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July, 2018

ZTE's brand will never be the same

Original article: The Verge

The U.S. has lifted its ban on trade with ZTE, freeing up the Chinese telecoms giant to resume purchasing equipment and software from American companies. While the ban was in place, ZTE was teetering on the brink of collapse. The company's smartphones rely on components from U.S. suppliers and Google's Android operating system. “Three interlocking elements — a suspended denial order, the $400 million in escrow, and a compliance team selected by and answerable to the Department — will allow the Department to protect US national security,” Commerce Secretary Wilbur Ross said in a statement.

Analysis:

Ostensibly, the worst is over for ZTE. It no longer faces imminent collapse. Investors responded to the repeal of the ban with measured optimism. On Monday, ZTE’s Hong Kong-listed shares rose 5.5% to $14.50. They had fallen more than 40% prior to suspension of trading in April. 


But it's hardly going to be business as usual for ZTE going forward. First of all, the ban has bruised the company's finances. A May CNN Money report estimates that ZTE's revenue could contract 10-20% this year. In 2017, ZTE earned about US$17 billion. 


Secondly, ZTE remains in the crosshairs of U.S. lawmakers, both Democratic and Republican. “ZTE should be put out of business," Senator Marco Rubio (R-FL) said in a statement issued after the ban was lifted. "There is no ‘deal’ with a state-directed company" that Beijing uses to spy on Americans in which the U.S. is the winner, he added. 


During a June legislative session, Senate Democratic Leader Chuck Schumer called ZTE technology "a national-security threat." He added: "Why on earth is the Trump administration considering relaxing penalties on such a bad actor?”


Indeed, ZTE's business partners will think twice about working with a company of ill repute. ZTE not only violated U.S. sanctions on Iran and North Korea. It also sought to systematically conceal evidence of its wrongdoing. Company executives repeatedly lied to U.S. officials. 


ZTE is no champion of intellectual property rights either. In a July 11 report, Mondaq noted that ZTE was found to be wilfully infringing seven of Japanese electronics manufacturer Maxell's U.S. patents related to technology used in mobile phones and tablets. A Texas court ordered ZTE to pay Maxell $43.3 million in damages. 


A close look at ZTE's record shows a history of unethical behavior. In a June report, The New York Times pointed out that the company was accused of bribing officials in the Philippines in 2007. In 2012, two of its executives were convicted of corruption in Algeria. In 2013, a contract with local police in Kenya was canceled because of overbilling. 


Ultimately, the ZTE case affirms many negative assumptions about the business practices of Chinese tech firms. It will certainly affect the company's important U.S. smartphone business, despite ZTE's robust ties with American carriers. Additionally, the ZTE case could have far-reaching effects on the ambitions of other Chinese tech companies as they look to expand globally.

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