Chinese telecommunications giant ZTE announced in an exchange filing on May 9 that it was ceasing operations following a ban imposed by the U.S. Department of Commerce — and President Donald Trump may have solved the issue his administration has helped create.
The troubles at ZTE began last year with a massive fine for working around U.S. sanctions that prevented sales to Iran and North Korea. They compounded last month, when the U.S. Department of Commerce announced a ban preventing American companies from selling components to ZTE, which is known for creating smartphones, telecommunications gear, and other mobile gadgets. American-made microchips and software, notably the Android operating system, are essential to making those products. Despite the direct wishes of politicians on both sides of the aisle, Trump declared plans to help the Chinese company — and is going ahead with them full steam.
ZTE overhauls its board
Earlier this year, the Commerce Department said it would drop the seven-year sales prohibition against ZTE if it overhauled its executive team. The company must also fire any leadership members tied to the case that were at a senior vice president level or above it.
It looks like ZTE is now taking steps toward attempting to lift the ban. In a filing on June 29, the company said it has hired Li Zixue as its new chairman, Reuters reports. Meanwhile, the previous board and senior management — which was led by Chairman Yin Yimin — submitted their resignation on the same day. Also elected to the new board was Cai Manli and Yumin Bao. In addition to replacing members, ZTE must also hire a U.S.-appointed compliance monitor within 30 days as part of the agreement.
Just how reliant is ZTE on U.S. products? Well, we know that the company can’t make its hardware without supplies from the States. And according to the South China Morning Post, the company can’t even fix the urinals in its restrooms due to the ban. The urinal in question was apparently made by New Jersey-based American Standard, so ZTE is unable to purchase the parts needed to fix it. A note above the urinal explaning the situation was confirmed by a ZTE employee.
ZTE deal endangered
The deal to save ZTE ran into a roadblock earlier this month when the Senate overwhelmingly voted to pass a bill containing a provision that would block Trump’s ZTE deal. The measure was included as part of the National Defense Authorization Act and was passed 85-10. The Senate’s version of the bill must still pass the House of Representatives, and it is unclear if they will vote to include the ZTE measure.
If the bill is passed in its current form, however, then ZTE may be in trouble. Trump could theoretically veto the bill, but that would mean vetoing an important piece of national defense legislation. Even if Trump does veto this bill, there is no guarantee that Congress won’t simply override the veto, since it is possible they could get votes to do so.
Congress has agreed to a deal allowing ZTE to resume U.S. operations in exchange for some major concessions, Reuters reports. The company will have to pay a large fine, place U.S. compliance officers at the company, and make changes to its management. On Friday, Trump tweeted that he let the company resume operations “with high level security guarantees, change of management and board, must purchase U.S. parts and pay a $1.3 Billion fine.”
Senator Schumer and Obama Administration let phone company ZTE flourish with no security checks. I closed it down then let it reopen with high level security guarantees, change of management and board, must purchase U.S. parts and pay a $1.3 Billion fine. Dems do nothing….
— Donald J. Trump (@realDonaldTrump) May 25, 2018
Trump had first tweeted on Mother’s Day to show his concern over lost Chinese jobs at ZTE, and professed his interest in working with the government to solve the problem.
“Too many jobs in China lost. Commerce Department has been instructed to get it done!” the president wrote.
On Friday, Reuters reported that the Trump administration was considering increasing ZTE’s fine to $1.7 billion. This may be because the agreement to lift sanctions against ZTE has met with bipartisan opposition in Congress, as some consider the company a threat to national security.
The news reveals the degree to which today’s whiz-bang technology gadgets and gear can be influenced by geopolitics. Trade sanctions, manufacturing jobs, and security concerns have become key factors in which products are available to modern consumers and how much they cost. Similar issues mean your next washing machine will be more expensive, and tariffs on high-end goods may lead to rising television prices as well.
As the trade wars have escalated between the U.S. and key partners such as China, companies have been forced to respond. ZTE filed a request with the U.S. Commerce Department’s Bureau of Industry and Security for a suspension of the ban. ZTE has not said when the request was made, but it was mentioned in a Sunday, May 13 filing statement made at the Shenzhen stock exchange. The full details of the request have not been disclosed, but the statement did say the company provided additional materials upon the request of the Commerce Department.
In addition to this ban, the company faces several other issues related to U.S. trade. Earlier in May, it was announced that Huawei and ZTE phones had been banned from military stores.
In response to the crisis, ZTE claimed it was taking steps to rectify the internal problems that led to the ban, and sought a solution. In a statement given to the Hong Kong Stock exchange, ZTE said it has “taken steps and is taking steps to comply with the denial order. The company is making active communications with relevant parties and seeking a solution.”
The actions include a committee focusing on compliance, overseen by ZTE’s CEO and experts in the matter, along with additional training for staff. ZTE said it has learned from “past experiences on export control compliance.”
The Department of Commerce’s ban makes it illegal for U.S. companies to sell any products and services to the company; but how did it reach this stage?
Last year, ZTE agreed to settle with the United States government for $892 million for violating laws that prohibit the sale of American technology to Iran and North Korea. Between 2010 and 2016, the company shipped $32 million worth of equipment to Iran that included U.S. components without authorization. The Chinese mobile giant then lied to investigators when it declared the dealings had stopped.
In addition to the fine, the company was subject to a seven-year, $300 million suspended penalty if the company violated the settlement, bringing the total penalty to about $1.2 billion. Not only did ZTE agree to participate in routine monitoring and auditing, but it was also placed on a list of companies U.S. suppliers are banned from doing business with absent government approval.
Upon pleading guilty to conspiracy to unlawful export, obstruction of justice, and making false statements to federal investigators, it appeared ZTE was committed to positive change. In a statement released amid the events, ZTE’s chief export compliance officer — U.S. lawyer Matt Bell — said the company would restructure its legal department as well as institute new policies, training, and automated tools to keep up with regulations.
Part of the agreement included letting go of four of the firm’s senior employees and disciplining 35 others by reducing their bonuses or reprimanding them, Reuters notes. But according to the Department of Commerce, ZTE rewarded its employees for the illegal conduct instead.
While the company disclosed it fired its four employees, it did not disclose that the rest of its staff received full bonuses rather than letters of reprimand. The company’s false statements were reported to the U.S. government after the Bureau of Industry and Security requested documentation showing proof that employee discipline had occurred.
The Department of Commerce determined ZTE made false statements to the Bureau of Industry and Security specifically in 2016 and 2017. The statements had been in relation to disciplinary actions the company claimed it had taken or was planning on taking toward its senior employees.
“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” U.S. Secretary of Commerce Wilbur Ross said in a statement.
Updated on June 29: Updated with the news that ZTE has overhauled its board.