After the United States said it would ban American companies from supplying tech parts and software to the Chinese smartphone maker ZTE, a document circulating on the Chinese internet has elucidated just how troubling the situation would be for China’s second-largest telecoms company.
The U.S. Department of Commerce announced the decision on April 16 after discovering that ZTE had failed to comply with the terms of a prior court agreement following the company’s sanctions violation.
In 2017, ZTE pleaded guilty in U.S. federal court to evading U.S. embargoes on Iran, by buying American tech parts, incorporating them into ZTE equipment, then illegally shipping them to Iran. The case was the result of a five-year federal investigation.
The company paid $890 million in fines and penalties, with an additional penalty of $300 million that could be imposed.
As part of the agreement, ZTE was to also dismiss four senior employees and discipline 35 others, by either reducing bonuses or reprimanding them. In March, the company admitted to U.S. officials that it had not disciplined the 35 others.
“This [ban] will be devastating to the company, given their reliance on U.S. products and software,” Douglas Jacobson, an exports control lawyer who represents suppliers to ZTE, told Reuters. “It’s certainly going to make it very difficult for them to produce and will have a potentially significant short- and long-term negative impact on the company.”
The Commerce Department decision also means ZTE may not be able to use Google’s Android operating system in its mobile devices, a source familiar with the matter told Reuters on April 17.
ZTE and Google’s parent company, Alphabet Inc., have been discussing the impact of the ban, the source added, but the two companies were still unclear about the use of Android by ZTE.
The Chinese firm shipped 46.4 million smartphones last year, placing it seventh among Android-based manufacturers, according to research firm IHS Markit.
A day after the Commerce Department ban, the Federal Communications Commission (FCC), which regulates the U.S. telecoms industry, proposed new rules that would bar government programs from buying from companies that it says pose a security threat to U.S. telecoms networks, which will likely hurt both ZTE and its rival Chinese smartphone maker, Huawei Technologies.
The proposed FCC rules would prevent money from the $8.5 billion FCC Universal Service Fund, which includes subsidies for telephone service to poor and rural areas, from being spent on goods or services from companies or countries that pose a “national security threat to the integrity of communications networks or their supply chains,” the FCC said.
“Hidden ‘backdoors’ to our networks in routers, switches, and other network equipment can allow hostile foreign powers to inject viruses and other malware, steal Americans’ private data, spy on U.S. businesses, and more,” said FCC Chairman Ajit Pai, who introduced the proposal.
Pai did not specify China or specific companies, but in a letter to Congress last month, Pai said he shared the concerns of U.S. lawmakers about espionage threats from Huawei, the world’s third-largest smartphone maker.
Republican U.S. senators have introduced legislation that would block the U.S. government from buying or leasing telecoms equipment from Huawei and ZTE, citing concerns about its potential use for spying on U.S. officials.
ZTE’s Dependence on US Firms
A 2016 report released by a Chinese regime-affiliated think tank—which has resurfaced in recent days due to the news of the U.S. ban—reveals just how troubling the situation will be for ZTE.
In March 2016, before ZTE settled the federal court case, the company was reeling from the repercussions of a temporary U.S. ban on exporting tech parts to ZTE, a punishment for the sanctions violations.
About a month later, CCID, a Beijing think tank affiliated with China’s Ministry of Industry and Information Technology, released a report analyzing the impact of the ban.
It found that ZTE relied heavily on imported chips and optical modules for manufacturing its smartphones, such as 4G baseband chips from Xilinx, FPGA chips from Intel, and radio frequency chips from Skyworks and Qorvo—all American chipmakers.
In 2014, ZTE’s biggest chip supplier was Broadcom, with the company purchasing $1.3 billion worth. All told, ZTE purchased 53 percent of its chips from American firms, worth $3.1 billion.
The report concluded that any U.S. sanctions would have a “destructive impact” on ZTE, and that without any U.S. suppliers, ZTE would only be able to rely on its own stock of chips. Within three months of a U.S. ban, ZTE would “face the brink of bankruptcy,” the report said.
The ban would also have ripple effects on the Chinese tech industry in general, according to the report.
ZTE’s chief competitor, Huawei, is also in trouble. This month, amid a slew of bad news, Huawei laid off its vice president of external affairs, Bill Plummer, and four other employees at its Washington office, sources familiar with the matter told Reuters.
Huawei’s planned deal with U.S. carrier AT&T to sell its smartphones in the United States collapsed in January after U.S. lawmakers lobbied against the idea to federal regulators, citing security concerns.
In March, electronics retailer Best Buy announced that it had cut ties with Huawei and will stop selling Huawei devices.
Huawei’s CEO, Ren Zhengfei, also has a unique background. According to a 2005 study by RAND Corporation, Ren was a former director of the Chinese military’s Information Engineering Academy. After he started Huawei in 1988, Ren used his father-in-law’s connections—the latter a former deputy governor of Sichuan Province—to obtain contracts setting up electronic switching systems for the military.
Meanwhile, the company’s former chairwoman Sun Yafang worked in China’s Ministry of State Security, an intelligence and security agency, for many years before joining Huawei in 1992, according to Chinese media reports. She was in charge of business with different governments and their militaries.
Reuters contributed to this report.