s been that way for a long time. 

Huawei and ZTE are both based in different parts of the city of Shenzhen, which is almost Hong Kong’s northern extension across the border with mainland China. They are both elements of China’s huge technological success over the past 10-15 years. Their systems are embedded into networks across the world – including both north and south of the US, in Canada and Mexico. Operators including Deutsche Telekom, Orange, SoftBank, Telefónica and Telus rely on them – as does AT&T, in its Mexican mobile network. 

Huawei and ZTE are at the centre of work to develop 5G mobile standards, which are likely to be used in commercial networks from 2020 onwards. It would be practically impossible to remove all of their contributions from the work that 3GPP is doing to complete the standards. 

In the long term the US-versus-ZTE saga might be to the benefit of the Chinese technological economy. It has shown the government and the companies how dependent they are on US hardware and software, from companies such as Intel, Microsoft, Oracle and Qualcomm. 

Their answer will be to develop home-grown replacements, so never again will Washington be able threaten to close down a Chinese company. 

Humiliate someone and they either shrivel and die – or they bounce back, determined to survive and grow.