China's second largest manufacturer of telecom equipment and the number four smartphone maker in the United States, ZTE, is on its way to shutting down after the US government banned the company from doing business with American component suppliers, including chipmakers Qualcomm and Intel, both of which it relied heavily on for parts used its smartphones. The company's future may now depend on an appeal to modify or reverse the 7-year ban.
For the time being, ZTE says it has enough funds to avoid going completely under, but has ceased "major operating activities." In essence, the company is on borrowed time.
"As of now, the Company maintains sufficient cash and strictly adheres to its commercial obligations subject to compliance with laws and regulations. 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 US government and forge a positive outcome in the development of the matters," ZTE said in a note to investors.
The US Department of Justice recently slapped ZTE with $1.2 billion in civic and criminal penalties after it pleaded guilty to illegally providing telecommunications equipment to Iran and North Korea, and subsequently lying about its actions. However, it was the decision to impose sanctions on ZTE that is proving to be the fatal blow. American companies are unable to export components to ZTE for a period of up to 7 years, and with ZTE relying so heavily on Qualcomm and its Snapdragon processors for its Android handsets and Intel for modems, ZTE's business is in critical condition.
"“ZTE made false statements to the US government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation. ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored," Secretary of Commerce Wilbur L. Ross said at the time.
Chine's State-owned Assets Supervision and Administration Commission (SASAC) also had some harsh words for ZTE. SASAC, which regulates domestic enterprises, said ZTE's actions were simply "stupid and passive" and that the company lacked "social integrity."
It's hard to imagine the US government reversing its ban, unless it wants to extend an olive branch to China to ease ongoing tensions, particularly in the technology sector. Along with Huawei, another major Chinese telecom, ZTE has been under the US government's radar as potentially posing a national security threat.
Thumbnail/Top Image Source: Flickr via Kārlis Dambrāns