US Sanctions Spotlight China Expansion Risk 美国制裁突显中国扩张风险
New US sanctions against a handful of Chinese companies accused of illegally selling goods to Iran, North Korea or Syria are once again casting a spotlight on the risk investors and businesses face when dealing with Chinese companies, especially sellers of high-tech equipment and services. In this particular case most of the sanctioned companies appear to have ties to China’s military and are all privately held. But other high-profile cases in the past year have pointed to similar potentially illegal behavior by telecoms equipment giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063), which are suspected of selling or trying to sell goods to Iran, possibly in violation of US or UN sanctions.
This kind of behavior is almost inevitable as Chinese firms with little or no global experience seek international business opportunities wherever they can find them. Since these firms often have trouble competing in the most lucrative developed markets where competition is fiercest, they often end up looking for opportunities in less competitive places like politically unstable countries in Africa or countries that have been shunned by the west for political reasons. In this case, Iran and North Korea have both been black-listed by the west, by the US in particular, due to their suspected attempts to develop nuclear weapons.
All that said, let’s take a look at the latest headlines that have the US imposing new sanctions against a handful of Chinese companies for allegedly violating rules that prohibit the sale of goods to Iran, North Korea and Syria. (English article) The only company named in most of the reports is Poly Technologies, a state-run weapons maker. I suspect that most or all of the other companies are also state-run firms mostly involved in the defense or related business, meaning these are highly specialized companies that do most of their business with governments rather than individuals.
China predictably issued a strong protest against the sanctions, calling them a serious violation of international norms and an act that hurts China’s interests. I suspect that in this case the US probably has strong reasons for its actions, as it is unlikely to take such a step that could so obviously harm its relations with China without strong proof.
These kinds of sanctions obviously will have the short-term effect of harming Poly Technologies by affecting its ability to do business in other countries besides Iran or North Korea. But even if the sanctions are eventually dropped, this kind of development will inevitably hurt all the accused companies longer term by damaging their reputations.
Many of these companies’ customers in other countries will probably limit or completely sever their relations in the months ahead, partly because they don’t want to anger the US. But perhaps more importantly, customers of these Chinese companies will fear future similar business disruptions. Those kinds of disruptions can be a nightmare for companies that often build their long-term business plans based on relationships with big suppliers like Poly Technologies.
In similar cases, ZTE has been accused of helping Iran to build an advanced telecoms network (previous post), and Huawei is also suspected of trying to illegally sell equipment to Iran through one of its business partners. (previous post) I’m not aware of any sanctions being imposed on either Huawei or ZTE in either of these cases. But it’s always possible they such sanctions could come with little or no warning similar to this latest case. Some of ZTE’s global partners have already shown signs of severing their relationships with the troubled company, perhaps due to the Iran case. Accordingly, western investors and companies should strongly consider this risk element when dealing with major Chinese companies, especially ones from the tech sector that are actively expanding abroad.
Bottom line: New US sanctions against Chinese companies for illegally doing business with Iran and North Korea spotlights the risk that such these inexperienced firms face in their global expansion.
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