ZTE China corruption

ZTE sidelines two more senior executives amid U.S.-China negotiations on export ban

Shenzhen-based ZTE had failed to comply with the terms of a 2017 settlement with the U.S. government.

By LI TAO | SOUTH CHINA MORNING POST

This story is being published by POLITICO as part of a content partnership with the South China Morning Post. It originally appeared on scmp.com on May 29, 2018.

ZTE Corp. has sidelined two senior executives amid ongoing negotiations between the U.S. and China over an export ban that has threatened the survival of the Chinese telecommunications equipment supplier, according to people familiar with the matter.

Xu Huijun, an executive vice-president and ZTE’s chief technology officer, and Huang Dabin, who oversees corporate operations, are no longer performing their usual duties at the company, said the people, who asked not to be named as the information is private.

They join Cheng Gang, who was replaced in March as chief compliance and legal officer, among executives who have been removed or reassigned in the wake of the U.S. Commerce Department’s seven-year ban on American companies doing business with ZTE.

The company declined to comment on the executives, who could not be reached through the main line of the company.

Shenzhen-based ZTE had breached the terms of a 2017 settlement with the U.S. government by paying full bonuses to employees who engaged in the illegal sales of equipment to Iran, failing to issue letters of reprimand to those employees, and then lying about it to U.S. authorities.

The U.S. Commerce Department responded by activating a seven-year ban that barred ZTE from doing business with American companies, cutting off the firm’s access to important components that go into everything from smartphones to network equipment.

The ban plunged ZTE into disarray, forcing Chairman Yin Yimin to admit that the company was in a “state of shock.” Because almost all parts of the company’s business had some dealings with the U.S., compliance with the order has meant a shutdown of a majority of its operations.

ZTE derived 59 percent of its revenue last year from its carrier network business, which includes switching and access systems, optical and data communications and wireless communication systems, while another 32 percent came from its consumer business and 9 percent from governments and companies.

The company has figured prominently in U.S.-China trade negotiations, with China demanding that the U.S. drop its sanctions against the company. With ongoing talks between the U.S. and North Korea over the latter’s nuclear weapons program, there were suggestions that U.S. President Donald Trump had offered to ease the punishment on ZTE as an olive branch to China.

ZTE’s swift descent into crisis following the U.S. denial order underscored its reliance on American companies, laying bare China’s vulnerabilities when it comes to having strategic control over important technology. That has sparked weeks of national soul-searching, with corporate leaders calling on companies to step up on research and development and to own core technology.

In a visit to the joint annual conference of the Chinese Academy of Sciences and Chinese Academy of Engineering, President Xi Jinping urged the country’s top scientists and engineers to build China into a global hi-tech leader.

“The situation is pressing. The challenges are pressing. The mission upon us is pressing,” Xi said, reiterating a call for self-sufficiency in important technology.

China has remained heavily dependent on imports of semiconductors, accounting for more than 60 percent of annual global chip sales, according to data from PwC. Semiconductors represent one of the top exports of the U.S., along with aircraft, refined oil and cars.

The United States has taken aim at Made in China 2025 with threats to impose tariffs on Chinese imports. Despite an easing in trade tensions, the White House appears determined to contain China’s ambitions to be a leading power in various technologies, including aerospace, industrial robots, software, high-speed trains and semiconductors.

At ZTE, Xu was the second-highest ranking executive in ZTE’s management team after CEO Zhao Xianming.

Huang, who was responsible for operational management, reported to the CEO directly before being removed from his post in March, according to the people. His removal was announced in an internal memo dated March 14 and seen by the Post.

It is unclear whether the sidelining of the three executives is sufficient to meet U.S. demands for a change in current management.

ZTE is estimating losses of at least 20 billion yuan from the U.S. export ban as clients pull out of deals and expenses mount, Bloomberg reported last week, citing unnamed sources.

The Shenzhen-based company said it has ceased “major operating activities” since the U.S. slapped it with the seven-year ban on April 15.