ZTE tells suppliers China trade row may be factor in U.S. ban: source

NEW YORK - 26 April 2018: China’s ZTE Corp (000063.SZ) held a conference call on Wednesday with major suppliers, during which a company representative suggested the trade dispute with Beijing may have been a factor in last week’s U.S. order banning American firms from selling goods to the smartphone maker, according to a person familiar with the call.

The Commerce Department last week banned American firms from doing business with ZTE after the company violated an agreement reached after it was caught selling U.S. goods to Iran despite U.S. sanctions.

The ZTE representative on the call said it would be naive to think the ban was ordered in “a vacuum” and was assumed to be connected to the U.S.-China trade war, the person said.

The U.S. has threatened to impose tariffs on up to $150 billion of Chinese imports, prompting Beijing to warn that it would retaliate if Washington pushes ahead. The U.S. also has taken actions aimed at reducing access to the U.S. by ZTE and Chinese tech company Huawei Technologies Co Ltd [HWT.UL] amid allegations the companies could be using their technology to spy on Americans.

In response to a Reuters request for comment, U.S. Commerce Secretary Wilbur Ross said late Wednesday that the order was “a law enforcement matter unrelated to broader trade policy,” according to a statement provided by a spokesman.

The conference call took place between ZTE and more than a dozen members of the Semiconductor Industry Association, the person said.

“It was a factual update on what happened, what they’ve done since the order was put in place, and what they’re doing to remedy the situation,” a Semiconductor Industry Association spokesman said. “There was no discussion of helping ZTE advocate before the U.S. government.”

U.S. companies are estimated to provide 25 percent to 30 percent of the components used in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.

Chipmaker Qualcomm Inc (QCOM.O), which is one of ZTE’s top suppliers, said on Wednesday the loss of ZTE’s business will hurt its third quarter earnings. Canalys, a technology consultancy, estimated that 65 percent of ZTE phones contain Qualcomm chips.

It is not known whether a Qualcomm representative was on the ZTE call and the company declined to comment. A ZTE spokesman did not immediately respond to a request for comment.

Aside from Qualcomm, ZTE’s other major business partners include Alphabet Inc’s (GOOGL.O) Google, Texas Instruments Inc (TXN.O) and GlobalFoundries [CSMF.UL].

LETTER TO BUSINESS PARTNERS

ZTE also sent a letter to its business partners on Wednesday, explaining why it believes the seven-year ban was a “drastic action” out of proportion to its misconduct.

According to a copy of the letter obtained by Reuters, ZTE said the order should be “very concerning to all,” since it took effect without warning to the industry, without waiting for the results of an independent internal investigation due at the end of the month, and without recognition for all the improvements in its export compliance program.

ZTE invested over $50 million in 2017 in improving its compliance program and planned to increase that spending this year, the letter says.

The Commerce Department ban was ignited when ZTE admitted in March that while it had fired four senior employees, it had not disciplined or reduced bonuses to 35 others when it said it had.

In the letter, ZTE said that once it confirmed the employee bonuses were not reduced and reprimands not completed, it disclosed the information and took “immediate remedial action.”

The order “sends the wrong message” to other companies who may be considering settling with the Commerce Department over export control issues, ZTE said.

It said it was committed to complying with the order and U.S. export control regulations “while seeking a resolution to the matter on all available fronts and with the support of many of our business partners.”