Tough ZTE penalty a costly reminder for firms to obey rules
In order to stay in business the fallen Chinese telecoms giant will have to meet harsh US demands, and this should serve as a warning to other companies
The extraordinary deal between the Chinese telecommunications company ZTE and the United States Department of Commerce has removed an obstacle in US President Donald Trump’s trade dispute with China.
But the wrangle with the Shenzhen firm was not an integral part of the row and it will rumble on, presumably with more twists and turns before it is resolved. Nor, with some lawmakers displeased with the manner in which the agreement was struck, can the company be certain it will be quickly back in business.
Of no doubt, though, is the warning that regulations have to be complied with and the need for the nation to push resolutely forward on becoming technologically self-reliant.
ZTE knowingly broke US rules and it will pay an unprecedented penalty. There will be a US$1 billion fine, US$400 million will have to be put into an escrow account and, most remarkably, an American appointed compliance team will be installed at the company for 10 years to prevent further violations.
How the latter will be managed has yet to be detailed and questions abound about issues such as boardroom privacy and trade secrets. But the firm has no choice if it wants to remain in business, such is its reliance on US technology for its products and research.
The tech industry is a complex global network of innovation and creativity that means few products, if any, are home-grown.
American firms are key players and that brings challenges not only for Chinese companies seeking parts and markets, but also when needing to comply with US sanctions imposed against nations Washington is in dispute with.
ZTE failed to comply by selling products made with American semiconductors to Iran and, when found out, illicitly continued the trade. Even when fined US$1.19 billion, it did not punish implicated senior managers as required and as a result was banned from trading with the US for seven years.
The case led President Xi Jinping to call on scientists last month to work harder on developing core technologies. That drive, under the banner of “Made in China 2025”, is in part behind Trump’s trade tussle.
The tough action against ZTE shows the lengths to which he is prepared to go. But some US lawmakers think he has been too lenient; they are seeking legislation banning the deal on national security grounds as they see ZTE as having Chinese government links and using products and services for spying and intellectual property theft.
Whatever the outcome, the ZTE case has highlighted urgent matters for China and its companies. Of the necessity for self-reliance in technology there is no question. But firms, whether at home or abroad, have to take the necessary steps to tighten corporate oversight and ensure compliance mechanisms are in place.