One of the many questions hanging over China’s ZTE after the US brought it to the brink of collapse is: why ZTE?
The Shenzhen-based telecoms group became the corporate face of Sino-US trade and tech wars when Washington slapped it with a punitive ban on buying vital components from the US. Though formally a punishment for failing to impose earlier American penalties over its sanction-busting sales to Iran, the timing and accompanying rhetoric left little doubt that ZTE was a pawn in a bigger game.
Unlike the much larger Huawei, ZTE’s kit has never been banned and it has drawn fewer concerns. Indeed, its handsets are America’s fourth most popular. While it is a big employer with a global workforce of 75,000 and operates in the key tech sector, it is not at the forefront of Beijing’s drive into AI and other cutting-edge technologies. Its smartphones are relatively thin on the ground in China and, far from championing it, the country’s State-owned Assets Supervision and Administration Commission has slammed the company for its “stupid and passive” actions, saying it lacks “social integrity”.
Yet this is the company that brought about negotiations at the highest level between the presidents of the world’s two largest economies. Those talks led to a settlement handing ZTE a lifeline in return for a $1bn fine, the overhaul of its board and senior management, and real-time monitoring by a US team.
“It was beyond our belief when [President] Xi Jinping went to battle for ZTE, when even in China people said it should go bankrupt,” said one Beijing-based lawyer. But the US monitoring demands, he added, were equally unprecedented. “It’s the first time in China’s post-1949 history that it has allowed a foreign government to enforce foreign law on the soil of China.”
Under the agreement with Washington, ZTE will retain for 10 years special compliance co-ordinators selected by and answerable to the US Bureau of Industry and Security. It is, said the bureau, “the first time BIS has achieved such stringent compliance measures in any case”.
There are several theories as to why China went in to bat for ZTE. One is military: among ZTE’s direct and indirect shareholders are two military-linked defence conglomerates that together account for China’s entire strategic missile industry.
These include the China Aerospace Science and Technology Corporation, which manufactures most of the country’s intercontinental ballistic missiles, and a subsidiary of China Aerospace Science and Industry Corporation, which supplies short and medium-range ballistic missiles and cruise missiles to the army.
But the more ominous theory in China is that Washington sees its moves against ZTE as a warm-up act for battles yet to come — and Beijing is making concessions now to protect bigger players such as Huawei. If that is the case, ZTE could not afford any mistakes in meeting the US settlement. Yet a phalanx of congressmen are calling for a reversal of the deal and the company itself has been carrying out Washington’s orders in a way that appears to meet demands without necessarily embracing the spirit.
Take personnel. It duly fired and replaced the board, as mandated. But many of the proposed new board members are dyed-in-the-wool insiders and have fulfilled Communist party committee roles in the past. Some have also served at various shareholding companies of Zhongxingxin, ZTE’S controlling shareholder. Likewise with senior management. The company’s new president has spent two decades with the company, and last served as assistant to his predecessor. Of the three incoming executive vice-presidents, two are internal promotions (including another 20-year staffer) and the third worked as assistant to the dean of the China Aerospace Electronics Technology Research Institute, an indirect Zhongxingxin shareholder.
Such a tight-knit structure makes it hard to imagine that US monitors, even Mandarin-speaking ones, will be able to get a handle on ZTE. The company has also shown its willingness to throw competitors under the bus. Part of its 2011 submission to the BIS over export violations included a detailed section on another company that had been selling into Iran. The authors helpfully detailed the structure that the company, which it called “F7”, used to carry out projects in embargoed countries, peppering it with information that has been widely seen to match Huawei.
Huawei has always insisted it complies with the laws and regulations of all jurisdictions in which it operates, including US export controls and sanction laws. But in the current febrile climate, its name is increasingly appearing in various congressional complaints. ZTE may not be the last corporate target for the US.
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