May 23, 2019 08:16 AM

Geopolitics of ZTE Case Offer Clues to Likely Outcome for Huawei-Washington Clash

Anyone looking for clues on how the ongoing clash between Washington and Chinese telecom giant Huawei Technologies might play out has plenty of precedents to draw on, most notably an earlier similar clash between the U.S. and Huawei rival ZTE Corp. The similar geopolitics at the center of both cases make it quite possible that Huawei will follow a path similar to ZTE’s, even though the two companies are quite different in terms of sophistication.

Huawei is far more advanced than ZTE in terms of technology, including its ownership of a chipmaking unit that supplies some of its needs for that critical part of its business. By comparison, ZTE is far more reliant on foreign suppliers for far more of its technology needs. But none of that may matter in this highly politicized case that’s likely to play out based on geopolitical considerations related to the ongoing U.S.-China trade war, rather than technological factors.

The latest dust-up began last week after Washington issued an order cutting off Huawei from its U.S. suppliers. Since then, Huawei founder Ren Zhengfei has said his company has already identified alternate suppliers that could fill the gap for current U.S. partners, even as Washington added a three-month extension before any action would take effect. Ren also said he won’t accept a harsh penalty like the one that forced ZTE to change its entire top management in its case.

Observers will know the earlier ZTE conflict — which I’ll review in more detail shortly — briefly saw that company face a possible shutdown after Washington imposed a similar penalty cutting it off from its U.S. suppliers. The two sides reached a settlement several months later that resolved the matter. I do suspect the Huawei saga will have a similar ending, though perhaps it could drag on a bit longer than the ZTE case as U.S. President Donald Trump attempts to make a point in his ongoing trade war with Beijing.

At the end of the day, it’s really in nobody’s interest to put Huawei out of business — certainly not in China’s and not even America’s. Despite Huawei’s absence from supply agreements with major U.S. carriers like Verizon and AT&T, a number of smaller U.S. phone companies currently rely on Huawei’s equipment and would be hurt by a long-term ban on doing business with the Chinese company.

Equally important, carriers in most of America’s major allies like Britain and France do extensive business with Huawei. Those carriers would face big headaches if Huawei was suddenly unable to supply them with parts and support for their existing telecom networks — a message Washington would hear loud and clear from places like London and Paris.

Huawei is really a test case in many ways, as it’s much bigger than ZTE and the U.S.-China trade war does seem to be reaching new highs these days. In terms of revenue, Huawei is about six times the size of ZTE, based on their 2017 results. And whereas ZTE has tended to focus on emerging markets, Huawei is much more entrenched in developed nations that are likely to be U.S. allies.

All that said, let’s take a deeper dive into this latest clash and explore its similarities with the similar conflict between Washington and ZTE that made global headlines for months last year.

We should start by pointing out that the latest conflict between Huawei and Washington has been brewing for quite some time, and dates back well before the Trump era. Western media reported as early as 2013 that Huawei and its CFO Meng Wanzhou were being examined by Washington for ties to a company suspected of selling U.S. products to Iran in violation of American sanctions at that time. Around that time similar reports emerged that ZTE was being investigated for similar transgressions.

The U.S. determined in 2017 that ZTE had indeed violated the anti-Iran sanctions, and reached a settlement in the matter that included a $900 million fine. Significantly, the company didn’t get hit with the harsher punishment of being cut off from its U.S. suppliers at that time, the punishment now being faced by Huawei.

ZTE did have to face such draconian consequences last year when Washington determined the company wasn’t following all the provisions of its original 2017 settlement, and ZTE had to cease operations for several months after being cut off from its U.S. suppliers. But it eventually reached a second settlement, including an even larger fine, and resumed business after regaining access to its U.S. suppliers.

Similar outcome for Huawei?

Against that backdrop, one could argue that a similar outcome could be in store for Huawei. The two cases are nearly identical in terms of what violation occurred.

The Huawei case differs a bit in Washington’s attempts to bring Huawei’s CFO Meng Wanzhou to the U.S. to face criminal charges. No such ZTE executives ever faced U.S. criminal charges, though its second settlement required the company to replace its entire board and top executives.

But again, Meng’s name was included in the early 2013 media reports, indicating she had been on Washington’s radar well before the Trump administration entered the picture. That would seem to indicate that both cases were being basically handled independently of political interference in line with procedures by the U.S. Commerce Department, which prosecutes such cases. That was the case at least for most of the time until specific punishments were announced.

That’s where both cases appear to have become politicized. Trump has been quite up front in saying both the ZTE and the Huawei cases could be included in trade talks with Beijing, even though many have advised against such mixing of criminal and policy matters.

We also have to consider that U.S. policy in terms of punishing corporate crimes, regardless of where a company is based, has always been to teach a lesson without endangering the company’s actual existence. That’s why you see such wide variation in fines for crimes committed by companies in America, since such punishments are often tied to a company’s ability to actually stay in business after paying them.

With all that legal background in mind, combined with the damage Huawei’s failure would do around the globe, it’s difficult to imagine the Trump administration really wants to put the company out of business. Then again, Trump does seem quite willing to mix the Huawei situation in with his trade talks. That means he will probably keep pressure on regulators overseeing the Huawei Iranian sanctions violation case to avoid reaching a settlement similar to the one last year with ZTE, at least until the U.S. reaches a broader trade deal with China.

The bottom line is that the U.S. Commerce Department has been treating the case in a routine way and has probably already begun settlement talks similar to those with ZTE last year. Such a settlement is almost certain to come, probably including a record fine commensurate with Huawei’s size. But it’s also quite possible Trump will pressure the department to drag out such a settlement until a larger U.S.-China trade deal can be reached, which means such a deal could take a month or two longer than the three-month ZTE case last year.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to

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