TELECOMS: US Keeps ZTE on Tight Leash, Eyes Huawei

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Bottom line: Washington’s 2 month extension of a temporary license for ZTE to keep buying from its US suppliers indicates a final ruling is likely by year end in a similar probe against Huawei for illegally selling US products to Iran.

US extends export license for ZTE

After a tense period earlier this year when it appeared it could lose access to some of its key suppliers, telecoms equipment maker ZTE (HKEx: 763; Shenzhen: 000063) has been given continued access to those suppliers under a new extension of its earlier deal with Washington. The clash stemmed from a Washington ruling that ZTE sold US-manufactured telecoms equipment to Iran in violation of trade restrictions. Washington was set to punish ZTE by cutting it off from its many US suppliers, but later relented after the Chinese company agreed to cooperate with an investigation into the matter.

No details were ever given on the nature of ZTE’s cooperation, but Washington was most likely trying to better understand the many ways that foreign firms often manage circumvent US trade restrictions. I speculated at the time that one of Washington’s top targets was ZTE’s larger rival Huawei, which has also been accused of violating US trade restrictions that were aimed at punishing Iran for its nuclear development program.

We’ll return to the Huawei angle shortly, which could become major news later this year if Washington determines the company also violated US trade restrictions. But first let’s look at the latest ZTE announcement, which says the company has been granted a new temporary license to keep importing products from its US suppliers. (company announcement; Chinese article)

After Washington first ruled that ZTE violated US restrictions earlier this year, it said a special license would be needed for the Chinese company to keep buying equipment from its US suppliers. Most interpreted that move as a ban, since Washington was expected to withhold such licenses from ZTE’s many US suppliers, which include the likes of Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL).

But then after some brief but intense negotiations, Washington relented after ZTE agreed to cooperate in its investigation and granted a temporary license for the company to keep buying US equipment. That license was set to expire at the end of this month, and now ZTE says it expects to get a new temporary license that will allow it to continue buying from its US suppliers through the end of August.

Huawei Ruling Coming?

The fact that Washington is granting such a short extension, 2 months to be precise, shows that it wants to keep ZTE on a short leash to make sure it will continue to cooperate in the investigation. But it also hints that Washington may be close to getting the information it wants as it pursues a similar case against the larger Huawei.

ZTE, Huawei and other large Chinese companies in the past had little or no concerns about trade restrictions imposed by the US or any other country, and looked for profits wherever they could. But as the pair have become increasingly reliant on western markets both as suppliers and customers, they have been forced to adhere more closely to international norms that include following western and global trade policies.

In all fairness, both companies have been making a real effort to become more transparent and adhere to global standards in recent years. But it’s impossible to change what happened in the past, and that history is now coming back to haunt both companies. Earlier this month, reports indicated that Washington had requested documents from Huawei as part of an ongoing investigation similar to the one against ZTE. (previous post)

I said at the time that the new Huawei headlines, combined with the ZTE ruling earlier this year and ZTE’s cooperation with Washington, hinted that a final guilty verdict could be coming soon in the Huawei probe. This latest short extension of ZTE’s license seems to add more evidence that such a verdict is near, and I expect the company could face similar punitive action from Washington by the end of this year.

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