The US sales ban UU China's ZTE opens a new front as tensions rise

LONDON / NEW YORK / HONG KONG (Reuters) – The United States banned US firms from selling parts to China's ZTE Corp for seven years, a potentially devastating move for the telco equipment maker and exacerbating tensions between the two economies biggest in the world. .

The action, reported for the first time by Reuters, comes at a time when the two countries have threatened tens of billions of dollars in tariffs in recent weeks, fueling concerns of a trade war that threatens global supply chains too. as business investment plans.

The US Department of Commerce UU He imposed the ban after ZTE violated an agreement on punishing employees that was reached after being illegally captured to ship EE products. UU To Iran.

China responded quickly, warning that it is prepared to take measures to protect the interests of Chinese firms and saying that it hopes that the United States can deal with the matter in accordance with the law.

The action of the USA UU It could be catastrophic for ZTE as it is estimated that US companies provide 25 to 30 percent of the components used in ZTE equipment, which include smartphones and equipment to build telecommunication networks.

"If the problem can not be solved without problems and immediately, we believe that ZTE will face a tremendous disaster and will be forced to reduce its smartphone business, not only in the US, but also in other markets "said Strategy Analytics. analyst Woody Oh.

ZTE, whose shares in Hong Kong and Shenzhen were suspended from trading on Tuesday, said in a statement that it was evaluating the implications of the US decision. UU And he was communicating with the "relevant parties".

The company has established a crisis management group in response to the ban, a ZTE source said, declining to be identified as the information was confidential.

With a value of $ 20 billion until the close of Monday, ZTE is the second largest manufacturer of telecommunications equipment in China after Huawei Technologies Co Ltd [HWT.UL] and the fourth largest seller of smartphones in the United States . In 201

7, it obtained 59 percent of the revenues of its network business and 32 percent of its consumer business.

"If the company can not solve it, it's very possible that this business will be closed," said Eric Hirschhorn, a former undersecretary. "Many banks and companies, even outside the US, are not going to want to deal with them." of the United States that was very involved in the case.

The Chinese company paid $ 890 million in fines and penalties after it pleaded guilty last year to conspiring to violate US sanctions. UU Through the illegal shipment of EE products. UU To Iran.

As part of the agreement, ZTE, based in Shenzhen, promised to lay off four senior employees and discipline another 35 either by reducing their bonuses or by suppressing them, senior US officials told Reuters.

But the Chinese company admitted in March that while it had fired the four main employees, it had not disciplined or reduced the bonds to the other 35.

Visitors are seen at a booth of the Chinese manufacturer of telecommunications equipment ZTE Corp at an exhibition in Beijing, China, September 27, 2017. Photo taken on September 27, 2017. REUTERS / Stringer

POINT OF LIGHT SECTOR

Say ZTE was likely to miss the shipments and lose orders , the broker Jefferies lowered its rating on the firm to "low performance". of & # 39; buy & # 39; and cut its price target to HK $ 15.72, almost 40% below the closing price of the firm before the commercial suspension on Tuesday.

But Jefferies also said he hoped that ZTE could reach an agreement with the US authorities. UU In three or five months.

Under the terms of the ban, US companies can not export banned products, such as chipsets, directly to ZTE or through another country, starting immediately.

As the USA UU They worry about protecting their chip technology and reducing their trade deficit, the technology sector has become a high point in the broader battle over trade and economic policy, with US President Donald Trump accusing Chinese companies of property theft intellectual.

Washington has also deepened its scrutiny of Chinese investment in the US, with the Committee on Foreign Investment in the United States (CFIUS), blocking many proposed acquisitions of US assets by Chinese companies.

Increasing the pressure on ZTE, Britain's leading cybersecurity agency said on Monday that it has written to organizations in the UK telecommunications sector warning about the use of ZTE services or equipment.

The ban on supplying ZTE comes two months after two Republican senators introduced legislation to block the US government. UU From buying or leasing telecommunications equipment from ZTE or Huawei, citing concerns that companies would use their access to spy on US officials.

"China does not follow our rules, and we must be alert to Chinese threats to both our economic security and our national security," said Republican Representative Robert Pittenger after the announcement of Commerce. Pittenger is sponsoring legislation that would strengthen the US national security review process. UU For foreign investments.

The actions of the large US suppliers of ZTE were caught in the crossfire of the US ban. UU Optical network equipment maker Acacia Communications Inc, which gained 30 percent of ZTE's total 2017 revenues, fell 35 percent, reaching a minimum in almost two years. Acacia said that it suspended the affected transactions and evaluated the impact.

Shares of optical components companies, including Lumentum Holdings Inc, fell 8.9 percent and Finisar Corp fell 4.0 percent. Oclaro Inc, which obtained 18 percent of its revenues for fiscal year 2017 from ZTE, lost 14.1 percent.

Visitors pass in front of the group of Chinese telecommunications equipment ZTE Corp at the Mobile World Congress in Barcelona, ​​Spain, on February 26, 2018. REUTERS / Sergio Pérez

ZTE has sold mobile devices to operators of US mobile telephony AT & T Inc, T-Mobile US Inc and Sprint Corp. have relied on US companies such as Qualcomm Inc, Microsoft Corp and Intel Corp for some components.

Report of Karen Freifeld in New York and Steve Stecklow in London and Sijia Jiang in Hong Kong; Additional reports by Noel Randewich and Peter Henderson in San Francisco, Munsif Vengattil in Bangalore and Miyoung Kim in Singapore; Written by Anne Marie Roantree; Edited by Jeffrey Benkoe, Lisa Shumaker and Edwina Gibbs

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