This past March, the U.S. Commerce Department took the rare action of blocking American companies from selling any technology to China’s ZTE telecommunications equipment corporation unless they received a special license. The step came with allegations that ZTE had violated American export sanctions by selling U.S.-made products to Iran. Later in the spring the Commerce Department subpoenaed Huawei Technologies, one of the world’s largest telecommunications equipment manufacturers, accusing the company of exporting American technology to Iran and other sanctioned nations such as Syria, North Korea, Cuba, and Sudan.
How and why are these Chinese companies risking their reputations to sell in such relatively poor, limited markets? In the wake of the subpoena, Huawei stated it abides by American laws and regulations. But according to a document released by the U.S. government, ZTE set up shell companies to mask their dealings with sanctioned nations. ZTE was apparently following a model developed by a rival telecom company ZTE code named “F7,” one sharing several characteristics with Huawei.
The “why” of these sales is perhaps less obvious, though increasing corporate profits is likely not the basis for the exports. Huawei rivals many global telecom equipment manufacturers, including Cisco Systems and Ericsson, with its sales of routers, switches, communications towers and other infrastructure. Its 2015 revenue reached some $61 billion. Its primary markets are domestic Chinese sales, making up about 40%, with Europe, parts of Africa, and developing economies like India, the Philippines, and Thailand taking much of the rest. ZTE revenue in 2015 was approximately $15.5 billion, with about half coming from domestic transactions and the rest from major customers in Europe. The scale of Huawei and ZTE sales in the sanctioned countries is not clear, but it is probably a small fraction of total revenues.
ZTE’s and Huawei’s actions are more likely driven by Chinese government desires to aid overseas allies. China has close ties with all of the countries: Cuba and North Korea are two of the world’s only remaining communist countries, and North Korea shares a long strategic border with China; Iran is the source of about nine percent of China’s imported oil; Syria is an ally of Iran; and Sudan provides oil and is part of China’s drive to deepen relations with Africa.
Like most large corporations based in China, both telecom companies need close relations with the government to prosper. ZTE itself is state-owned, though as a publicly listed company it has aimed to function as a profit-driven enterprise. While Huawei is privately owned, it grew quickly with early government support of its domestic equipment sales. Given the political environment, it is not surprising the companies would tailor their export endeavors to further Chinese foreign policy goals.
American motivations are easier to understand. All of the nations under trade sanctions have long been targets of economic sanctions, and North Korea’s weapons programs and Syria’s civil war conduct are currently at the top of U.S. foreign policy concerns.
In some ways, however, the move against Huawei and ZTE exports work against U.S. moves to improve ties with some of the sanctioned countries. American relations with Cuba have warmed significantly in the past year, and Iran has cooperated to date in its pledge to curtail its nuclear programs. Using Chinese equipment to expand public communications systems in both countries may in fact help further popular access to information, and perhaps foster movements toward more widespread on-line civil organizations. After all, Iran’s 2009 Green Movement protests were fueled partly by web-based social network interaction.
Despite the American foreign policy sanctions basis for the moves against ZTE and Huawei, Chinese political and business circles will likely see the developments through protectionist eyes. Since 2012, Huawei and ZTE have been effectively shut out of selling equipment in the U.S., after the House Intelligence Committee reported their networking gear could be used for espionage.
However, mobile phones are exempt from the sales ban, and both ZTE and Huawei have ambitions to succeed in the global smartphone arena. In the second quarter of 2015, ZTE had about eight percent of the U.S. smartphone market, trailing only Apple, Samsung, and LG. Huawei is also eying the U.S. market for smartphones – the company is already third in the world in smartphone sales, behind Apple and Samsung, and wants to be number one within five years. With domestic sales in China slowing, growth overseas, such as in the American market, is key to meeting this goal.
In the aftermath of the Commerce Department sanctions, ZTE, dependent on American hardware and software, including Qualcomm mobile phone chips, moved quickly to pledge cooperation with U.S. officials. The sanctions on ZTE were lifted on a temporary basis after only two weeks. For good measure, ZTE later removed its chief executive and two other top company officials.
Huawei may be slower to respond. While it has research and development facilities in five U.S. cities, it relies on its own technologies for many of its products, and may be able to convincingly demonstrate that its exports are devoid of any U.S. components or technologies.
As for the future, if Huawei and ZTE want to find a more receptive environment in U.S. markets, they may have to choose between following Chinese government desires to aid friendly nations, or complying with U.S. objections to its actions in controversial markets. For both companies’ business strategies, avoiding sales to rogue nations makes the most sense – but for domestic political reasons, the two companies may find themselves caught in a difficult dilemma.
