ZTE Corporation: In the China-United States Trade War Crosshairs?
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Case Code: ECON072 Case Length: 19 Pages Period: 2012 – 2018 Pub Date: 2019 Teaching Note: Available |
Price: Rs.500 Organization : ZTE Corporation Industry : Telecommunications Countries : Global Themes: International Management, Globalization |
Abstract Case Intro 1 Excerpts
Excerpts
Background Note
Shenzhen-based ZTE traced its origins to 1985 when it was established as Shenzhen Zhongxing Semiconductor by Hou Weigui (Hou). The company was originally a part of a joint venture between the two state-owned enterprises in aerospace in China – China Aerospace Science and Technology Corporation (CASC) and China Aerospace Science and Industry Corporation (CASIC). In March 1993, Zhongxing Semiconductor was renamed Zhongxing New Telecommunications Equipment Co., Ltd (ZTE). Under the leadership of Hou, ZTE focused on crucial technological developments in telecommunications such as CDMA , PHS (Personal Handy-phone Service ), and mobile phones. The company was primarily a supplier of carrier equipment to telcos, including base stations and core networking...
ZTE in the USA
ZTE entered the US in 1998 and within two decades became the fourth-largest supplier of mobile devices and the second-largest supplier of prepaid devices in the country. It was a primary supplier of low to mid-range mobile devices to US wireless carriers such as AT&T, Verizon, Sprint, and T-Mobile. Being available on US carriers was a crucial part of gaining market share for ZTE in the US as 90% of Americans purchased their mobile devices directly from carriers. According to analysts, ZTE’s phenomenal rise in the US mobile phone market was mainly due to growing distribution at second-tier carriers and a reputation for operator customized, budget conscious phone models. Reportedly...
ZTE's Tussle with the Law
ZTE and Huawei had long been in the crosshairs of US law and policymakers. In 2012, ZTE faced intense scrutiny based on a US House Intelligence Committee report which claimed that Huawei and ZTE posed a threat to US national security due to their close ties with the Chinese government. The report claimed that Chinese security agencies could access private US business communications using Huawei and ZTE’s devices and spy on US government and American companies...
Export Ban on ZTE
In April 2018, US investigators found that ZTE had not fully complied with the terms of the 2017 sanctions settlement related to senior employee disciplinary actions. According to the US Commerce Department, the company had failed to follow through with a series of fairly basic punishments — like not giving bonuses to those who had violated the trade sanctions. While ZTE disclosed it had fired four employees, it did not reveal that the rest of its staff had received full bonuses rather than letters of reprimand...
Implications
ZTE's future in the US looked rather bleak as some carriers, who had been long-term customers of the company, were scaling back deals over concerns whether it could guarantee supply. For instance, T-Mobile discontinued a ZTE phone model while Consumer Cellular stopped selling ZTE phones and was in talks with other vendors to fill the gap. In Australia too, major telecommunications firm Telstra discontinued selling phones manufactured by ZTE. In China, ZTE suspended handset sales on its official store on Alibaba’s Tmall shopping site. Analysts said the ban would also impact the future purchase plans of carriers in the US and provide an opportunity for ZTE’s rivals like Ericsson and Nokia to attract new customers and gain market share....
Back to Business
Though the US sanctions against ZTE began before the trade tensions between China and the US, they later became central to the discussions. Lifting the sales ban on ZTE was a key demand China made in broader trade talks with the US to avert a trade war. At this point, President Trump intervened and helped ZTE in reaching a settlement with the US Commerce Department. On May 13, 2018, Trump tweeted:.. .
Challenges Ahead
Despite the withdrawal of the ban, ZTE’s struggles were far from over. In February 2018, the heads of the Central Intelligence Agency (CIA), the Federal Bureau of Investigation (FBI), the National Security Agency (NSA), and the director of national intelligence to the Senate Intelligence Committee warned that Americans should avoid using products from Huawei and ZTE. ZTE’s close ties with the Chinese government were a cause for concern among US intelligence agencies...
Exhibits
Exhibit I: Ownership Structure of ZTE
Exhibit II: ZTE: Key Financials
Exhibit III: Market Share of Telecom Mobile Infrastructure Companies Worldwide 2017
Exhibit IV: Core Technological Competencies of ZTE vis-à-vis Local and Global competitors*
Exhibit V: US Smartphone Shipments
Exhibit VI: Major US Suppliers to ZTE
Exhibit VII:Implications of US – China Trade War
Exhibit VIII:Global Telecom Equipment Market: Revenue Share
Exhibit IX:Stock Price of ZTE (Jan-Dec 2018)
Exhibit X:ZTE Corp: Key Financials (3Q 2018)
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