China’s ZTE sees supply chain in limbo as talks with US on export curbs over Iran continue

US-made components estimated to account for up to 15 per cent of ZTE’s total bill of materials in 2015

PUBLISHED : Wednesday, 09 March, 2016, 11:12am
UPDATED : Saturday, 12 March, 2016, 5:25pm

Chinese telecommunications equipment giant ZTE said today it is uncertain whether a resolution can be reached with Washington, after the company was slapped with export restrictions over its alleged violation of longstanding trade sanctions on Iran.

Analysts expected the US export curbs to have no immediate impact on production at ZTE, but the situation could keep the trading of its shares in Hong Kong in limbo.

ZTE requested the suspension of trading in its Hong Kong-listed shares on Monday amid initial reports about the US action.

In a regulatory filing on Wednesday, chairman Hou Weigui said ZTE was now “conducting a thorough assessment on the potential impact of the restriction measures”.

The Bureau of Industry and Security under the US Department of Commerce imposed the export restrictions on ZTE on Tuesday, making it difficult for suppliers to ship any American-made equipment and parts to the Shenzhen-based company.

“There is uncertainty as to whether a solution can be achieved through the communications between the company and the relevant US governmental department,” Hou said.

Suppliers of goods subject to the US export curbs are required to apply for a licence to ship those items to ZTE.

A “licence review policy of presumption of denial shall apply” in this situation, ZTE said.

It added that US export restrictions also applies to affiliates ZTE Kangxun Telecommunications, Beijing 8-Star International and Iran-based ZTE Parsian.

READ MORE: ZTE vows to cooperate with Washington to resolve import restrictions, but China blasts US for ‘incorrect’ handling of issue

Nomura research analyst Huang Leping pointed out that ZTE completed its purchase of US components for its 2016 production schedule at the end of last year, which should provide the company and the Chinese government with some lead time to negotiate a resolution to the US export restrictions.

“We estimate US-made components accounted for between 10 per cent and 15 per cent of ZTE’s total bill of materials last year,” Huang said.

Major suppliers included Qualcomm for chips used on smartphones, as well as Xilinx and Intel subsidiary Altera for chips used in base stations.

“If the restrictions last long enough, ZTE may experience some supply chain disruption given the difficulty to find alternate suppliers for some components, especially chipsets,” Huang said.

ZTE can file an appeal against the US action, which stemmed from the Commerce Department’s investigation of a 98.8 million euro (HK$845.5 million) contract between the company and the government-controlled Telecommunications Company of Iran (TCI) for the supply of a powerful surveillance system.

That deal, which was signed in December 2010, delivered a product that would make TCI “capable of monitoring landline, mobile and internet communications” across Iran, Reuters reported in 2012.

According to the 907-page packing list for the system delivered to Iran in 2011, that ZTE equipment included hardware and software components from various US technology companies, including Microsoft, Oracle, Cisco Systems, Dell and Symantec.

The United States imposed restrictions on trade with Iran from 1979, following the seizure of the American embassy in Tehran. Those are separate from international sanctions on Iran over its nuclear programme, which were lifted in January.

Huang said any negative impact on the lengthy imposition of US export restrictions against ZTE could mean gains for other global suppliers of telecommunications infrastructure, including China’s Huawei Technologies, Sweden’s Ericsson and Finland-headquartered Nokia Networks.

In the smartphone market, component supply problems for ZTE could benefit other suppliers of low-priced Android mobile phones, such as Lenovo Group and TCL Communications, he said.