Risk & Compliance

U.S. Parts Ban Forces Halt to ZTE Operations

The Chinese smartphone maker, which is heavily reliant on Qualcomm processors, is seeking a reversal of the Commerce Department's ban.
Matthew HellerMay 9, 2018

Chinese smartphone maker ZTE said Wednesday it had ceased “major operating activities” as a result of a U.S. ban on American companies supplying it with parts.

The announcement is the first major indication of the fallout from a “denial order” that the Department of Commerce issued on April 20, citing ZTE’s breach of a settlement of allegations it illegally shipped goods to Iran.

ZTE’s products, including smartphones, use such American parts as microprocessors from Qualcomm, glass made by Corning, and sound technology from Dolby.

“As a result of the denial order, the major operating activities of the company have ceased,” ZTE said in a filing with the Hong Kong Stock Exchange.

It added that it was “actively communicating with the relevant U.S. government departments in order to facilitate the modification or reversal of the denial order by the U.S. government and forge a positive outcome in the development of the matters.”

Experts had predicted the ban would be devastating to ZTE, the fourth-largest handset brand in the U.S. According to Quartz, “Over 50% of its smartphones come packed with processors from San Diego-based Qualcomm, while the bulk of its remaining devices rely on chipsets from Taiwan’s MediaTek.”

Taiwan’s Ministry of Economic Affairs last week granted an export permit to MediaTek, while several other Taiwanese companies are reportedly waiting for similar approvals.

But Quartz noted that “While ZTE can continue to rely on MediaTek to supply it for mid-range devices, no chipmaker other than Qualcomm can adequately power the company’s high-end devices.”

ZTE had reached a settlement with the U.S. in 2017 following a multiyear investigation into claims that it violated U.S. sanctions against Iran and North Korea by selling electronics to those countries. The Chinese firm also agreed to pay $890 million in fines and penalties.

The Commerce Department said ZTE breached the agreement by failing to discipline or reduce bonuses to senior employees.

“The penalty will likely serve as a further impetus for Beijing to improve its domestic semiconductor industry and become less reliant on foreign companies like Qualcomm,” Quartz said.