TELECOMS: First ZTE, Now Huawei Comes Under US Scrutiny

Bottom line: A US investigation of Huawei into possible illegal sales of US-made equipment to Iran is old news, and may be getting dredged up now to give Washington leverage in its ongoing trade frictions with China.

Some might argue that US sanctions against telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) are just the prelude to a much bigger story that could now be sharping up, with word that ZTE’s much larger rival Huawei is being probed in a similar case. The subject at the heart of this matter involves sales of American-made equipment to Iran, which would have violated earlier US sanctions against such sales to pressure Iran to curtail its nuclear program.

In fact, I’m quite surprised that this probe against Huawei is coming back into the headlines just now. Media reported on this potential probe as early as 2013, at the same time reports first emerged about a similar probe into ZTE. Additional reports appeared about a year ago saying an unnamed company was being investigated for violations similar to ZTE, with strong hints that the company was Huawei. (previous post)

The fact that this story is now popping into the headlines again seems somewhat opportunistic, since the US and China are now engaged in a fledgling trade war being largely fought by Donald Trump. Trump has threatened punitive tariffs against China for unfair trade, and China has countered with its own retaliatory threats.

Thus one might argue the Trump administration may be pressuring the Commerce Department, which handles these probes, to announce and leak related news to pressure China. The ZTE probe was already bad enough, and has led to big discussion at home about how China is still highly reliant on western companies for much of its high-tech capabilities. A Huawei probe would be even bigger news, since that company is often held out as one of China’s high-tech superstars.

All that said, let’s zoom in on the latest headlines that simply say Huawei is being probed by U.S. prosecutors in New York over whether it sold American-made high-tech products to Iran in violation of US sanctions. (English article) The only other significant item in this report, which cites unnamed sources, is that the probe may have been going on for at least two years.

For its part, Huawei has issued the vanilla statement saying that it complies with “all applicable laws and regulations where it operates, including the applicable export control and sanction laws and regulations of the UN, US and EU.” As I’ve said above, this particular probe appears to date back as long as five years, and was back in the headlines as recently as last year.

Delayed Timing

It’s a bit unclear why the probe in ZTE has wrapped up relatively quickly, whereas the Huawei probe is still taking place. The ZTE probe ended in 2016 with a finding against the company, which was followed last year by a settlement that included around $1 billion in fines. Washington said last week it would reimpose an original punishment, banning US companies from selling to ZTE for seven years, after determining that ZTE had failed to comply with some elements of the 2017 settlement.

My guess is that the Huawei case has taken longer because perhaps the company was better at covering its tracks, if it did indeed violate US sanctions. When the reports popped into the headlines last year that Huawei was still being probed, I speculated that ZTE might now be cooperating with Washington to show how Huawei had found ways to skirt the US restrictions without being detected.

I still suspect that’s the case, and that Huawei could yet be slapped with similar punishment to the one meted out to ZTE. At the end of the day, that means that Huawei could also negotiate a settlement similar to ZTE’s that allows it to avoid a ban on importing equipment from US suppliers.

This exercise does seem a bit political in some sense, designed by the Trump administration to show just how dependent China’s so-called high-tech champions remain on foreign know-how. That fact would become even more prominent if and when Washington produces its smoking gun showing Huawei violated US sanctions, since Huawei is a far more high-profile company due to its position as the world’s leading telecoms equipment seller and a major smartphone maker.