US drops the hammer on China's ZTE amid trade tensions

The Commerce Department bans US companies from selling components to ZTE amid accusations that the Chinese telecom giant lied to the US.

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Until now, ZTE's Axon M has used US-based Qualcomm's chips and US-based Corning's Gorilla Glass.

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The US just handed down more penalties against a Chinese telecommunications giant. And no, this isn't about Huawei.  

The Commerce Department has imposed a "denial of export privileges" against ZTE, which translates to a ban on US companies selling any products and services to the China-based company. The ban lasts for seven years and comes into effect after ZTE allegedly violated the terms of a 2017 settlement, officials from the Commerce Department's Bureau of Industry and Security said Monday in a conference call. 

The ban, which could mean US players like Qualcomm and Dolby can't sell their components to ZTE for phones, comes after ZTE pleaded guilty in March 2017 for illegally shipping US equipment to Iran and North Korea and agreed to pay up to $1.2 billion in penalties. Part of the settlement required ZTE to take actions against employees who took part in the violations. 

The Commerce Department said Monday that ZTE officials lied about reprimanding the employees, and even gave some of them full bonuses.

"Instead of reprimanding ZTE staff and senior management, ZTE rewarded them," Commerce Secretary Wilbur Ross said in a statement. "This egregious behavior cannot be ignored," 

The action comes amid mounting pressure on Chinese telecommunications companies and a broader escalation of tariffs from both the US and China. Chinese phone giant Huawei has hit a wall in the US, with federal officials publicly warning against using its phones due to security risks for US telecommunications infrastructure and espionage concerns. AT&T and Verizon have reportedly dropped their plans to sell its products. CNET broke the news last month that Best Buy would likewise drop all Huawei products, including laptops and smartwatches. 

ZTE didn't respond to a request for comment. 

While Huawei has primarily been the focus of security concerns, ZTE has long been dragged along in the conversation. Both Huawei and ZTE were part of a 2012 ban against their telecom equipment, although the House Intelligence Committee said that phones weren't part of decision. 

Unlike Huawei, ZTE has had more success in the US, with its phones at various carriers and with an established presence in the prepaid market for inexpensive phones. It's a primary sponsor at marquee venues like Madison Square Garden. ZTE Mobile CEO Lixin Cheng said in an interview last month that he considered ZTE "collateral damage" in the scrutiny over Huawei and touted the US components that go into its phones. 

That may change after the ban. 

The Commerce Department said ZTE was supposed to fire four senior employees and discipline 35 others, whether by reducing their bonuses or issuing them a letter of reprimand. Bureau of Industry and Security officials said the Chinese company had fired the four senior staffers, but had taken no action against the other 35 employees.

First published, April 16 at 6:20 a.m. PT.
Update, 7:29 a.m. PT: Adds background on Huawei.

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