Chinese telecoms equipment giant ZTE Corp. was hit with trade sanctions from the US Department of Commerce last month for allegedly violating laws restricting exports of US technology to Iran and other nations.
Trading of ZTE’s shares was suspended for a month on the Shenzhen Stock Exchange, and is down more than 3% since April 7 when trading finally resumed.
The sanctions were temporarily lifted until June 30, assuming ZTE continues to cooperate with US authorities. The increased scrutiny will likely expose other Chinese firms to similar bans, potentially introducing volatility and downward pressure on Chinese stocks—with the Shanghai Composite already down 13% year-to-date, Epoc Times reported.
The US government has been investigating ZTE’s activities dating back to 2012. The company allegedly created shell entities to sell software and telecom equipment containing components made in the United States to Iran, which was at the time in violation of US economic sanctions.
On March 7, the US government barred manufacturers from selling US-made electronic components to ZTE. The sanction was a major setback to ZTE’s global operations. The company delayed releasing its 2015 financial statements by around two weeks to assess its bottom line impact and three top executives left the firm.
Shi Lirong, CEO since 2010, and two executive vice presidents stepped down from their posts on April 5.
The case is ongoing and ZTE isn’t in the clear yet. “The investigations are still in progress and may result in criminal and civil liabilities under US laws,” the company announced on April 6 when it released its 2015 earnings.
A Critical Case
The Shenzhen-based ZTE, China’s second largest telecoms company, relies on key US components for much of its equipment.
“In the information and communications technology sector, Chinese companies are unable to wholly rely on self-production,” an equities analyst in Hong Kong told Caixin, a Chinese business magazine.
“China still lags behind in key areas, such as the production of computer chips, storage devices, electronic devices used in telecom towers and other advanced materials.”
An unfavorable outcome to ongoing investigations could bar procurement of critical components from US vendors such as Qualcomm for smartphone chips and Xilinx for base station chips, a catastrophic result for ZTE’s global business.
ZTE currently has less than 5% global market share on mobile phones, and its latest smartphones all use Qualcomm chips. It’s also a major player in networking equipment such as base stations and switches.
In a research note to investors, Nomura Securities last month estimated that between 10 and 15% of ZTE’s components are sourced from US companies. Of those components, ZTE would be able to secure alternative vendors to cover only 30% of its needs from US companies, according to Commerce Department estimates.
That means production on some products would be halted, severely crippling ZTE’s ability to compete.
Huawei Implicated?
Huawei, with annual revenues of more than $60 billion, is much larger than ZTE and has a bigger footprint in the United States as a leading smartphone maker. It would be hardly surprising if ZTE sought to replicate Huawei’s business practices.
The ongoing ZTE case could signal that the US government is increasing investigation and enforcement of trade embargo rules. And Chinese companies, especially ones in the engineering, construction, and financial sectors could be in the crosshairs.
