Yesterday, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has announced the activation of a denial order against ZTE, banning the company from US technologies covered under Export Administration Regulations (EAR).

The ban follows an investigation and follow-up guilty-plea in March 2017 that ended with a civil and criminal penalty imposed on ZTE for illegally shipping telecommunications equipment to Iran and North Korea. On top of the $892M monetary penalty, the settlement agreement put ZTE on "probation", with the company agreeing to forfeit their export privileges for seven years and paying the remaining $300M of the original $1.19B fine in case of a breach or further misconduct.

The Department of Commerce has now determined that ZTE has breached the settlement agreement by giving false statements and failing to enact disciplinary actions to parties originally identified as responsible for engaging in the illegal conduct. Instead of reprimanding the employees, the company is stated to have rewarded them with full bonuses.

The activation of the Denial Order has broad consequences for ZTE as it blocks the company in participating in any transaction of “technology” that is subject to the EAR.

What the EAR covers is extremely precise and fine-grained as it tries to characterise military-grade equipment technology. The categories that would most impact ZTE are items falling under categories 3, 4 and 5; Electronics Design Development and Production, Computers, and Telecommunications & Information Security. The telecommunications document is particularly interesting as it covers ubiquitous technologies in use in today’s networking and mobile devices. The EAR makes clear exceptions to radio technologies covered by ITU standards, however then goes on to more specific items which possibly apply to cellular modems and base stations.

ZTE’s main business is networking equipment where they are a major player alongside other mentionable companies such as Nokia, Ericsson, Huawei and Cisco. Category 3 covering Electronics Design Development has a lot more broad implications for this business as it covers semiconductor components that not only can be present in US exported products but may be IP that ZTE licenses to use in-house in their custom networking chipsets. If this is the case, there are wider implications at play as it would severely block the company from developing equipment.

On the consumer devices side ZTE makes heavy reliance on Qualcomm SoCs to power their smartphone products. We briefly talked with ZTE during last MWC about their partnership with Qualcomm and were told that the relationship is very strong and ZTE had continued plans to use Qualcomm chipsets in the future. We have reached out to Qualcomm for comment but haven’t had a response yet, however we see on Qualcomm’s Export Control Assurance (ECA) form the following confirmation of company's products being subject to the regulation:

Qualcomm Incorporated, its subsidiaries and affiliates’ ("Qualcomm") hardware, software, source code and technology (collectively, “Products”) are governed by the export laws of the US and other countries where we do business.  Products obtained from Qualcomm, are subject to the US Government (“USG”) export control and economic sanctions regulations, including the Export Administration Regulations (“EAR”, 15 CFR 730 et seq.)

The BIS denial order specifically prohibits ZTE under section “FIRST A”:

  1. Applying for, obtaining, or using any license, license exception, or export control document;

While I’m not too clear on the exact legal ramifications here and this is just my interpretation, it seems that if Qualcomm would be outright blocked from issuing ZTE an ECA, which is essentially an EAR waiver, and thus not able to sell any of its products to ZTE anymore.

The ramifications could go even further because seemingly the EAR applies to re-exports as well, so any other company using US IP would in theory be blocked from selling to ZTE. Semiconductor companies such as SoC vendors make wide use of common foundation IP which often can come from US vendors, say from Cadence or Synopsys. If such products fall under the EAR, then the regulations could have a domino effect on the product chain and also involve non-US silicon vendors such as MediaTek or Samsung.

ZTE’s only comment on the story comes as a short press release on its website:

ZTE is aware of the denial order activated by the United States Department of Commerce.  At present, the company is assessing the full range of potential implications that this event has on the company and is communicating with relevant parties proactively in order to respond accordingly.

Seemingly in tandem with the US BIS announcement, the UK’s National Cyber Security Centre issued an advice statement to the UK telecommunications sector highlighting the potential national security risk from using ZTE equipment or services cannot be mitigated.

Following the announcements ZTE has suspended trading in the company’s shares.

Source: US Department of Commerce

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  • raghu8912 - Thursday, April 19, 2018 - link

    Snowden leaks & Stealing technology by Chinese companies are two different issues.
    It's open secret that Chinese manufacturers steal technology from west.
    Piracy is rampant in China, what % of Windows OS are authentic ?
    Why would China force companies to tie up with local business to manufacture in China ?
    So that local business can "Lean" manufacturing techniques from international companies.
    My friend works for a software company, his client is a bank in China, his client always asks for source code for the software they are working on, every time there is a bug, they would like to see source code, they are trying to get source code so that they can use that code to develop their own software.
    Reply
  • FullmetalTitan - Friday, April 20, 2018 - link

    U.S. gov't spying on citizens is a huge strawman when we are talking about state-owned tech industry strong-arming international partners to give concessions in the form of technology transfer in order to operate within China.

    They are both bad practice, and I don't think anyone here was even disputing that American gov't actions like this are wrong. The difference is that stealing mounds of personal data from private citizens does nothing to prop up technological advancement, and the fact that China's tech industry IS the state, whereas U.S. companies involved in actions similar to what you described are doing so exclusively for personal wealth/influence.
    Reply
  • NeuralNexus - Sunday, April 22, 2018 - link

    China does steal tech and everybody knows it's. The only people in denial are those who support China's thievery and wants our data and innovation passed on to China. Reply
  • NeuralNexus - Sunday, April 22, 2018 - link

    China in fact steals and it time they pay the place for that thievery. Reply
  • 1prophet - Wednesday, April 18, 2018 - link

    Oh boo hoo, American corporations went to China for easy profits due to the disparity that exists in the costs of labor, environmental issues, safety rules etc. that make it more expensive to operate in western countries because of the false mantra brainwashed into our executives called "profit only matters", and employees are nothing more than commodities (human resources) subject to the lowest bidder mentality.

    China rope a doped American corporations using their own greed against them by sacrificing their people and environment so the fool westerners would think they found a slave/serf paradise to make money hand over fist and because they were blinded by their immediate profit greed didn't realize what they were doing was transferring knowledge and building up China while eroding their economy and middle class back home,

    now that the Chinese have been built up enough to start flexing their muscles and tell these corporations how they are going to play the game, these same "profit only matters", "cheapest is best" hero corporarists that used China so they don't have to pay American workers and the associated costs run to the taxpayer funded American courts and the President crying over the injustice of it all.
    Reply
  • Alexvrb - Wednesday, April 18, 2018 - link

    Minor point, in many cases the influence to move overseas came from shareholders and their competition.

    With that being said, yes they were short-sighted and unwittingly created a monster. Now moving forward, do you simply cheer on the monster? Or do you try to do something about it? Which is more productive?
    Reply
  • knightspawn1138 - Tuesday, April 17, 2018 - link

    I don't know how I should feel about a company selling it's products in Iran and North Korea, but I know I still love my ZTE Axon 7 phone. It was $400, and it's been a better smart phone than any LG I've owned. As for selling products in Iran and North Korea, I think the sanctions the west places on those countries are stupid and mis-placed. There are other countries with much more brutal warlords and governments in power that the west turns a blind eye to. Most likely because there are western companies making money in those countries rather than Chinese companies. Reply
  • webdoctors - Tuesday, April 17, 2018 - link

    Sure you can argue about sanctions against Iran, they're just a bogeyman used for propaganda purposes, but it'd be hard to justify any compassion against the N. Korean regime. It'd be ridiculously easy to run a smear PR campaign against any company propping up that country.

    If ZTE really wanted the cash, they should've hidden it through a shell corp. Now Samsung, LG, Motorola can bring it up when trying to compete in any phone segment.
    Reply
  • Alexvrb - Wednesday, April 18, 2018 - link

    "Iran is just a bogeyman"

    *Fifteen years later Iran nukes a neighboring country*

    "Damnit why didn't anyone DO anything about Iran?? I was there calling for action the whole time honest!"
    Reply
  • webdoctors - Tuesday, April 17, 2018 - link

    This has huge implications, not just American business but everything. Who'll buy a ZTE product (even with non-USA tech in it) if you know they're supporting Iran and N. Korea? The optics for a company would be terrible, I can't imagine AT&T retaining them in their cellphone product portfolio.

    Similarly, would qualcomm risk supplying chips or doing business with them in China? How would their employees feel about supporting N. Korea? Terrible business decision. They shoud've separated the business to another chinese company owned by the gov.
    Reply

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