Fortune.com/David Meyer: One of the World's Biggest Phone Firms Is Stopping Operations Because of a Ban on Buying U.S. Parts

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Tech-China

One of the World's Biggest Phone Firms Is Stopping Operations Because of a Ban on Buying U.S. Parts
By David Meyer 4:25 AM EDT

ZTE, a major Chinese phone company and the country’s second-largest manufacturer of telecom network equipment, may have been finished off by a U.S. ban on its purchase of American components. The ban stemmed from ZTE’s violation of sanctions on Iran and North Korea.

The company said in a Wednesday investor note that, as a result of the U.S. “denial order, the major operating activities of the company have ceased.”

“As of now, [ZTE] maintains sufficient cash and strictly adheres to its commercial obligations subject to compliance with laws and regulations,” the Android manufacturer said. “The company and related parties are actively communicating with the relevant U.S. government departments in order to facilitate the modification or reversal of the denial order by the U.S. government and forge a positive outcome in the development of the matters.”

ZTE got hit with a fine of almost $900 million last year for evading the embargo on telecom equipment exports to Iran, by using U.S. components in devices that it sold there. It had also violated sanctions on North Korea by selling equipment there.

According to the U.S. Commerce Department, ZTE then violated its settlement by failing to reprimand—and paying full bonuses to—the employees who were involved in the sanctions-busting, and by lying to the Americans about it.

As a result, the U.S. issued its denial order, forbidding ZTE from buying chips from companies such as Intel (intc, +0.00%) and Qualcomm (qcom, +2.60%), and optical components from Lumentum. The ban even potentially extended to Android, the Google-made operating system that powers ZTE’s phones.

ZTE was furious, but there was nothing it could do. Unable to make new phones, it ran out of inventory.

ZTE’s shares have been suspended since the order was issued, but those of its non-U.S. suppliers, such as Mobi Development Co. and Shenzhen SDG Information Co., are down around 1% on the news that it is ending major operations.

All eyes will now be on Huawei, also a major player in Android smartphones and telecom equipment. Like ZTE before it, Huawei is reportedly under investigation in the U.S. for violating sanctions against Iran.

A lot is riding on the U.S.-China trade talks that are currently underway, as the latter country tries to avert the threat of an all-out trade war. The U.S. is demanding that China stop targeting its technology and intellectual property “through cyber operations, economic espionage, counterfeiting and piracy,” and that it agree to “abide by U.S. export control laws.”

The possibility of losing access to critical U.S. components has led to a great research and development push in China in recent years, as companies race to devise homegrown alternatives; suppliers in Japan and South Korea lack the capacity to provide all the components China needs.

Ironically, the White House fears that this R&D is unfairly building on American technology—thereby exacerbating its hostility to China on trade.
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