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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  • nagi603 - Tuesday, April 17, 2018 - link

    > Instead of reprimanding the employees, the company is stated to have rewarded them with full bonuses.

    It's not like anyone had previously showed them in the US how to operate... I mean, banks that participated in the mortgage crisis and did the exact same thing never received anything more than some semi-harsh words and bailout packages.
    Reply
  • serendip - Tuesday, April 17, 2018 - link

    But those were American banks, American insurance companies and American car companies that got bailed out after 2008. See a pattern there? ZTE is Chinese so it gets the book thrown at it. Reply
  • Despoiler - Tuesday, April 17, 2018 - link

    You are conflating domestic economic crisis actors with international sanctions violations. Not even remotely the same thing. Reply
  • Alexvrb - Wednesday, April 18, 2018 - link

    Not to mention the US government helped create that mortgage crisis with such legislation as the Community Reinvestment Act. It's kind of hard to punish banks for handing out loans to people they knew couldn't pay them back... when the government is the one that was pushing them to do so in the first place. Reply
  • Stas - Thursday, April 19, 2018 - link

    yup Reply
  • R0H1T - Tuesday, April 17, 2018 - link

    Try harder! China engages not only in (state sponsored) IP theft but also making it nearly impossible for tech companies to operate in the mainland without giving up trade secrets & so much more, this on top of other restrictions like forcing JV & some such BS. As a matter of fact the Chinese revel in the art of stolen tech, many of them are also proud of it. Reply
  • Retycint - Tuesday, April 17, 2018 - link

    Cue the one salty anti-China commenter that always appears on articles on China. At this point it's like a broken record that parrots out the same few points over and over again. "China steals tech blah blah unfair to US blah blah Western companies can't compete" Reply
  • BurntMyBacon - Wednesday, April 18, 2018 - link

    @Retycint
    So are you disputing the points or are you just tired of hearing them?

    If you are disputing the points, you haven't actually presented an argument here. When one side of a dispute has no case, then the other side can appear more valid even with a weak case.

    If you are not disputing the points and are just tired of hearing them, then I have a hard time following. Perhaps you are not American and are unconcerned with what you see as American woes, though the points seem to apply to anyone who isn't Chinese. If you are American, I would think repeated offenses, even after being called out on it, would incite anger, not apathy. Where I come from if someone slaps you in the face a third time, you don't just suddenly change from insulted to bored.
    Reply
  • AiiiMT - Thursday, April 19, 2018 - link

    Americans like you always spout bullshit about China "stealing" tech without providing a shred of evidence. It's just like the current bullshit spying accusations against Huawei and ZTE, after years of trying they still can't find any proof. Meanwhile what is proven by the Snowden leaks is that it's in fact the US who's been putting backdoors in Cisco routers, Intel processors, Windows operating systems for years and years and years.

    Hypocrisy much?
    Reply
  • 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

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