National security warning for British firms dealing with Chinese telecoms giant ZTE

Delia Walker
April 17, 2018

The latest NCSC warning about ZTE coincides with the announcement of a seven-year ban on United States companies selling products and services to ZTE due to its alleged failure to act against personnel who sold sensitive U.S. technology to Iran and North Korea, according to The Guardian.

A statement from the Commerce Department said that In March 2017, ZTE agreed to a combined civil and criminal penalty and forfeiture of $1.19 billion after illegally shipping telecommunications equipment to Iran and North Korea, making false statements, and obstructing justice including through preventing disclosure to and affirmatively misleading the U.S. Government.

The US Commerce Department said that ZTE lied to American officials about punishing employees who violated US sanctions against North Korea and Iran.

The warning from the UK's NCSC deals another blow to ZTE's global reputation, which has already taken a hit this week, as USA authorities have banned the sale of U.S. components to ZTE for a seven-year period.

The company "covered up the fact that ZTE paid full bonuses to employees that had engaged in illegal conduct, and failed to issue letters of reprimand", the US Department of Commerce said.

Separately, the U.K.'s National Cyber Security Centre warned the country's telecommunications companies and regulator that national security risks from using ZTE equipment and services "cannot be mitigated".

US firms are also likely to get caught in the crossfire, with the fallout set to hit Qualcomm Inc, which provides the lion's share of chips inside ZTE smartphones. It said the Shenzhen-based company has cooperated with hundreds of USA companies and contributed to the country's job creation. Jefferies cut its recommendation on ZTE's stock to underperform and slashed its share price target by more than half to reflect its expectation that profit this year will slump by 51 per cent.

"We stand ready to take necessary measures to protect Chinese companies' legitimate rights and interests", it added. Its shares were last traded at HK$25.6 at the close in Hong Kong on Monday. The company has been banking on sales of next-generation 5G network equipment to become its new engine for growth, as 4G mobile operators start to upgrade their networks and 5G-enabled smartphones and tablets are expected to soon hit the market.

Having suffered a loss of 767.8 million Chinese yuan ($122 million) in 2016, ZTE bounced back with a net profit of more than RMB6.7 billion ($1.1 billion) previous year, with sales up 7.5%, to RMB108.8 billion ($17.3 billion). He previously served as president at ZTE for two three-year terms, from 2004 to 2010. "The company's internationalisation will also have its ups and downs", Yin said in the memo. "Huawei is closely associated with the Chinese government, and Huawei and ZTE strongly dislike each other".

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