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 Under the measure announced by the Commerce Department on Monday,
U.S. manufacturers will be banned from selling components to ZTE,
which is a major global supplier of telecom-networking equipment. In
addition, foreign manufacturers will be prohibited from selling
products containing a significant amount of U.S.-made parts to the
Chinese company.
The Commerce Department, confirming the decision that was first
reported by Reuters on Saturday, said ZTE planned to use a series of
shell companies “to illicitly reexport controlled items to Iran in
violation of U.S. export control laws." It said ZTE acted "contrary
to the national security or foreign policy interests of the United
States."
While ZTE suppliers can apply for an export license to ship any
American-made equipment or parts, the Commerce Department said such
license applications generally will be denied.
The export restriction, which does not stop ZTE from selling
handsets in the United States, is expected to have a global impact.
“It is going to have a large ripple effect. It’s very significant to
many companies both in the U.S. and (outside the) U.S.,” said Doug
Jacobson, an export attorney at law firm Jacobson Burton Kelley
PLLC, who said he has been fielding calls from clients who supply
ZTE since Reuters broke news of the impending export restrictions.
 For example, a Taiwanese chipmaker that uses American-made
components to make processors for ZTE handsets would likely have to
cut off those sales. If the Taiwanese supplier only procures
components from outside the United States it can continue to sell to
ZTE, experts said.
“I am telling all my clients today that anything (for ZTE)not
already on board an airplane going to China, you cannot ship it
starting tonight. They have to scrub and screen their customers
lists – pending orders and future orders – to make sure that any
transactions with ZTE are flagged and stopped.”
ZTE, which has annual sales of more than $15 billion and is the only
Chinese smartphone maker with a meaningful presence in the U.S.
market, can appeal the decision.
ZTE is among the largest companies that the Commerce Department has
hit with a near-total export ban, according to public records. In
2014, the department restricted exports to Russian energy companies
Lukoil OAO and Gazprom OAO, but those restrictions only stopped
American companies from supplying certain types of oil-production
projects, such as Arctic offshore and deepwater drilling.
EFFECT ON HANDSET PRODUCTION
ZTE is the No. 4 smartphone vendor in the United States, with a 7
percent market share, behind Apple Inc <AAPL.O>, Samsung Electronics
Co <005930.KS> and LG Electronics Inc <066570.KS>, according to
research firm IDC. It sells handset devices to three of the four
largest U.S. mobile carriers - AT&T <T.N>, T-Mobile US <TMUS.O> and
Sprint Corp <S.N>.
Although ZTE is not being banned from selling handsets in the United
States, the restriction could disrupt handset production if ZTE
sources U.S.-made parts to manufacture its handsets, experts said.
AT&T declined to comment, and T-Mobile and Sprint did not respond to
requests for comment.
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A ZTE website states that several leading U.S. technology companies,
including Microsoft <MSFT.O>, Intel Corp <INTC.O>, IBM <IBM.N> and
Honeywell International Inc <HON.N>, are "key strategic partners."
Intel and Qualcomm confirmed they were ZTE suppliers, but did not
elaborate on specific products sold to the Chinese company or how
sanctions would affect their businesses.
Texas Instruments <TXN.O>, which has also said it provides
processors for the Chinese company, did not immediately respond to a
request for comment.
The impact of the new restrictions on these three companies was not
immediately clear as most of them produce components both in the
United States and overseas.
Microsoft, in an emailed statement, said, "We follow U.S. law and
will review new U.S. restrictions."
A spokeswoman for Microsoft said the company had a licensing
agreement with ZTE but could not confirm if ZTE purchases other
products, such as software.
The other U.S. companies did not respond to requests for comment.
The U.S. decision could even prompt suppliers to halt sales of
non-U.S. components that are still allowed, said Kay Georgi, an
export attorney at law firm Arent Fox LLP.
"When you get placed on one of these lists nobody wants to do
business with you at all," Georgi said.
The United States has long banned the sale of U.S.-made technology
products to Iran as part of its sanctions, even as China maintains
close diplomatic, economic, trade and energy ties with Tehran. Last
year, the United States and major world powers reached a deal with
Iran to loosen economic sanctions in exchange for Tehran curbing its
nuclear program.
"We hope this sends a strong message to ZTE, to China, and to other
Chinese telecommunications companies who present serious national
security risks not only by evading export controls, but by
purposefully compromising supply chain security," said
Representative Adam Schiff of California, the top Democrat on the
House of Representatives Intelligence Committee.
(Reporting by Steve Stecklow in London, Susan Heavey in Washington,
Yimou Lee in Hong Kong, Dan Burns and Malathi Nayak in New York;
Editing by Soyoung Kim and Leslie Adler)
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