ZTE Corp. could be going through an existential crisis at the moment after the US Commerce Department barred American companies from selling technologies and components to the Shenzhen-based telecommunications equipment maker for seven years.
The export ban threatens to wreak havoc on the supply chain of the Chinese company because it uses Qualcomm processors and Google’s Android software for the devices that it produces.
There is widespread perception that the severe blow dealt ZTE is part of US President Donald Trump’s moves to punish China for what he perceives as its unfair trade practices and violations of intellectual property rights.
But ZTE has no one to blame but itself. The export ban was imposed after the Chinese company breached a previous agreement in connection with its violation of US sanctions on Iran and North Korea.
Under the terms of the 2017 settlement, ZTE agreed to pay the United States US$1.19 billion in fines and punish the employees who were found to have breached the US sanctions by shipping telecommunications equipment to Iran and making 283 shipments of microprocessors, routers and servers to North Korea.
However, ZTE failed to fulfill the 2017 settlement as the company continued to pay the staff responsible for breaching the US sanctions.
While most of the Chinese state-owned media labeled the US action as part of the escalating trade tensions between the US and China, the reports barely touched on the fact that ZTE failed to fulfill its obligations under the 2017 settlement.
But clearly, the US action was a punishment for ZTE for cheating the US government.
Trump may be intent on narrowing his country’s trade gap with China and stopping China from gaining access to US intellectual property, but the export ban is not a political but an integrity issue.
The US is justified in preventing its companies from doing business with ZTE, which failed to honor its commitment to a previous agreement: why should anyone deal with a company that does not honor its commitments, that does not fulfill its contractual obligations?
The State-Owned Assets Supervision and Administration Commission, which monitors the nation’s state-owned enterprises, reportedly issued a scathing commentary on how ZTE bungled the US sanctions affair.
According to the document, the company had told lies to the US government and refused to fulfill its commitment to fire the employees involved in the transactions with Iran and North Korea.
ZTE was “stupid and passive” in handling the case, the document said, adding that its short-sightedness and dishonesty could have an impact on other Chinese enterprises and even affect the country’s image.
In a stock exchange filing issued on Sunday, ZTE said it has established a compliance management committee led by no less than its chief executive.
The company said it “engaged several counsels and consultants to provide professional guidance in order to establish and optimize ZTE’s export control compliance management structure, system and procedure”.
It was also reported that ZTE has fired its compliance chief after the US export ban.
The moves came after the US Commerce Department granted its request to submit more evidence regarding the export ban.
Apparently, the Chinese company is engaged in damage control and doing whatever it could to wiggle out of the export ban.
But ZTE should first apologize to its shareholders, from retail investors to institutional investors, for its mishandling of the situation.
Then it should do its utmost to slowly rebuild the trust of its business partners, suppliers and the authorities, which it has taken for granted and so foolishly squandered.
Originally published at www.ejinsight.com on April 24, 2018.