US Levels Trade Sanctions against Major Telco Manufacturer

The US Commerce Department placed heavy trade restrictions on the multinational conglomerate ZTE yesterday, citing evidence that the telecommunications equipment manufacturer had exported products to a sanctioned country in violation of the international embargo in place there. Reuters reports that the sanctions, which almost completely restrict US companies from supplying their products to ZTE, are likely to substantially disrupt its sprawling global supply chain, and could potentially result in shortages of critical parts.

The sweeping ban by Commerce Department also prohibits foreign manufacturers from supplying US-made components to ZTE and will only allow suppliers that have successfully applied for an export license to do business with the company. However, the Commerce Department also advised that such export license applications will generally be denied.

According to a statement released by the Commerce Department, the aggressive measure came in response to findings of a long-standing investigation by the US government that the company had planned to use shell companies in order to “to illicitly reexport controlled items to the target country in violation of U.S. export control laws” thereby acting “contrary to the national security or foreign policy interests of the United States.” It is also reported that the company exported prohibited products to the forbidden country.

While ZTE has yet to release a statement in response to the ban and the charges levelled against it, it did request that its shares be suspended from trading on the stock exchanges, effective as of yesterday, March 7, 2016.

The impact of the sanctions imposed against the company are expected to be sweeping and global in scope, given the extent of the company’s business activities worldwide which range from semiconductors to smartphones and software. ZTE is currently the fourth largest smartphone vendor in the US. The ban will also adversely impact US suppliers to ZTE, such as Qualcomm Inc. and Intel which export chips to the company.

Furthermore, there is the possibility of backlash and reciprocal measures being adopted by the foreign government, which warned that the ban could “harm economic and trade cooperation and bilateral relations.” The Wall Street Journal also speculated that the Commerce Department’s measures could have the effect of catalyzing innovation and development of domestic manufacturing capabilities to make up for the shortage.

This analysis lines up with findings from Bizety’s prior report on the Chinese Telco Market, which notes that they have enforced local standards in the past in order to wean its state-owned companies off of foreign suppliers and spur indigenous innovation.

Overall, the news of the heavy sanctions struck a dissonant chord with observers who follow ZTE, which has otherwise been the subject of positive media coverage. The company announced just weeks ago that its revenues had increased by 23.8% in fiscal year 2015 and that its net profits had grown by 43.5% in that same period of time.

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