HONG KONG/WASHINGTON (Reuters) - Chinese telecommunications equipment maker ZTE Corp (0763.HK) has urged its U.S. suppliers to apply for export licensee to satisfy newly imposed U.S. trade restrictions, a source with direct knowledge of the situation told Reuters on Tuesday.
The news came as export restrictions against ZTE (000063.SZ) for alleged Iran sanctions violations drew fire from the Chinese government, which said it was “resolutely opposed” to the tough measures but stopped short of announcing retaliation.
The moves announced by the U.S. Commerce Department on Monday are likely to disrupt ZTE’s sprawling global supply chain and could create substantial parts shortages, according to sanctions experts.
ZTE purchases of technology components last year will not be enough to meet demand in a rapidly changing global tech industry, said the source, adding the U.S. export restrictions were a rare punishment for a company.
“It’s possibly the toughest punishment you can do to a tech company,” said the source who declined to be identified as the information was not public.
If the restrictions remained in place for a significant amount of time, “the case would escalate to a very high level politically”, the source added, declining to give a timeframe.
China’s Ministry of Commerce criticized the decision, adding to complaints from the Foreign Ministry on Monday.
“China expresses its strong dissatisfaction and resolute opposition” to the measure, the ministry said on its website (www.mofcom.gov.cn).
“The U.S. move will severely affect normal operations of Chinese companies. China will continue negotiating with the U.S. side on this issue.”
Under the measures, U.S. manufacturers will be banned from selling components to ZTE, a major global supplier of telecom-networking equipment and smartphones. In addition, foreign manufacturers will be prohibited from selling products containing a significant amount of U.S.-made parts to the Chinese company.
The U.S. Commerce Department, confirming the decision that was first reported by Reuters on Saturday, said ZTE planned to use a series of shell companies “to illicitly reexport controlled items to Iran in violation of U.S. export control laws.”
It said ZTE acted “contrary to the national security or foreign policy interests of the United States.”
In a statement, ZTE said it was “working expeditiously” towards a resolution to the issue.
“ZTE is fully committed to compliance with the laws and regulations in the jurisdictions in which it operates. ZTE has been cooperating and will continue to cooperate and communicate with all U.S. agencies as required,” the Shenzhen-based company said.
While ZTE suppliers can apply for an export license to ship any American-made equipment or parts, the Commerce Department said such license applications generally will be denied.
ZTE, which has annual sales of more than $15 billion, can appeal the decision.
The export restriction, which does not stop ZTE from selling handsets in the United States, is expected to have a global impact.
“It is going to have a large ripple effect. It’s very significant to many companies both in the U.S. and (outside the) U.S.,” said Doug Jacobson, an export attorney at law firm Jacobson Burton Kelley PLLC.
Although ZTE is not being banned from selling handsets in the United States, the restriction could disrupt handset production if ZTE sources U.S.-made parts to manufacture its handsets, experts said.
ZTE is the No. 4 smartphone vendor in the United States, with a 7 percent market share, behind Apple Inc (AAPL.O), Samsung Electronics Co (005930.KS) and LG Electronics Inc (066570.KS), according to research firm IDC.
A ZTE website says companies including Microsoft (MSFT.O), Intel Corp (INTC.O), IBM (IBM.N) and Honeywell International Inc (HON.N) are “key strategic partners.” The terms of the partnerships are not described.
Reporting by Beijing Monitoring Desk, Donny Kwok and Yimou Lee in Hong Kong, John Ruwitch in Shanghai, Joel Schectman and Susan Heavey in Washington, Steve Stecklow in London, Dan Burns and Malathi Nayak in New York; Editing by Anne Marie Roantree and Lincoln Feast