ZTE ordeal shows allied cooperation key to keeping bad actors in check

The recently announced agreement by Commerce Secretary Wilbur Ross concerning the Chinese technology company ZTE sends a strong signal that there will be consequences to those who choose to violate or ignore sanctions imposed by the United States and other multilateral institutions.

The ZTE controversy stems from an ongoing investigation by the FBI and the intelligence community that ZTE had been selling and installing telecommunications networks in Iran and North Korea in clear violation of U.S. and United Nations sanctions imposed on these countries for their work on developing nuclear weapons.

{mosads}Instead of disciplining the employees responsible for the Iran and North Korea transactions, ZTE incomprehensibly rewarded the offenders with bonuses. 

For those unfamiliar with ZTE, it would be appropriate to provide some background on this company. ZTE, along with Huawei, is one of the two largest telecommunication’s equipment makers in China. These companies compete against the likes of Nokia Siemens, Erikson and Alcatel Lucent.

Two-thirds of ZTE’s revenues come from the manufacture and sale of telecommunication network equipment and the remainder of its sales comes from consumer products such as mobile phones.

The area where ZTE is particularly strong is in cellular base stations. This is the affiliated hardware and software that forms the backbone of cellular telephone networks.

ZTE is accorded status as a “national champion” and by any measure a substantial “red-chip” company in China’s corporate landscape. 2017 revenues amounted to over $17 billion, and it employs over 80,000 people.

ZTE is partially state-owned and publicly listed. At its inception, ZTE was a subsidiary of China’s Ministry of Aviation, providing it a multitude of governmental privileges including easy access to capital, access to the best universities and research institutes and access to a nationwide sales network of companies affiliated with the aviation ministry.

ZTE’s leadership and CEOs are all hand-picked by the China Communist Party. A party commissar, or party secretary, is integral on company direction and has a seat on the management council.

While companies like ZTE or Huawei have no presence in the United States, they have been doing well in emerging market and frontier market economies. ZTE will enter such markets and win contracts by offering complete turn-key solutions that include the design, building and financing of telecommunication networks.

They can out-compete western companies with their lower prices and attractive financing terms. ZTE has been designated as one of the companies high on President Xi Jinping’s “going out” strategy of encouraging Chinese companies to internationalize to become China’s version of Samsung.

The U.S. Department of Commerce Bureau of Industry and Security (BIS) is tasked with the oversight and enforcement of U.S. export control laws. The ZTE case fell squarely within its jurisdiction and it has the power to impose a range of penalties as a part of its enforcement powers.

Commerce Secretary Wilbur Ross announced that ZTE has agreed to satisfy a $1 billion penalty and place in escrow an additional $400 million as a compliance guarantee that it shall abide by rules imposed by the United Nations as well as the United States against sanctioned nations.

This comes on top of the $892 million ZTE has already paid in fines and penalties over the past year. In addition, ZTE has agreed to change its senior leadership and expel its board members in favor of new directors.

ZTE Chairman Yin Yiming, in a company-wide town hall, expressed his apologies for the events and pledged to make the appropriate changes to prevent such malfeasance in the future.

The ZTE episode offers a demonstration that international institutions and commitment from allies work. The fact that ZTE had no alternatives for critical parts gives strength and bite to U.S. mandates. That ZTE could not turn to Germany, Japan or South Korea as alternate sources for parts forced ZTE to waive the white flag.

Had the ban on ZTE continued, it would most certainly have resulted in the company’s demise. It’s ironic that President Trump, who assails multilateral institutions and the strength of alliances, has in this instance been fortified by those institutions that he wishes to dismantle.

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.