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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  • DanNeely - Tuesday, April 17, 2018 - link

    If the initial fines for the violation didn't make people stop, I don't think the additional penalties from this will either.

    The question is how far will the bans effects cascade across their product line. I saw an estimate elsewhere that they bought $500m of Qualcomm SoC's last year. That's a big hit for QC and having to replace all of their current/upcoming designs using QC SoCs with ones from someone else is going to be a huge it in and of itself. But with IP blocks being passed around like crazy between various vendors they could potentially find themselves locked out from other major SoCs too because of US sourced blocks in their chips.
    Reply
  • sonny73n - Wednesday, April 18, 2018 - link

    @webdictors
    Keep the politic bullshit to yourself. People like you only support selling weapons to Saudi Arabia and the likes.
    Reply
  • PeachNCream - Tuesday, April 17, 2018 - link

    Isn't China in general already working on a large number of technologies and varied industries that would allow the country to operate more independently from other nations' goods and services? I remember reading about a number of Chinese efforts like Red Flag Linux and the Loongson MIPS64-based CPU. One would think they were aware of their vulnerability in that regard as they were working on solutions even years ago because of the potential threats to domestic telecommunications and computing capabilities. I can't see as how this won't add a little fuel to that fire. Reply
  • ZolaIII - Tuesday, April 17, 2018 - link

    Kubuntu now. Last year when Imagination Technologies whose facing bankruptcy & whose forced so sell US government intervened that Imagination CPU MIPS business and GPU business must be split up & by all means how MIPS business cannot be bought by Chinese company or it's collaborative. This is with a single goal of undercutting the Chinese MIPS efforts & MIPS is still mostly British and located in Britain. Chinese how ever bought Imagination GPU business true American trust found & it's still located in the US. This is just one of examples of US uncompetitive practices. Intel ain't anymore the biggest semiconductor manufacturer & how this is only another step in ruining Qualcomm it really makes me wonder will their be anything left of the last big US monopoly aka semiconductor production capabilities in let's say next ten years. US government certainly doesn't help with ruining the famous US manufacturers. Reply
  • AiiiMT - Thursday, April 19, 2018 - link

    I think it's time China start banning Cisco and other American companies in a similar manner.

    It's completely absurd China hasn't applied any sanctions to the US despite them attacking so many countries and raising terrorists to overthrow so many governments. To top it off now they want to tell Chinese companies to stop trading with peaceful countries like Iran and North Korea.
    Reply
  • raghu8912 - Thursday, April 19, 2018 - link

    Really you think North Korea is peaceful ?
    North Kore is the only country in last decade to test nuclear weapons.
    I am pretty confident that you are posting this from China.
    It depends on who's loosing by refusing to do business with Western companies.
    China is not three yet, they are not self sufficient, and they have to steal lot more before they can become self sufficient.
    Reply
  • NeuralNexus - Sunday, April 22, 2018 - link

    GOOD! We don't need anymore Chinese OEM stealing US tech and making crappy products to siphon our data and hack our network infrastructure here. This should've happened ages ago Reply
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