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Chinese phonemaker ZTE near collapse after parts run out because of U.S. sanctions

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Chinese telecom giant ZTE said its major operations had ceased following last month’s U.S. ban on American sales of critical technology to the company, raising the possibility of its collapse.
(Johannes Eisele / AFP / Getty Images)

ZTE Corp., the Chinese phonemaker that once hoped to rival Apple, has been brought to near collapse after suspending all operations because of U.S. sanctions.

The No. 2 Chinese telecom equipment manufacturer said Thursday its three main divisions — network gear, devices and enterprise solutions — have all but halted sales and aren’t bringing in sizable income, a person familiar with the matter said. ZTE specified the next two weeks as a “critical window” and urged managers to calm employees, according to an email to senior staff seen by Bloomberg News.

ZTE remains intent on resolving a seven-year blockade Washington imposed as punishment for violating the terms of a 2017 sanctions settlement — then lying about it. That blockade cut off access to the American technology it needs to build most of its products, from Qualcomm Inc.’s semiconductors to optical chips from Lumentum Holdings Inc.

“The company is currently working hard to speedily resolve this impasse,” read the email. “Don’t let inaccurate information and rumors unsettle us. Stick to your posts, rally your teams, and calm your troops.” The email didn’t elaborate on that two-week timeframe, which takes it roughly to the end of May.

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ZTE’s increasingly precarious position is exacerbating tensions between the United States and China, the world’s two biggest economies, now in the throes of sensitive negotiations to try to forestall a calamitous trade war.

The telecom giant essentially ran out of inventory in the month since the ban’s imposition and had no way to replenish it. As of Thursday, its website and flagship smartphone store on Alibaba’s Tmall online marketplace had suspended sales. Carriers, including Australia’s Telstra Corp., stopped offering its devices.

ZTE’s best hope may be for intervention from Beijing — but that’s a long shot given rising tensions between the U.S. and China. President Trump has threatened tariffs on $150 billion of Chinese imports following allegations of intellectual property rights violations, while Beijing has vowed to retaliate on everything from American soybeans to planes.

The blow came just as ZTE was preparing to lead the country’s charge into the era of fifth-generation wireless technology, along with local rival Huawei Technologies Co.

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Major wireless carriers around the world are preparing to spend billions rolling out 5G networks, which enable new technologies such as faster internet access and augmented reality. ZTE, which once harbored ambitions of vying with Apple Inc. in phones, has called the punishment “unacceptable” and threatened to take legal action.

ZTE, whose shares have been suspended since the imposition of the ban, said in its statement it has sufficient cash and will adhere to its commercial obligations. Company representatives declined to elaborate further. On Thursday, shares in ZTE suppliers Mobi Development Co. and Shenzhen SDG Information Co. were down more than 1%.

“As a result of the denial order, the major operating activities of the company have ceased,” ZTE said in a filing to the exchange. “The company and related parties are actively communicating with the relevant U.S. government departments in order to facilitate the modification or reversal of the denial order by the U.S. government and forge a positive outcome in the development of the matters.”

ZTE’s larger rival, Huawei, also faces heightened U.S. opposition. The Justice Department is said to be investigating its own compliance with American sanctions banning sales to Iran. The Pentagon has banned ZTE and Huawei phones for sale, and the Federal Communications Commission voted in April to ban federal money from being used to buy gear from companies deemed a national security risk.

“It is not unexpected to see ZTE’s exhausted its inventory since it can’t get more components from the key U.S. suppliers,” said Edison Lee, an analyst with Jefferies. “The U.S. said they are reviewing the appeal from ZTE, I think that’s a good sign.”


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