Just when you thought things couldn’t get worse between the U.S. and China, it appears to have done so. The US Department of Commerce is imposing an export ban on Chinese phone maker ZTE Corp. for seven years. The action prohibits American companies from selling components to ZTE, and was taken in response to a violation of the terms in a sanctions case settlement.
Last year, ZTE Corp. was found guilty of violating US sanctions through illegal shipments to Iran and North Korea. In addition to paying more than $1 billion in fines, the company agreed to fire four senior officers and reprimand or deny bonuses to 35 other employees. However, in March, ZTE admitted that it failed to take action against the 35 employees.
This ban is expected to affect ZTE and its stock drastically as it depends on companies like Qualcomm (QCOM), Microsoft (MSFT), Intel (INTC) and Dolby for components. The loss of Qualcomm, in particular, will hurt ZTE badly as it leaves the latter with fewer alternatives for devices. ZTE gets around 25% to 30% of its components from US companies.
Before ZTE, it was Huawei that faced the wrath of the US government over telecommunications infrastructure security risks and espionage worries. Companies like Verizon and Best Buy decided to stop sales of Huawei products.
The stocks of major ZTE suppliers in the US, such as Acacia Communications Inc., dropped along with optical companies such as Lumentum Holdings Inc. and Finisar Corp.
The US is not alone in penalizing ZTE. The National Cyber Security Centre in the UK. has warned telecom companies against using ZTE’s equipment or services owing to national security risks.
The ban is likely to worsen the current trade situation between the US and China and also to be detrimental to ZTE both on a short and long-term basis.