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Commerce Cuts Off China's ZTE From U.S. Tech for Seven Years

Andrew Mayeda, Ian King
An employee inspects smartphone circuit boards in a manufacturing facility at ZTE Corp.'s headquarters in the Nanshan district of Shenzhen, China, on Thursday, Aug. 7, 2014. ZTE, a Chinese maker of telecommunications equipment and systems, is scheduled to report second quarter earnings on Aug. 20.

The U.S. government said Chinese telecommunications-gear maker ZTE Corp. violated the terms of a sanctions settlement and imposed a seven-year ban on purchases of crucial American technology needed to keep it competitive.

The Commerce Department determined ZTE, which was previously fined for shipping telecommunication equipment to Iran and North Korea, subsequently paid full bonuses to employees who engaged in the illegal conduct, failed to issue letters of reprimand and lied about the practices to U.S. authorities, the department said.

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“Instead of reprimanding ZTE staff and senior management, ZTE rewarded them,” Commerce Secretary Wilbur Ross said in the statement. “This egregious behavior cannot be ignored.”

The ZTE rebuke may aggravate tensions between the U.S. and China over trade between the world’s two biggest economies. President Donald Trump has threatened tariffs on $150 billion in Chinese imports in retaliation for alleged violations of intellectual property rights, while Beijing has vowed to retaliate on everything from American soybeans to planes. Trump on Monday accused China along with Russia of devaluing their currencies, opening a new front in his argument that foreign governments are exploiting the U.S.

For ZTE, the latest Commerce action means one of the world’s top ten makers of smartphones will no longer be able to buy technology from U.S. suppliers, including components central to its products. ZTE has purchased chips from Qualcomm Inc. and Intel Corp., and optical components from Acacia Communications Inc. and Lumentum Holdings Inc. A seven-year ban would effectively cover a critical period during which the world’s telecoms carriers and suppliers are developing and rolling out fifth-generation wireless technology.

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“All hell breaks loose,” wrote Edison Lee and Timothy Chau, analysts at Jefferies, after the export ban was announced.

They downgraded ZTE shares to underperform and cut their price target on its stock by more than half. Shares in Acacia and Lumentum plunged on the news. Trading in ZTE shares was suspended in Hong Kong.

ZTE faces tough options in particular due to the ban on buying Qualcomm’s processors and modems, the main components in smartphones. China’s Huawei Technologies Co. makes those chips for use in its own handsets, while MediaTek Inc. is Qualcomm’s largest rival in offering chips on a so-called merchant basis. ZTE may have to either buy from a competitor or get chips from a Taiwanese company whose products generally lag those of its U.S. rival’s in performance.

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ZTE said it was aware of the sanctions and is evaluating its impact while talking with related parties. Qualcomm declined to comment.

Read More: Commerce Department Order Against ZTE

Separately, the U.K.’s National Cyber Security Centre warned the country’s telecommunications companies and regulator that national security risks from using ZTE equipment and services “cannot be mitigated.”

A senior official with the Commerce Department Bureau of Industry and Security told reporters that the ZTE decision was unrelated to the administration’s threats to impose tariffs on Chinese imports, saying the actions against the Chinese company are part of an investigation. The official, speaking on the condition of anonymity, said the timing of the ZTE action was unfortunate because it could seem related to U.S. steps to stop alleged theft of intellectual property.

ZTE agreed in March of last year to plead guilty and pay as much as $1.2 billion for violating U.S. laws restricting sale of American technology to Iran.

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The agreement called for the company to pay $892 million in fines and forfeitures and be subject to an additional $300 million in penalties if it violates the terms of the settlement. It was the largest criminal fine for the Justice Department in an export control or sanctions case.

“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” ZTE’s Chairman and Chief Executive Officer Zhao Xianming said at the time. The company is making personnel changes and instituting new compliance procedures, he said.

Denying ZTE export privileges prevents the company from “participating in any way in any transaction” subject to the U.S. government’s Export Administration Regulations, which govern sales of sensitive technology abroad. It’s also illegal for other businesses or individuals to participate in transactions with a company that has been denied export privileges, according to the department.

The U.S. Federal Communications Commission on Tuesday plans to consider a ban on networking equipment from companies such as ZTE and Huawei.

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