ZTE faces U.S. export restriction for Iran sanctions violations

ZTE at Mobile World Congress 2016Chinese telecom network maker ZTE is facing huge challenges in the international mobile markets due to a new U.S. export restriction for alleged Iran sanctions violations.

Chinese telecom product makers including Huawei and Lenovo also have larger presence in the U.S.

ZTE, which was aiming to achieve 23.8 percent growth in revenue to RMB 100.8 billion in 2015, will be under extreme pressure this year to improve its revenue performance. ZTE relies on 4G handsets, 4G network products, among others, in the global telecom markets to enhance revenue.

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The Commerce Department said U.S. manufacturers will be banned from selling components to ZTE, which is a global supplier of telecom networking equipment, according to Reuters reports. Foreign manufacturers will be prohibited from selling products containing a significant amount of U.S.-made parts to the Chinese company.

Chinese ZTE in US turmoil

# China government opposes the measures
# ZTE wants immediate resolution
# There could be substantial parts shortages
# U.S. manufacturers banned from selling components to ZTE
# Foreign manufacturers prohibited from selling products containing U.S.-made parts to ZTE

The Commerce Department said ZTE planned to use a series of shell companies to illicitly re-export controlled items to Iran in violation of U.S. export control laws. ZTE acted contrary to the national security or foreign policy interests of the United States, it said.

“We hope this sends a strong message to ZTE, to China, and to other Chinese telecom companies who present serious national security risks not only by evading export controls, but by purposefully compromising supply chain security,” said U.S. Representative Adam Schiff of California, the top Democrat on the House of Representatives Intelligence Committee.

While ZTE suppliers can apply for an export license to ship any American-made equipment or parts, the Commerce Department said such license applications generally will be denied.

However, ZTE, which has annual sales of more than $15 billion and is the only Chinese smartphone maker with a meaningful presence in the U.S. market, can appeal the decision.

The export restriction is expected to have a global impact. “It’s very significant to many companies both in the U.S. and outside the U.S.,” said Doug Jacobson, an export attorney at law firm Jacobson Burton Kelley.

A Taiwanese chipmaker that uses American-made components to make processors for ZTE handsets would likely have to cut off those sales. If the Taiwanese supplier only procures components from outside the United States it can continue to sell to ZTE.

The export restriction does not stop ZTE from selling its handsets in the United States. ZTE is the No. 4 smartphone vendor in the United States, with a 7 percent market share, behind Apple, Samsung Electronics and LG Electronics, according to IDC. ZTE sells handset devices to telecom network operators such as  AT&T, T-Mobile US and Sprint in the U.S.

Though the Commerce Department of the US has not banned ZTE from selling mobile handsets in the United States, the restriction could disrupt handset production if ZTE sources U.S.-made parts to manufacture its handsets. ZTE has partnerships with Qualcomm, Texas Instruments, Intel, Microsoft, etc.

Vina Krishna
[email protected]