ALU

ZTE

‘Shocking’ Huawei arrest threatens US-China trade truce

On the same day Donald Trump and Xi Jinping struck a trade war truce in Argentina, some 11 000km away Canadian authorities made an arrest that now threatens to make the US-China conflict much worse. Original Link

Briefing: US lawmakers warn Canada about Huawei

The US recently signed a new law that prohibits government agencies from using Huawei and ZTE’s services and hardware. Original Link

US market rout extends to China as ZTE, Tencent plummet

Even for the world’s worst performing stock markets, Thursday’s losses were extreme. China’s benchmark equity gauge closed 5.2% lower, the biggest loss since February 2016, as a global selloff spread. Original Link

China mulling mobile mega merger

China is exploring a merger between two of the nation’s three wireless carriers to speed up the development of 5G mobile services amid a race with the US over the technology, according to people familiar with the matter. Original Link

Australia bans Huawei, ZTE from 5G work

Australia has banned China’s Huawei and ZTE from supplying next-generation wireless equipment to the nation’s telecommunications operators, the latest blow in an escalating global battle over network security. Original Link

ZTE back in business in South Africa

After suspending operations around the world following a ban by the US government, ZTE South Africa is back in business, the Chinese telecommunications equipment company said on Monday. Original Link

Innovation will win, not a trade war

Innovation will win, not a trade war · TechNode

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ZTE surges as US lifts embargo

ZTE climbed as much as 15% after the US formally lifted a ban on its American technology purchases, allowing the Chinese telecommunications gear maker to resume business.

The company’s shares marked a month’s high in Hong Kong and rose by their 10% daily limit in Shenzhen. Washington’s decision resolves a months-long moratorium that thrust ZTE into the centre of a US-China trade dispute and threatened to choke off the components it needs to make its networking gear and smartphones.

The company had languished in limbo since the US imposed the moratorium in April as punishment for violating Iran and North Korean export sanctions, then lying about it. In return for lifting that ban, ZTE forked over US$1.4-billion in penalties, replaced its entire board and agreed to let the US appoint compliance overseers to monitor its business.

ZTE said in a weekend post on social media service Weibo that it would “set out with full confidence” after the US decision. It estimates it could incur a loss of as much as nine billion yuan ($1.3-billion) for the first half of the year.

“This will push investors to reconsider their overly pessimistic expectations,” Wu Youwen, an analyst with Zhongtai Securities, wrote in a research note. “The communications sector had led market declines since the start of the year. It’s fully reflected concerns about shrinking capital expenditure, the ZTE issue and China-US relations.”  — (c) 2018 Bloomberg LP

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US signs deal to lift restrictions on ZTE

The Donald Trump administration said ZTE took another step toward ending a US ban on the company doing business with American suppliers, a key Chinese government demand amid an escalating trade dispute between the world’s two largest economies.

The Chinese telecommunications giant has signed an escrow agreement with the US commerce department and the ban will be lifted as soon as the company deposits US$400-million in escrow, the department said in an e-mailed statement Wednesday. The company is currently operating on a temporary waiver that expires on 1 August.

“Once the monitor is selected and brought on board, the three-pronged compliance regime — the new 10-year suspended denial order, the $400-million escrow, and the monitor — will be in place,” commerce said in the statement. “The ZTE settlement represents the toughest penalty and strictest compliance regime the department has ever imposed in such a case. It will deter future bad actors and ensure the department is able to protect the US from those that would do us harm.”

A person familiar with the matter said the escrow payment should be completed within a day.

ZTE representatives met with commerce department officials on Monday to discuss a path forward for the deal, people familiar with the meeting said on condition of anonymity.

The Trump administration in April announced a seven-year ban on US exports to ZTE after it said the company violated sanctions agreements by selling American technology to Iran and North Korea. The ban had forced ZTE to announce it was shutting down.

President Trump reversed course in May, saying he was reconsidering penalties on ZTE as personal favour to Chinese President Xi Jinping. Later that month, his administration announced it would allow the company to stay in business after paying a $1.3-billion fine, changing its management and providing “high-level security guarantees”.

ZTE took a major step forward in meeting the White House’s conditions by sacking its entire board and appointing a new chairman last month. ZTE’s new management now faces the challenge of rebuilding trust with phone companies and corporate customers. The company is said to be facing at least $3-billion in total losses from the months-long moratorium, which cut off the flow of chips and other components it needed to make its networking gear and smartphones.

A bipartisan group of US lawmakers remains concerned about ZTE’s threat to US national security and is pushing for legislation aimed at restoring harsher penalties. Wednesday marks the start of negotiations on legislation that will try to balance concerns that ZTE presents a security risk with efforts to get the company back into business.  — Reported by Jennifer Jacobs and Jenny Leonard, (c) 2018 Bloomberg LP

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Huawei pushes back as US pressure grows

Huawei Technologies has said a proposed ban on selling its gear to some US mobile providers isn’t lawful, pushing back against assertions it poses a risk as the Trump administration increases pressure on China over trade and national security.

The Shenzhen-based networking giant’s presence in the US “has been artificially restricted by unfounded allegations and suspicions based solely on misperceptions” about its relationship with China’s government, Huawei said in a filing with the Federal Communications Commission that was made public on Tuesday.

The agency under chairman Ajit Pai, an appointee of President Donald Trump, has proposed barring telecommunications companies from using a federal subsidy to buy gear from companies such as Huawei and ZTE that are judged to be a national security risk.

Huawei, China’s top telecoms equipment vendor and the world’s number three smartphone maker, was founded in 1988 by former Chinese army engineer Ren Zhengfei. The company took the unusual step on Wednesday of publicising the minutes of a recent high-level meeting during which the ex-military officer emphasised the symbiotic relationship between the two world powers, and China’s dependence on cutting-edge American technology. Huawei will buy some 50 million chips from Qualcomm alone this year, he was cited as saying.

“The US-China trade dependency is mutual and extensive, I don’t foresee strong conflicts,” Ren was quoted as saying in a transcript posted on social media platform WeChat. “American communications technology crested in the 1960s, when we were mere college students.”

The rapid ascendancy, however, of Huawei and other Chinese companies in just the past decade has raised red flags. On Monday, another federal agency asked the FCC to block China Mobile from entering the US market, citing national security grounds. A spokesman for China’s foreign ministry said the US “should stop groundless speculation and intentional suppression against Chinese companies”.

The US is set to impose tariffs on US$34-billion of Chinese goods on Friday, with China vowing to retaliate. Trump has also threatened additional tariffs on $200-billion of Chinese imports that could be implemented if China imposes counter-measures. Talks between the US and China have stalled in part over American demands that Beijing reduce government support for high-tech industries.

‘Highly concentrated market’

Huawei, in its comments to the FCC that became available on Tuesday, said it’s an independent, privately owned business. Letting Huawei compete freely could yield savings, while restrictions “will result in excessive profits for a handful of other equipment suppliers in this highly concentrated market”.

The result would leave the US falling behind other countries, with harm concentrated in remote and poor areas, according to the filing. “The US cannot afford to become the only country in the world that lacks access to the best communication technologies,” Huawei said.

The FCC’s authority over the subsidy, the Universal Service Fund, doesn’t encompass national security concerns, Huawei said.

Huawei’s flagship smartphone, the P20 Pro

CTIA, a Washington-based trade group with members including US mobile providers AT&T and Verizon Communications, didn’t express outright support or opposition to the measure. It said in a filing that the FCC should proceed cautiously and consult with the department of homeland security and other agencies before acting.

FCC action could have the “inadvertent effect” of inhibiting investment in secure equipment by creating uncertainty over which suppliers can be used, the CTIA said.

The Competitive Carriers Association, with members including regional and rural mobile providers, opposes the FCC’s rule which will “devastate impacted rural carriers”, according to an e-mailed statement from the Washington-based trade group.

The Telecommunications Industry Association, a trade group for gear makers, said it supports the FCC’s proposal.

The FCC in April cast a 5-0 vote to advance the restriction, which won’t be final until a second vote that hasn’t been scheduled. The agency in its draft order said congress scrutinised Huawei and ZTE as possible security threats.  — Reported by Todd Shields, with assistance from Gao Yuan, (c) 2018 Bloomberg LP

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Now US targets China Mobile as tensions escalate

The US has moved to block China Mobile from entering its telecommunications market on national security grounds, launching another salvo in the fight between the world’s two biggest economies days before they’re expected to impose tariffs on each other over trade.

The Federal Communications Commission should deny state-backed China Mobile’s seven-year-old application to offer international voice traffic between the US and foreign countries, the National Telecommunications and Information Administration said in an e-mail on Monday. NTIA, a branch of the commerce department, said China Mobile’s entry “would pose unacceptable national security and law enforcement risks”.

Though hardly as threatening as the US measures against telecoms equipment maker ZTE — China Mobile generates virtually all of its revenue at home — the move comes as the US is set to impose tariffs on US$34-billion of Chinese goods on Friday, with China vowing to retaliate in kind. President Donald Trump has also threatened additional tariffs on $200-billion of Chinese imports that could be implemented if China imposes counter-measures.

Talks between the US and China have stalled in part over American demands that Beijing reduce government support for high-tech industries. It remains unclear if the differences can be bridged before the first round of tariffs take effect. White House press secretary Sarah Huckabee Sanders on Monday said negotiations with China were continuing, but declined to elaborate.

Asked in January about US opposition to China Mobile’s entry into the US market, a spokesman at China’s ministry of foreign affairs said that the government encourages Chinese enterprises to abide by the laws of the markets they invest in and that countries should level the playing field for Chinese enterprises.

China Mobile shares fell 2.2% to HK$68.20 as of 1.02pm in Hong Kong, while the Hang Seng Index was 2.8% lower. A representative at the company had no immediate comment when reached by phone.

ZTE, the Chinese telecoms equipment maker that was blocked off from US suppliers in April for violating a sanctions settlement, has seen its stock fallen by about half since the ban was announcement. The company relies on US-made components for some of its products. The US in June reached a deal to allow ZTE to get back in business after the Chinese telecoms company pays a record fine and agrees to management changes.

World’s largest

China Mobile is the world’s largest mobile phone operator by customers, with about 899 million subscribers. In the NTIA filing, the carrier indicated it didn’t intend to offer mobile service within the US.

“The deepening integration of the global telecoms market has created risks and vulnerabilities in a sector replete with a broad range of malicious activities,” the NTIA said in its filing.

The Chinese government could use links established by China Mobile for economic espionage and intelligence collection, according to the filing. Customers could include fixed and mobile network operators, calling-card companies, and business customers.

Officials had “significant engagement” with China Mobile but weren’t able to resolve concerns, David Redl, assistant secretary for communications and information at NTIA, said in a news release.

FCC spokeswoman Tina Pelkey said the commission would review the filing.  — Reported by Todd Shields, with assistance from Danni Wu and Jing Yang de Morel, (c) 2018 Bloomberg LP

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ZTE tanks as US lawmakers seek to restore ban

ZTE dived 24% after American lawmakers green-lit a bill to restore severe penalties on the Chinese telecommunications gear maker, potentially up-ending a deal struck with US President Donald Trump to allow it to get back in business.

The company’s Hong Kong shares slid to their lowest since July 2016, while its Shenzhen stock fell below its 10% daily limit on Tuesday. The selloff ensued after the US senate passed legislation on Monday that would restore penalties on the company, complicating Trump’s efforts to ease sanctions on ZTE after it pays a record fine and reshuffles management. A settlement on the issue is also deemed pivotal to tense US-Chinese negotiations over trade.

The wrangling over China’s second largest telecoms equipment maker produced a rare instance of Republicans allying with Democrats to defy Trump. Reinstating a ban on ZTE’s purchases of American technology would cut off access to the chips and components it needs to build smartphones and networking equipment — essentially a death sentence.

“This is the first time congress has really stood up to him on a trade issue, and it’s clear they are angry,” said Bill Reinsch, a senior adviser at the Center for Strategic and International Studies in Washington. “There will be a lot of congressional resistance to weakening the ZTE amendment, but I would not be surprised to see a compromise.”

The bipartisan measure, part of a defence bill, passed 85-10 and came two days before Trump was to host Republican members of congress to discuss ways that would allow ZTE to get back into business.

Trump’s agreement with ZTE was struck after the US in April blocked its access to US suppliers, saying it had broken a sanctions settlement and then lied about it. That prompted the company to declare its operations were grinding to a halt just weeks later. A settlement was deemed a key Chinese demand as the world’s two largest economies try to avoid a trade war and negotiate the denuclearisation of North Korea. After a personal plea from Chinese President Xi Jinping to help the company get back into business, Trump last month instructed the commerce department to find a solution to save ZTE.

The Trump administration wants legislators to modify the senate language on ZTE in the defence bill, once the house and senate begin work to merge their versions of the legislation. Lawmakers hope to wrap up negotiations by the end of July. Commerce secretary Wilbur Ross and treasury secretary Steven Mnuchin in recent weeks have tried to persuade lawmakers of the administration’s approach to ZTE, but legislators said the deal failed to address their national security concerns.

“We’ve articulated our desire to better educate members about the ZTE action by commerce, and we expect to address it in conference,” White House legislative liaison Marc Short said last week. “We think we can fix it in conference,” Short added, referring to the process when differences in house and senate bills are reconciled.  — (c) 2018 Bloomberg LP

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Severing ZTE’s head leaves US battling a Hydra

Penalties meted out by the US on ZTE were meant to punish the company for breaking trade sanctions.

They certainly hurt its shareholders. Stock in the Chinese telecommunications equipment maker plunged as much as 41.5% to the lowest in a year Wednesday in Hong Kong, as trading resumed after being suspended since mid-April.

ZTE won’t be the only one to feel the impact of this pay-for-play deal by the Trump administration.

A US$1bn fine to be paid to the US department of commerce before 8 August is enough to wipe out a year of operating profit. What’s more, ZTE is required to get rid of its board and senior management at both the parent company and affiliate ZTE Kangxun Telecom. Terms for those layoffs were clarified in a ZTE filing to the Hong Kong stock exchange late on Tuesday.

ZTE will terminate all current members of the senior leadership of both the company and ZTE Kangxun at or above the senior vice president level.

That paragraph goes on to explain that ZTE must also expel any staff member responsible for illegally shipping telecoms equipment to Iran or North Korea.

ZTE’s annual report lists 30 people under the heading of director, supervisor and senior management — with nine holding the title of executive vice president. Another dozen or so are likely connected to the embargo-busting team.

Losing so many senior leaders at once will be a major blow. Business continuity and decision making will probably be severely impacted, and the resulting turmoil will at some point make for a great business school case study.

If you look at this as the US cutting off the head of the snake, then perhaps its goal will be achieved. But China’s state-backed tech industry more closely resembles a Hydra.

Litter of mini-ZTEs

If more than 30 senior leaders at one of China’s biggest and most powerful tech companies are let loose, we’re not likely to see a rise in mid-week golfing. The risk to the US is that at least some staff start their own businesses, or move to firms that will benefit from their years of experience, and corporate and government connections.

A litter of mini-ZTEs isn’t in the best interests of the US as it faces a determined and aggressive Beijing intent on making China technology independent.

Cutting off ZTE from US semiconductor manufacturers was a wake-up call for the entire nation. Cutting its senior leaders from the company is merely an invitation to go forth and prosper.  — Written by Tim Culpan, (c) 2018 Bloomberg LP

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ZTE’s US troubles may be far from over

The US senate plans to advance legislation to restore penalties on ZTE after President Donald Trump drew sharp criticism for easing restrictions to get the Chinese company back in business.

The senate is voting late on Monday to start debate on the defence authorisation bill for fiscal 2019, and senators said the ZTE measure has been included.

“Great news! Our bipartisan amendment restoring penalties on #ZTE is included in the #NDAA bill the Senate will be advancing to later this evening,” senator Marco Rubio said in a Twitter post.

Rubio, a Republican from Florida, is co-sponsor of the amendment, with senators Chris Van Hollen, a Democrat from Maryland, and Tom Cotton, a Republican from Arkansas.

Commerce secretary Wilbur Ross last week announced the US reached a deal with ZTE that includes a record fine, changes to the company’s board and management and US compliance officers.

The US blocked ZTE’s access to US suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations. The telecommunications company announced it was shutting down just weeks after the ban was announced.

Trump has said he reviewed the penalties as a personal favour to Chinese President Xi Jinping. Lifting the sales ban on ZTE was a key demand China made in the broader trade talks with the US to avert a trade war between the world’s two largest economies.

The deal has sparked bipartisan push-back, with many lawmakers citing national security as their main concern.

White House trade adviser Peter Navarro on Sunday likened the deal to “three strikes you’re out”, referring to two prior violations ZTE committed under the sanctions agreement with the US.

Ross was planning to brief senators on the ZTE deal on Monday, senate majority whip John Cornyn said.

‘Bipartisan reaction’

Van Hollen said the move is a very good sign for stopping the ZTE deal. “What you are seeing is a bipartisan reaction against letting ZTE off the hook,” he said.

The quick action to stop Trump from rolling back the ZTE penalties shows the seriousness of the issue, senate minority leader Chuck Schumer said in a statement.

“The fact that a bipartisan group of senators came together this quickly is a testament to how bad the Trump administration’s ZTE deal is and how we will not shy away from holding the president’s feet to the fire when it comes to keeping his promise to be tough on China,” Schumer said.  — Reported by Roxana Tiron and Jenny Leonard, with assistance from Erik Wasson, (c) 2018 Bloomberg LP

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ZTE vows to shake up business after US reprieve

ZTE has pledged to overhaul its flawed management and internal culture after striking a deal with the US to get back in business after a damaging two-month hiatus.

In a memo to employees, chairman Yin Yimin promised to hold “relevant people” accountable for a ban on purchases of American technology that threatened to smother China’s second largest telecommunications equipment maker. Yin, who took up his post in March 2017, said ZTE will restore operations swiftly once the issue is finally resolved.

ZTE’s candour mirrored withering criticism from state-run media since the imposition of the ban in April for violating Iranian sanctions then lying about it. It’s since become a focal point of a trade dispute between China and the US. In an online commentary, China National Radio warned Chinese firms shouldn’t be like “giant babies” and rely on Beijing to bail them out when they run afoul of international laws.

“We must deeply realise that this issue in essence mirrored problems in our compliance culture and management,” Yin wrote. “We should hold relevant people accountable and avoid similar issues in the future,” he added, vowing to strengthen its compliance culture and internal controls.

The memo came hours after US commerce secretary Wilbur Ross said ZTE will pay a record fine and replace its entire board of directors and senior leadership in exchange for lifting the ban.

The moratorium is suspended for 10 years but can be activated should the company commit additional violations. Mobi Development, which relies on ZTE for more than 45% of its business, rose as much as 10.1%. ZTE’s own shares remain suspended.

ZTE relies on US suppliers such as Qualcomm to make its networking gear and smartphones. The Shenzhen, Guangdong-based company could incur losses of at least US$3bn as a result of the US action. But it has a plan in place to swing idled factories into action within hours once given the go-ahead.

The company could be back in business by late next week, said Edison Lee and Timothy Chau, analysts for Jefferies in Hong Kong. It should have few problems swallowing the financial fines given its roughly 30bn yuan ($4.7bn) of cash on hand, they added.

“We expect it to promote younger members of the company to be the top management team,” they wrote in a note. “We will not be surprised that the central government may put in its representatives as board members, since it has been instrumental in helping ZTE reach the new settlement agreement.”  — (c) 2018 Bloomberg LP

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Facebook shared data with Chinese device makers

Facebook said it had data-sharing partnerships with four Chinese consumer device makers, including Huawei, escalating concerns that the social network has consistently failed to tell users how their personal information flows beyond Facebook.

The disclosure came after Mark Warner, the top Democrat on the senate intelligence committee, said earlier on Tuesday that he saw “a serious danger” that Facebook shared user information with Chinese device makers. Facebook said it was careful about the partnerships, which were designed to help smartphone makers build custom versions of Facebook’s app. Still, the confirmation is likely to heighten scrutiny of the company’s privacy practices if the deals weren’t explicitly disclosed to users.

“Facebook’s integrations with Huawei, Lenovo, Oppo and TCL were controlled from the get go — and we approved the Facebook experiences these companies built,” Francisco Varela, the company’s vice president of mobile partnerships, said in a statement. “Given the interest from congress, we wanted to make clear that all the information from these integrations with Huawei was stored on the device, not on Huawei’s servers.”

Facebook has been responding to a global backlash about how it handles users’ data, from lawmakers and privacy advocates in the US and Europe. The company sent CEO Mark Zuckerberg to Washington in April to undergo 10 hours of congressional questioning after a March revelation about an app developer that passed information on up to 87m Facebook users to a political consultancy, Cambridge Analytica. Zuckerberg told congress that the company’s policies no longer allow such lapses.

Then, The New York Times reported on Sunday that the company had for years allowed deals with about 60 phone and device manufacturers, giving them access to vast amounts of information on users and their friends. It’s not clear yet whether any of the partners abused the data or transferred it to unauthorised parties. Still, the disclosure adds fuel to public distrust of the social network, whose main app has more than two billion users worldwide, and which owns other popular programs like Instagram, WhatsApp and Messenger. If users weren’t aware of device makers’ access, the deals could violate a 2011 US Federal Trade Commission consent decree.

Facebook shares slipped in extended trading following the disclosure, after declining less than 1% to US$192.94 at the close in New York.

The confirmation that Chinese device makers, especially Huawei, were among the manufacturers with access to user data raised even more questions among US lawmakers about how the information was stored and used.

‘Legitimate concerns’

“The news that Facebook provided privileged access to Facebook’s API to Chinese device makers like Huawei and TCL raises legitimate concerns,” senator Warner of Virginia said after Facebook’s disclosure late on Tuesday. “I look forward to learning more about how Facebook ensured that information about their users was not sent to Chinese servers.”

Huawei, China’s largest maker of telecommunications equipment, was founded in 1988 by former Chinese army officer Ren Zhengfei. Congress has barred the Pentagon from buying Huawei’s gear, along with ZTE, citing the companies’ connections to the Chinese government and the potential for intellectual property theft and spying.

In April, the US Federal Communications Commission voted 5-0 to ban federal funds from being spent with the companies, citing concerns their products can provide “hidden back doors” into US computer networks that could inject viruses, spy on businesses and steal Americans’ private data, said FCC chairman Ajit Pai.

Facebook CEO Mark Zuckerberg

“Concerns about Huawei aren’t new — they were widely publicised beginning in 2012, when the house permanent select committee on intelligence released a well-read report on the close relationships between the Chinese Communist Party and equipment makers like Huawei,” Warner said in the statement late on Tuesday.

Some US lawmakers, many of whom were already critical of Facebook’s response to earlier inquiries into the Cambridge Analytica data scandal, have been sceptical of Facebook’s explanations of its latest purported data lapse, and demanded more accountability.

Senators John Thune and Bill Nelson, the Republican chairman and top Democrat respectively on the senate commerce committee asked Zuckerberg in a Tuesday letter for a full list of device makers with which Facebook had agreements. They also asked how the company verifies compliance with the agreements and whether Zuckerberg would like to amend his April testimony to the committee in which he said that users have “complete control” over how their data is shared.

Facebook had already said in April that it was dismantling the device-maker data partnerships following a review of information-sharing agreements sparked by the Cambridge Analytica crisis. After The New York Times disclosed the names of device makers who had deals, the company said it was winding down the Huawei agreement this week.

Still, Facebook defended the choice on Tuesday. “Huawei is the third largest mobile manufacturer globally and its devices are used by people all around the world, including in the US,” Varela said.  — Reported by Ben Brody and Sarah Frier, (c) 2018 Bloomberg LP

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ZTE prepares to resume operations as US-China trade tension relaxed

ZTE prepares to resume operations as US-China trade tension relaxed · TechNode

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A risky get-out-of-jail-free card for ZTE

While the world waits to see whether North Korea will agree to dismantle part of its nuclear arsenal in return for a rapprochement with the US, Washington appears to be planning a unilateral disarmament on trade.

The US and China are closing in on a deal that would suspend American sanctions on Chinese mobile phone maker ZTE in return for Beijing not imposing tariffs on US farm goods, The Wall Street Journal reported on Monday, citing people it didn’t name who’d been briefed on the plan.

While this columnist is all in favour of lowering the temperature on US-China trade, that particular quid pro quo sets a dangerous precedent for Washington.

After all, most trade politics takes place on a reasonably level playing field where either partner can inflict more or less equal amounts of pain on the other. The sanctions regime that tripped up ZTE is potentially far more powerful.

Because of the critical position of the US in the semiconductor industry and the dollar’s crucial role in global trade, Washington has been able to punish Chinese and European companies for doing business with countries it sanctions, even when their own governments don’t prohibit such activity.

BNP Paribas agreed to pay a US$8.8bn penalty for doing business with the Iranians, Sudanese and Cubans in one 2015 case. ZTE’s settlement last year totalled as much as $1.2bn, and included an extensive list of undertakings on internal compliance and disclosure. It was for violating one such undertaking (on taking disciplinary action against specified employees) that the US commerce department last month ordered American companies to stop selling components to ZTE, pushing a business with $16bn in annual revenue to the brink.

That ability to inflict extreme pain on one of China’s largest technology companies — and the threat that the punishment could be extended to the far larger Huawei Technologies — represents a potent weapon in any trade dispute. So it’s remarkable to see Washington trade it away so readily now.

Lied to investigators

The strength of the law typically depends on the perception of its implacability. The whole point of Washington’s case against ZTE is that it has thumbed its nose at the law, first exporting US-made components to Iran, then lying to investigators about the practice, then secretly resuming the trade while it was under investigation, and finally failing to uphold the terms of its plea agreement.

Trading the penalties on ZTE for a deal on farm exports blows up that argument. China will be doing no more than upholding the status quo; in exchange, Washington will decommission one of its most powerful weapons. The moral hazard is perhaps even worse: any government entangled in a dispute with Washington now knows that it need only threaten the Trump-voting farm belt to get off the hook.

For all their legal underpinnings, this wouldn’t be the first time that trade politics ended up in a grubby exchange of spoils. Indonesia and the US in 2014 signed a wide-ranging agreement covering issues such as intellectual property and mining to settle a trade dispute over exports of clove cigarettes.

Still, at a time when trade tensions between the US and China are running high, Washington is sending one of its most powerful divisions off the battlefield. Soybean and sorghum farmers in the US grain belt must feel they’ve become the punchline of that old Woody Allen joke: in the event of trade war, they’re the hostages.  — Reported by David Fickling, (c) 2018 Bloomberg LP

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Trump’s ZTE reversal sparks bipartisan rebuke

US President Donald Trump. Image: Gage Skidmore

US President Donald Trump’s conciliatory move to help Chinese telecommunications equipment maker ZTE stoked bipartisan condemnation in Washington on Monday, as lawmakers warned the US president’s concession could endanger national security.

Trump shocked many in Washington with a tweet on Sunday that he was working with Chinese President Xi Jinping to give ZTE “a way to get back into business, fast”. Trump said “too many jobs in China” had been lost and that his commerce department “has been instructed to get it done”.

It was an abrupt shift from the campaign Trump has mounted against Chinese technology companies, which he regularly accuses of stealing American intellectual property and exploiting unfair trade rules. The US commerce department cut off ZTE from American suppliers last month, saying it violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations.

Commerce secretary Wilbur Ross told reporters on Monday at the National Press Club in Washington that the department is now considering “alternative remedies” for ZTE’s sanctions violations and will seek to resolve the issue “very, very promptly”.

In a sign that both sides are trying to avoid a trade war, Chinese regulators restarted their review of Qualcomm’s application to acquire NXP Semiconductors, according to people familiar with the process. The work had been shelved earlier in response to growing trade tensions with the US. San Diego-based Qualcomm supplies semiconductors to ZTE.

Both Republican and Democratic lawmakers have expressed concerns that Chinese telecoms companies, such as ZTE, have ties to the Chinese government and pose a cyber-espionage threat as they move into the US market.

Senator Marco Rubio, a Florida Republican, tweeted on Monday that the US would be “crazy” to allow ZTE to operate in the country “without tighter restrictions”.

“Any telecomm firm in #China can be forced to act as a tool of Chinese espionage without a court order or other review process,” Rubio said.

‘Bad deal’

Those concerns were echoed by senate Democratic leader Chuck Schumer, who said in a statement on Monday that the plan was “a bad deal if there ever was one”.

“The toughest thing we could do, the thing that will move China the most, is taking tough action against actors like ZTE,” Schumer said. “But before it’s even implemented, the president backs off. This leads to the greatest worry, which is that the president will back off on what China fears most — a crackdown on intellectual property theft — in exchange for buying some goods in the short run.”

And representative Tim Ryan, an Ohio Democrat, noted that Trump’s tweets had highlighted layoffs in China even as autoworkers were losing their job in his home state.

“On top of that, the NSA, FBI and CIA all have cybersecurity concerns with ZTE,” Ryan said. “The Pentagon even stopped selling its phones in its bases. Your willingness to throw a lifeline to ZTE and China puts our national security at risk. What happened to America First?”

Members of the president’s own national security team have expressed concerns over Chinese telecoms manufacturers in recent months. In February, director of national intelligence Dan Coats told the US senate intelligence committee that he believed Chinese cyber-espionage capabilities would “continue to support China’s national security and economic priorities”.

Gina Haspel, nominated by Trump to lead the CIA, said during her confirmation hearing last week that she wouldn’t use a phone manufactured by Chinese telecoms manufacturer Huawei.

“I don’t even have a social media account, but I wouldn’t — I wouldn’t use Huawei products,” Haspel said.

Even as some lawmakers levelled criticism at the administration’s move, analysts said it still wasn’t clear what impact the president’s tweet would have. The White House has refused to explain what specific direction was provided to the commerce department, but said in a statement that the ultimate decision on how to handle the restrictions imposed against ZTE would reside there.

“It certainly sends a bad signal about sanctions on companies that do business with Iran and for the normal procedures at commerce,” in terms of “the consistency with US sanctions and follow-through,” said Adam Segal, director of the Digital and Cyberspace Policy Programme at the Council on Foreign Relations in New York.

The US retreat from penalising ZTE may also be determined by talks on Tuesday between treasury secretary Steven Mnuchin and Chinese vice Premier Liu He.

“I don’t think this tweet tells us that the US is going to relax its suspicion of ZTE products sold in the US,” said Stewart Baker, a partner at Steptoe & Johnson and a former assistant secretary for policy at the department of homeland security. “This was about whether to cut ZTE off entirely from US products that it needs as components for the systems it sells around the world. The US can and probably will work to keep ZTE out of the US; the tweet is about whether the US is going to put ZTE out of business entirely.”

The US blockade forced the suspension of most operations at ZTE, which employs about 75 000 people. The firm’s shares were suspended from trading in Hong Kong last month.

ZTE faces two likely scenarios, according to analysts Edison Lee and Timothy Chau at Jefferies: the commerce department may conclude ZTE’s violation is a careless mistake and will lift the ban without additional penalty, or the agency could suspend the ban temporarily, subject to further investigations and negotiations. Lee and Chau said the second scenario is much more likely, which would make it harder for ZTE to sign up new, overseas customers because of the uncertainty over its future.  — Reported by Justin Sink, with assistance from Yuan Gao, Nafeesa Syeed and Todd Shields, (c) 2018 Bloomberg LP

Original Link

China Tech Talk 47: Shenzhen style innovation: IP protection, ZTE, and manufacturing standards with Benjamin Joffe of HAX

China Tech Talk 47: Shenzhen style innovation: IP protection, ZTE, and manufacturing standards with Benjamin Joffe of HAX · TechNode

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Trump reverses course on China’s ZTE

Donald Trump

President Donald Trump has ordered the US commerce department to get ZTE back into business, weeks after cutting off the massive Chinese telecommunications equipment maker from its US suppliers with a condemnation of ZTE’s “egregious” behaviour.

Trump said in a Sunday morning tweet, posted minutes after arriving at his golf course in Virginia, that he and Chinese leader Xi Jinping are working together to give ZTE “a way to get back into business, fast”.

In a major reversal for a president who has accused China many times of stealing US jobs, Trump said the “commerce department has been instructed to get it done” because “too many jobs in China lost”. The tweet comes as China plans to send vice Premier Liu He to Washington this week to discuss trade tensions.

The US blockade has choked off the revenue of the number two Chinese telecoms gear maker, which employs about 75 000 people. The firm said last week it’s suspended all major operations, and its shares stopped trading in Hong Kong last month.

With ZTE facing possible ruin, Chinese officials have stepped in. The US delegation that held talks with China this month was expected to be told that reversing the commerce department’s action was a condition for discussions to continue, said administration officials who asked not to be identified discussing private deliberations.

ZTE suppliers rallied after the Trump tweet. Mobi Development jumped as much as 18% in Hong Kong, while Nextronics Engineering rose as much as 8.5% in Taiwan and Zhong Fu Tong surged the daily limit of 10% in mainland trading.

This week’s Washington trip by China’s vice premier comes after the US delegation to Beijing, led by treasury secretary Steven Mnuchin, didn’t produce a deal following Trump’s threats to impose tariffs on US$150bn of Chinese imports with promised Chinese retaliation.

While Trump said in his tweet he’d “instructed” the commerce department to “get it done”, the White House said the president expects secretary Wilbur Ross to “exercise his independent judgment, consistent with applicable laws and regulations, to resolve the regulatory action involving ZTE based on its facts”. Specific questions were referred to the commerce department, and a spokesman could not be immediately reached on Sunday. The state department referred comments to the White House and commerce.

Seven-year ban

ZTE has been trying to resolve the blockade that Trump’s commerce department imposed in April as punishment for violating the terms of a 2017 sanctions settlement related to trading with Iran and North Korea, then lying about it. That seven-year ban prohibited ZTE from buying American technology it needs to build most of its products, including Qualcomm’s semiconductors and optical chips from Lumentum Holdings.

In a sharply worded statement on 16 April, Ross said ZTE made false statements to the US government and “covered up the fact” that the company paid full bonuses to employees that had engaged in illegal conduct.

“ZTE misled the department of commerce,” Ross said. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behaviour cannot be ignored.”

US military exchanges also have stopped selling smartphones made by ZTE and Huawei Technologies, China’s largest mobile and telecoms company, after the Pentagon warned that the devices pose a security risk to military personnel and operations, the defence department said earlier this month.

Representative Adam Schiff of California, the top Democrat on the house intelligence committee, said in a tweet that US intelligence agencies have warned that ZTE technology and phones “pose a major cybersecurity threat”. He told Trump: “You should care more about our national security than Chinese jobs.”

The president’s most recent call with Xi was on 8 May. A White House readout at the time said the president “affirmed his commitment to ensuring that the trade and investment relationship between the US and China is balanced and benefits American businesses”.

In another tweet on Sunday, Trump said the US and China “are working well together on trade” but past negotiations “have been so one sided in favour of China, for so many years, that it is hard for them to make a deal that benefits both countries”.

“But be cool, it will work out!” Trump said.

Trump’s apparent directive to the commerce department was stunning, said a former commerce official who worked on the ZTE case during the Obama administration.

“That’s never happened before, because the rules are not designed this way. I don’t know how to even think through this,” said Kevin Wolf, a partner at Akin Gump Strauss Hauer & Feld in Washington who helped oversee export controls as an assistant secretary at the Bureau of Industry and Security.

ZTE’s precarious position is exacerbating tensions between the world’s two biggest economies, now involved in sensitive negotiations to try and forestall a trade war. Trump is also weeks away from a high-stakes summit with North Korean leader Kim Jong Un, where having China on his side would be beneficial.

The company also has been working on new, faster 5G wireless technology, along with local rival Huawei. That’s a key technology battle between the US and China — and one that China has a chance to win.

The US’s only major telecoms equipment maker, Lucent Technologies, was acquired by France’s Alcatel in 2006, with the combined company later absorbed into Finland’s Nokia. Nokia and Ericsson have floundered as their Chinese rivals churned out capable and relatively cheap gear for wireless networking customers such as China Mobile and Telefonica.

US reliance

But ZTE still relies on US companies to supply it with components for its networking gear. Qualcomm and Micron Technology provided chips. Lumentum Holdings and Acacia Communications sold key optical equipment. ZTE’s smartphones used Google’s Android operating system. The moratorium disrupted these relationships, putting the Chinese company on life support.

Even though Trump is reversing course, the blockade will make Chinese companies more reluctant to rely on US firms on grounds that “the US is an unreliable supplier”, said Andrew Bartels, an analyst at Forrester Research.

The move by Trump, who’s bragged about the relationship he has forged with Xi, also has larger implications for Trump’s threats to impose sanctions and tariffs, Bartels said in a telephone interview.

“People might say the only thing you have to do to counter those is have a relationship with Trump,” he said.

Patrick Moorhead, founder of Moor Insights & Strategy, a technology research firm that works with ZTE suppliers including Qualcomm, said he thinks it’s the right move to give a company another chance, because no one wants to see it die or go bankrupt.

“I think we can be sure that Trump is going to get something out of this,” Moorhead said. “It’s all part of the big picture, which is to get a fair shake for US companies.”  — Reported by Ben Brody, Alistair Barr and Jenny Leonard, with assistance from Noah Buhayar and Shahien Nasiripour, (c) 2018 Bloomberg LP

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Node Worthy 24: The post-ZTE era

This week, Fiona and Masha talk about core technology, AI chips, and the role of the government in China’s innovation.

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John Artman

John Artman is Editor-in-Chief for TechNode’s English content and has been living in Beijing for almost a decade. John is passionate about the business of technology, strategy, and testing the viability of business models. You can contact him at john.artman at technode dot com

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ZTE in crisis as US ban threatens to sink firm

ZTE regards the next two weeks as crucial to resolving a US blockade that’s brought its main businesses to a standstill and choked off revenue, signalling the potential collapse of one of the world’s largest makers of phones and networking gear.

The number two Chinese telecommunications equipment maker said on Thursday that it has suspended all major operations. That means its three main divisions — network gear, devices and enterprise solutions — have all but halted sales and aren’t bringing in sizeable income, a person familiar with the matter said. ZTE specified the coming fortnight as a “critical window” and urged managers to calm employees, according to an e-mail to senior staff seen by Bloomberg News.

ZTE remains intent on resolving a seven-year blockade Washington imposed as punishment for violating the terms of a 2017 sanctions settlement, then lying about it. That cut off access to the American technology it needs to build most of its products, from Qualcomm’s semiconductors to optical chips from Lumentum Holdings.

“The company is currently working hard to speedily resolve this impasse,” read the e-mail. “Don’t let inaccurate information and rumours unsettle us. Stick to your posts, rally your teams and calm your troops.” It didn’t elaborate on that two-week timeframe, which takes it roughly to the end of May.

ZTE’s increasingly precarious position is exacerbating tensions between the world’s two biggest economies, now in the throes of sensitive negotiations to try and forestall an internecine trade war. It essentially ran out of inventory in the month since the ban’s imposition and had no way to replenish it. As of Thursday, its website and flagship smartphone store on Alibaba’s Tmall online marketplace had suspended sales. Carriers, including Australia’s Telstra, stopped offering its devices.

ZTE’s best hope may be for intervention from Beijing — but that’s a long shot given rising tensions between the US and China. US President Donald Trump has threatened tariffs on US$150bn of Chinese imports for alleged violations of intellectual property rights, while Beijing has vowed to retaliate on everything from American soybeans to planes.

The blow came just as ZTE was preparing to lead the country’s charge into the era of 5G wireless technology, along with local rival Huawei. Major wireless carriers around the world are preparing to spend billions rolling out 5G networks, which enable new technologies from faster Internet access to augmented reality. ZTE, which once harboured ambitions of vying with Apple in phones, has called the punishment “unacceptable” and threatened to take legal action.

Major activities ceased

ZTE, whose shares have been suspended since the imposition of the ban, said in its statement it has sufficient cash and will adhere to its commercial obligations. Company representatives declined to elaborate further. On Thursday, shares in ZTE suppliers Mobi Development and Shenzhen SDG Information were down more than 1%.

“As a result of the denial order, the major operating activities of the company have ceased,” ZTE said in a filing to the exchange. “The company and related parties are actively communicating with the relevant US government departments in order to facilitate the modification or reversal of the denial order by the US government and forge a positive outcome in the development of the matters.”

ZTE’s larger rival, Huawei, also faces heightened US opposition. The justice department is said to be investigating its own compliance with American sanctions banning sales to Iran. The Pentagon has banned ZTE and Huawei phones for sale, and the Federal Communications Commission voted in April to ban federal funds from being used to buy gear from companies deemed a national security risk.

“It is not unexpected to see ZTE’s exhausted its inventory since it can’t get more components from the key US suppliers,” said Edison Lee, an analyst with Jefferies. “The US said they are reviewing the appeal from ZTE, I think that’s a good sign.”  — (c) 2018 Bloomberg LP

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ZTE and corporate cultural fever in China

ZTE and corporate cultural fever in China · TechNode

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Opinion: The China-US Thucydides Trap is about data as much as it is about trade

Opinion: The China-US Thucydides Trap is about data as much as it is about trade · TechNode

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Huawei faces new US probe over Iran

The US justice department has joined two other agencies probing Huawei Technologies for possible violations of sanctions banning sales to Iran, according to two people familiar with the matter.

Agents from the Federal Bureau of Investigation, which is overseen by the justice department, have been looking into transactions by the Shenzhen, China-based mobile and telecommunications giant, the people said.

According to one of them, the criminal inquiry grew out of an earlier sanctions-violation probe that ultimately led to penalties against another Chinese technology company, ZTE.

The US treasury department’s Office of Foreign Assets Control, or OFAC, which enforces sanctions, and the department of commerce are also looking into Huawei’s transactions. The commerce department in 2016 issued an administrative subpoena aimed at Huawei, China’s largest maker of telecoms equipment, seeking information about whether it was sending US technology to rogue nations including Syria, Iran and North Korea.

Earlier this month, the commerce department banned ZTE, China’s second biggest network equipment maker, from buying US-made components as punishment for violating a sanctions settlement over transactions with Iran and North Korea.

ZTE had previously reached a settlement with the commerce department’s Bureau of Industry and Security, and pleaded guilty as part of a sanctions-violations agreement with the justice department.

ZTE agreed to pay US$892m in fines and forfeitures in the justice department deal, at the time the largest US criminal fine against a Chinese company, with additional fines if it failed to comply with the deal.

Internal ZTE documents posted on the commerce department website cited a rival, referred to only as “F7”, as also violating US export controls in sales of equipment to Iran.

A group of Republican lawmakers pushed the Donald Trump administration last April to investigate and identify F7, citing news reports that have highlighted the similarities between the company described in the documents and Huawei.

‘Exposed’

The FBI and OFAC investigations into Huawei have been going on since at least early 2017, according to one of the people with knowledge of the probes, who asked not to be identified because he isn’t authorised to speak about the matter.

A finding of wrongdoing by Huawei and a similar US supplier export ban “would have wide ramifications on various suppliers on a larger scale than peer ZTE, in our view”, according to Bloomberg Intelligence technology analysts Woo Jin Ho and Anand Srinivasan. “Chip suppliers such as Skyworks and Qorvo, each with about 10% sales exposure to Huawei, would be affected. Optical suppliers including NeoPhotonics, Oclaro and Lumentum may also be exposed.”

Some Huawei suppliers in Asia slid after the news, with Chinasoft International tumbling as much as 21% and Sunny Optical Technology Group fell 7.4%.

Huawei’s new P20 Pro with three rear-facing cameras

Huawei Technologies’ $500m of 2027 notes fell 0.9c on the dollar to a record low of 93.2c in Hong Kong trading. Its bonds are the worst performers in the Bloomberg Barclays Asia dollar bond index Thursday.

Glenn Schloss, a spokesman for Huawei in Shenzhen, declined to comment about the probes. The company has said it complies with all applicable laws and regulations where it operates, including US export controls and sanctions laws and regulations, and that it “actively cooperates” with government agencies regarding its compliance.

A spokesman for the justice department declined to comment.

Separately, the US Federal Communications Commission voted unanimously last week to ban federal funds from being used to purchase networking gear from companies determined to be a national security risk, dealing another blow to ZTE and Huawei. The measure has yet to be finalised. FCC chairman Ajit Pai cited the risk of “hidden ‘back doors’ to our networks in routers, switches and other equipment” that could “allow hostile foreign powers to inject viruses and other malware”.

Schloss, the Huawei spokesman, said those allegations aren’t true.

“We pose no security threat in any country,” he said. “US authorities should not base government decisions on speculation or rumour. In 30 years, not a single operator has experienced a security issue with our equipment.”

Huawei was founded in 1988 by former Chinese army engineer Ren Zhengfei, leading to congressional concerns over Chinese military and government influence at the company. In addition to producing networking gear and other electronics, it was the globe’s number three smartphone seller last year behind Samsung Electronics and Apple.

Huawei has faced several setbacks in the US this year. AT&T and Verizon Communications, the biggest US carriers, dropped plans to sell Huawei’s latest smartphones. Then, consumer electronics retailer Best Buy stopped selling Huawei phones, laptops and smartwatches.

Earlier Won ednesday, the company dropped a planned dollar-denominated bond sale and delayed pricing a European offering.

Huawei maintains research and development facilities in Texas, New Jersey, California and four other US states, all of which provide technology for Huawei’s global operations.

Despite the setbacks, Huawei said last month that 2017 net income rose 28% and that growth in markets from the Middle East to Africa have it targeting record sales of $102.2bn this year.  — Reported by Sheridan Prasso, with assistance from Greg Farrell, Beth Thomas and Lianting Tu, (c) 2018 Bloomberg LP

Original Link

TalkCentral: Ep 215 – ‘Allo, Google?’

In this week’s episode of TalkCentral, Duncan McLeod and Regardt van der Berg talk about Google’s desperately confused instant messaging strategy. What’s gone wrong, and why the company’s plan to fix it might not work (again).

Also this week, Openserve introduces 200Mbit/s home fibre (as first reported on TechCentral), more South Africans potentially exposed in the Facebook data scandal, ZTE’s fight with the US government and a new JPEG picture format is coming.

Listen to the show to find out who has been picked as winner and loser of the week.

Regardt’s pick this week is the MSI GS65 Stealth Thin 8RF gaming laptop, while Duncan has chosen Yahoo Finance.

Remember, you can send a WhatsApp voice note to us for inclusion on the show. The number to use is 071 999 1111. (TechCentral does not take calls on that number.)

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Original Link

ZTE says US ban ‘unacceptable’, vows legal action

China’s ZTE has blasted the US government decision to impose a seven-year ban on its purchases of crucial American components, calling the move “extremely unfair” and “unacceptable”.

The Shenzhen-based communications equipment maker vowed to protect its rights by legal means without specifying what actions it may take, according to a statement posted on the company’s website. It also said it will continue to resolve the issue through negotiations with the US government.

The forcefully worded statement came days after the US commerce department said ZTE had violated the terms of a sanctions settlement and barred the Chinese company from buying any components from US suppliers until 2025. Such a ban would deal a crippling blow to the Chinese company and its aspirations to expand globally.

“The denial order not only severely jeopardises the survival of ZTE, it also hurts the interests of all the partners of ZTE, including a large number of American companies,” said the company.

The case is adding to rising tensions between China and the US over trade. In response to the ZTE ban, China’s ministry of commerce said — twice this week — that it would take necessary measures to protect the interests of its companies. “The action has given way to widespread market concern on the US trade and investment environment,” a spokesman said.

The Chinese firm relies on suppliers from chip makers Qualcomm and Micron Technology to optical developers Lumentum Holdings and Acacia Communications. The ban may also stop the company from using Google’s Android operating system, the heart of its smartphones.

Shares of ZTE remain suspended in Hong Kong and Shenzhen. Its American Depository Receipts fell 33% on Tuesday after news of the ban, but have recovered some of those losses since.  — Reported with assistance from Jeff Kearns, (c) 2018 Bloomberg LP

Original Link

ZTE could lose access to Android

ZTE executives are evaluating software options for the company’s smartphones after a US technology ban threatened to cut off the operating system at the heart of its devices, a person with knowledge of the matter said.

The Android operating system, designed by Google, is the core of ZTE smartphones, powering user-facing functions, apps and other services. That means the software likely falls under Monday’s US government order denying China’s ZTE access to American technology for seven years. Trading in ZTE shares was suspended in Hong Kong soon after the announcement.

ZTE lawyers have been meeting with Google officials about the issue, according to the person. They asked not to be identified talking about private discussions. Google and ZTE declined to comment.

The US order stated that ZTE can’t “participate in any way in any transaction involving any commodity, software or technology … exported or to be exported from the United States.” That includes licences, the typical way software is used.

Losing access to Android would be a major blow for ZTE because there are few alternatives. Microsoft and HP no longer offer smartphone operating systems, Apple’s iOS is exclusive to its own devices, and ZTE doesn’t have its own operating system. The only possible alternative is Samsung’s Tizen, which hasn’t taken off and only supports a few apps.

For Google, losing ZTE as an Android handset maker wouldn’t be critical given the Chinese company’s small market share. However, Google has been losing control of what some Android handset makers put on their devices. Samsung, the largest Android manufacturer, has introduced its own mobile services, such as a voice assistant, that compete with Google services. In response, Google has relied more heavily on Chinese manufacturers like ZTE, Huawei Technologies and Xiaomi.  — Reported by Mark Gurman, (c) 2018 Bloomberg LP

Original Link

Huge blow for ZTE as US imposes 7-year ban

Donald Trump

The US government said Chinese telecommunications gear maker ZTE violated the terms of a sanctions settlement and imposed a seven-year ban on purchases of crucial American technology needed to keep it competitive.

The commerce department determined ZTE, which was previously fined for shipping telecoms equipment to Iran and North Korea, subsequently paid full bonuses to employees who engaged in the illegal conduct, failed to issue letters of reprimand and lied about the practices to US authorities, the department said.

“Instead of reprimanding ZTE staff and senior management, ZTE rewarded them,” commerce secretary Wilbur Ross said in the statement. “This egregious behaviour cannot be ignored.”

The ZTE rebuke adds to US-China tensions over trade between the world’s two biggest economies. President Donald Trump threatened tariffs on US$150bn in Chinese imports for alleged violations of intellectual property rights, while Beijing vowed to retaliate on everything from American soybeans to planes. Trump on Monday accused China along with Russia of devaluing their currencies, opening a new front in his argument that foreign governments are exploiting the US.

China’s ministry of commerce rapidly responded to the ZTE ban, saying it would take necessary measures to protect the interests of Chinese businesses. It said the Shenzhen-based company has cooperated with hundreds of US companies and contributed to the country’s job creation.

For ZTE itself, the latest US action means one of the world’s top makers of smartphones and communications gear will no longer be able to buy technology from American suppliers, including components central to its products. ZTE has purchased chips from Qualcomm and Intel, and optical components from Acacia Communications and Lumentum Holdings. A seven-year ban would effectively cover a critical period during which the world’s telecoms carriers and suppliers are developing and rolling out 5G wireless technology.

“All hell breaks loose,” wrote Edison Lee and Timothy Chau, analysts at Jefferies, after the export ban was announced.

Downgraded

They downgraded ZTE shares to underperform and cut their price target on its stock by more than half. Trading in ZTE shares was suspended in Hong Kong.

The company’s suppliers in Asia tumbled in response, with MOBI Development down 13% and Zhong Fu Tong off 7.9%. Shares in Acacia and Lumentum plunged in the US.

ZTE faces tough options in particular due to the ban on buying Qualcomm’s processors and modems, the main components in smartphones. China’s Huawei Technologies makes those chips for use in its own handsets, while MediaTek is Qualcomm’s largest rival in offering chips on a so-called merchant basis. ZTE may have to either buy from a competitor or get chips from a Taiwanese company whose products generally lag those of its US rival’s in performance.

ZTE said it was aware of the sanctions and is evaluating its impact while talking with related parties. Qualcomm declined to comment.

Separately, the UK’s National Cyber Security Centre warned the country’s telecoms companies and regulator that national security risks from using ZTE equipment and services “cannot be mitigated”.

A senior official with the US commerce department’s Bureau of Industry and Security told reporters that the ZTE decision was unrelated to the administration’s threats to impose tariffs on Chinese imports, saying the actions against the Chinese company are part of an investigation. The official, speaking on the condition of anonymity, said the timing of the ZTE action was unfortunate because it could seem related to US steps to stop alleged theft of intellectual property.

ZTE agreed in March last year to plead guilty and pay as much as $1.2bn for violating US laws restricting sale of American technology to Iran. The agreement called for the company to pay $892m in fines and forfeitures and be subject to an additional $300m in penalties if it violates the terms of the settlement. It was the largest criminal fine for the US justice department in an export control or sanctions case.

“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” ZTE’s chairman and CEO, Zhao Xianming, said at the time. The company is making personnel changes and instituting new compliance procedures, he said.

Denying ZTE export privileges prevents the company from “participating in any way in any transaction” subject to the US government’s export administration regulations, which govern sales of sensitive technology abroad. It’s also illegal for other businesses or individuals to participate in transactions with a company that has been denied export privileges, according to the department.

CICC predicted the commerce ban will have a significant effect on ZTE’s business — and perhaps on the building of wireless networks.

“If they can’t operate normally because of the US export ban, that will clearly impact global and Chinese network construction and could affect future 5G roll-outs,” CICC analysts including Wang Xinglin wrote in a research note on Tuesday.

The US Federal Communications Commission on Tuesday plans to consider a ban on networking equipment from companies such as ZTE and Huawei.  — Reported by Andrew Mayeda and Ian King, with assistance from Gao Yuan, Edwin Chan and Abhishek Vishnoi, (c) 2018 Bloomberg LP

Original Link

First 5G smartphones to arrive soon

Chinese smartphone maker ZTE aims to launch a smartphone with faster 5G Internet capabilities in about a year, according to Lixin Cheng, CEO of the company’s US division.

The device would be introduced in the US at the end of 2018 or early 2019, Cheng said in an interview.

Plans may change based on the availability of fifth-generation networks and the supply of the necessary chipsets. Cheng said it would be a smartphone, but also noted that a 5G tablet or wireless Internet hub for homes were possibilities, too.

US telecommunications operator AT&T said earlier this month that it plans 5G phone service in about a dozen cities this year, without naming any specifically. Qualcomm has talked up new chips it will sell to enable this faster wireless connectivity. Without those ingredients, ZTE and most other phone makers will struggle to offer viable 5G gadgets.

Cheng’s comments, made on the sidelines of the CES consumer electronics conference in Las Vegas, come as Chinese phone makers are being scrutinised by US authorities. ZTE was fined as much as US$1.2bn last year for breaching US sanctions on Iran. Huawei, which was labeled a cyber-spying threat by a US congressional committee in 2012, planned to announce its first US carrier deal this week with AT&T, but the deal crumbled close to the announcement.

ZTE has already sold phones via both AT&T and Verizon in the US. Phone makers don’t need carrier deals to sell devices in the US, but such partnerships provide a significant boost in marketing and retail presence.

Race is on

According to data compiled from Bloomberg Intelligence, ZTE isn’t a significant player in the global market, with just 2.1% market share in the third quarter. However, the company is part of the string of Chinese phone makers pushing to compete with Apple and Samsung globally. If it indeed releases a 5G smartphone by early 2019, it’s likely that they would be one of the first to the market, potentially going up against or beating Apple and Samsung to offer that feature.

The market leaders haven’t revealed plans for 5G smartphones, but Samsung announced a partnership with Verizon Wireless this month to bring 5G Internet to people’s homes in some parts of California. Last year, the US government granted Apple permission to begin testing 5G networking, implying that the Cupertino, California giant is exploring an iPhone that can connect to 5G networks.  — Reported by Mark Gurman, (c) 2018 Bloomberg LP

Original Link

China attempts to be a leader not a follower in 5G, dominate another area of tech

The first round of standards for 5G sees China taking a more decisive role that could put Chinese manufacturers at the forefront of equipment production for the new technology–at the expense of others around the world. A foreshortened timetable for 5G rollout also emerged at an international meeting.

Radio Access Network (RAN) just held its Meeting 78 in Lisbon where networking companies, mobile carriers and equipment manufacturers from around the world gather to negotiate the future of the technology. At the meeting, the standards body 3GPP approved specifications for the next generation of mobile signal: non-standalone (NSA) 5G New Radio (NR) which for simplicity’s sake we will refer to as “5G” despite ongoing discussion on who is in charge of this standard.

This approval happened six months earlier than had been expected, accelerating the rollout of large-scale trials and commercial networks. Full approval of 5G standards is expected in September 2018.

China was well represented at the meeting with its three major telecom companies plus network equipment manufacturers Huawei and ZTE. In a joint media release, Yang Chaobin, president of Huawei’s 5G product line, said Phase 1 of the 3GPP 5G NR standardization was completed “with great progress” and that “Huawei will keep working with global partners to bring 5G into the period of large-scale global commercial deployment from 2018,” according to ZDNet.

China Telecom EVP Liu Guiqing said the carrier hopes to launch field trials in many major Chinese cities in 2018 and China Mobile EVP Li Zhengmao said the network is looking at 2020.

Chinese tech groups including Huawei and ZTE are known to be putting huge sums into 5G research. They could secure up to 20 percent of all essential patents for 5G technology, according to Edison Lee, analyst at investment bank Jefferies.

There has been a new “generation” of mobile network roughly every 9 years from the early 1980s. 4G The time needed is in part due to developing technology, but also forging standards and negotiating international and global specifications. These allow hardware to be used in multiple regions or worldwide. Previous generations saw China on the backfoot, limiting its abilities to benefit from selling equipment.

Frank Hersey

Frank Hersey is a Beijing-based tech reporter who’s been coming to China since 2001. He tries to go beyond the headlines to explain the context and impact of developments in China’s tech sector. Get in touch with him on frankhersey@technode.com

Original Link

Another corruption scandal hits Huawei with its top executive suspected of bribery

The executive vice president of Huawei’s consumer business group Greater China, Teng Hongfei, has been taken away by the public security, according to people familiar with the matter. Once a recipient of the highest management honor granted by Huawei, Teng is under investigation for corruption charges, Caijing has reported (in Chinese).

The consumer division is the fastest growing among Huawei’s three business groups, thanks to strong performance of Huawei’s smartphone sales in recent years. Teng’s fall from grace might have been a result of the rampant corruption inside China’s direct-to-consumer sales, in which retailers often bribe the manufacturers.

This isn’t the first time Huawei has found itself in the midst of a corruption scandal. This year started with a bang when six top middle and senior leaders from the consumer business group were accused of giving out internal information to LeEco (now known as Leshi) and Chinese smartphone brand Coolpad (酷派) in January. One of the arrested employees was the chief architect of Huawei’s flagship P6 Wu Bin.

The most famous corruption case in recent years was in 2014 when the company accused 116 members of staff of corruption and managed to retrieve RMB 370 million of funds. According to local media speculation, the number of people involved in the practice might have been higher.

In 2012, Huawei also found itself in trouble in international waters when Huawei’s Xiao Chunfa was sentenced by an Algerian court along with two other staffers from Chinese smartphone maker ZTE. The trio was tried in absentia for a bribery scandal involving the state-owned Algérie Télécom. They were sentenced to ten years in prison and fined five million dinars ($65,000).

Huawei has made efforts to eliminate internal corruption in its ranks by rewarding law-abiding employees and making its executives take a loyalty oath.

Masha Borak

Masha Borak is a technology reporter based in Beijing. Write to her at masha.borak [at] technode.com.

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