Home / Technology / ZTE Document Raises Questions About Huawei and Sanctions

ZTE Document Raises Questions About Huawei and Sanctions


An anniversary celebration in 2013 for the Chinese technology company ZTE. This month, the United States said ZTE would be blocked from buying technology from American companies without a special license. Credit Barry Huang/Reuters

HONG KONG — When the United States government punished ZTE of China this month, saying it had done business with Iran, it released internal company documents that it said detailed how the electronic equipment maker had done it — and that also suggested the problem might not be limited to one Chinese company.

One document described how ZTE would set up seemingly independent companies — called “cut-off companies” — that would sign the deals in other countries. That could enable it to continue to do business in Iran, North Korea and other countries placed under American restrictions.

In describing the effort, the document cited as a model — and at times a cautionary tale — a rival company it called F7. ZTE said F7 had done something similar, though its business in restricted companies ended up hurting its American ambitions.

The document does not give F7’s real name. But the description offered by ZTE matches a company far larger and more politically sensitive: Huawei Technologies, its chief rival and a major force in the technology world.

The ZTE document, dated August 2011, suggests that other Chinese companies could have potential exposure to American export limits. Given the recent sanctions against ZTE, it also suggests that the issue could be a continuing one between Chinese and American government officials.

ZTE on Thursday said that it had delayed the release of its annual financial results because of the sanctions, which limit the ability of American companies to sell equipment to it.

ZTE officials declined to comment on the identity of F7, and Huawei declined to comment. ZTE has said it is cooperating with investigators and is committed to complying with the law.

The United States Commerce Department, which last week restricted sales of American telecommunications equipment to ZTE, accusing it of violating embargoes, did not respond to requests for comment.

It is rare for the Commerce Department to publicly provide evidence for an addition to its blacklist of restricted companies, especially full disclosure of internal documents.

It is not clear how accurate ZTE’s version of the events might be. The document says some information about F7 was gathered by ZTE’s legal department, without offering details.

F7, the document says, tried in 2010 to buy an American company called 3Leaf but met with opposition from American officials. That same year, Huawei agreed to buy major assets from 3Leaf, but it dropped the bid in February 2011 because of opposition from American officials.

F7 also has a joint venture with the American digital security company Symantec, the 2011 document says. Huawei had a joint venture with Symantec before the American company dissolved it in 2012.

Like ZTE, Huawei makes telecommunications equipment for corporate networks and for big telecommunications systems such as phone companies. American officials have long suspected it has Chinese government ties, and United States intelligence officials have tried to tap into the company’s network. Both companies are effectively barred from selling equipment for American networks.

Huawei says that it is privately owned and that accusations of government ties are an excuse to hurt the company for protectionist purposes.

Huawei is much larger than ZTE. In 2014, it reported revenue of about $ 60 billion, about four times that of ZTE. Depending on the measure, it ranks with Sweden’s Ericsson as the world’s largest supplier of the base stations and other equipment that make mobile telecom networks run. Huawei equipment supports networks in countries across the world, including many European markets.

While both Huawei and ZTE are given privileged status as high-tech innovators by China’s leadership, Huawei is more prominent.

Huawei has also had greater success selling its smartphones in America, and indeed across the world. The company was the third-largest smartphone vendor by units sold in the fourth quarter of 2015 according to IDC, with an 8.1 percent share of the global market, compared with the 21.4 percent share of Samsung, the company in first place.

Despite the trouble in the United States, Huawei has not shied away from potentially controversial deals. In September, Huawei signed a deal with Syria’s Communications and Technology Ministry to help the country develop its communications networks.

The ZTE document details how F7 recruited compliance experts and placed them in its joint ventures as part of efforts to mitigate its risks. It says that the company recruited one “senior export control compliance specialist from Texas Instruments” and a “Chinese-American attorney who is familiar with the related laws in the U.S.”

It also describes how F7 found partners that it could say were independent companies and that could work on its behalf in countries under embargo. F7, it said, found a big information technology company that was “serving as its agent to sign contracts for projects in embargoed countries.”

“This cut-off company’s capital credit and capability are relatively strong compared to our company; it can cut off risks more effectively,” the document said.

But ZTE came to believe that F7’s activities in embargoed countries hurt its American expansion efforts.

It said it believed that F7’s efforts to acquire companies in the United States were in part blocked because of its “ongoing projects in embargoed countries.”

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