research report
The Analysis and Reflection of ZTE Incident's Sanctions in the United States
SASAC Research Center April 20, 2018
Editor's note: On April 16th, the United States announced the sanctioning of China’s ZTE Corporation, which caused public concern. As China’s telecommunications industry is highly dependent on US chips, ZTE is the largest listed company of state-owned holding communications equipment in China. The incident was against ZTE itself and the industry. All bring a lot of influence, and it will inevitably bring series effects to other central enterprises.
In the context of the trade war, this incident has caused many worries. Some people accused the United States of imposing a technical blockade on China, and some people enthusiastically believe that this is a catalyst for the localization of the chip industry. This is a good opportunity. It is necessary to calm down. Think and take appropriate measures. We must correctly understand the historical stage of our country’s social economy, recognize the gaps and shortcomings between Chinese companies and world-class companies, and stick to independence and self-sustaining reform and opening up.
Insist on governing the country according to law and manage enterprises in accordance with the law. Taking the ZTE event as an opportunity, the central enterprises should make up for the shortcomings of the system in a timely manner to lay the foundation for the next step in participating in international competition and cooperation.
On April 16 this year, the U.S. Department of Commerce issued an announcement that the U.S. companies and the ZTE Corporation should be prohibited from conducting any business transactions within seven years on the grounds that ZTE had violated the settlement agreement reached with the U.S. government in 2017 and that the situation is still spreading.
Since China’s communications industry is highly dependent on US chips, ZTE is the largest listed company of state-owned holding communications equipment in China. The incident of sanctions has had a lot of impact on ZTE itself and the industry, and will inevitably have a series of impacts on other central enterprises.
Author: Wang Jiang
I. The Causes and Causes of ZTE Corporation's U.S. Sanctions
According to the reasons given by the US Department of Commerce, the reason why such a severe sanction against ZTE is because ZTE violated the U.S. sanctions clause that restricts the sale of U.S. technology to countries such as Iran and North Korea. State Court first gave
ZTE’s subsidiary in the United States issued a letter of appeal to initiate investigations on ZTE Corporation. In November 2013, ZTE Corporation, having known that US regulators investigated their own violations, sought a U.S. listed company to evade the supervision of the U.S. side. As a cut-off company, through the form of domestic trade, it said that it sold the product to this Wuxi company, and then this Wuxi company sold it to Iran. This approach is equivalent to talking about reconciliation on the one hand, and on the other In 2016, the U.S. Department of Commerce had conducted investigations on ZTE’s sale of products to Iran. ZTE Corporation offered a settlement to the U.S. government. The U.S. government hired a third party to enter ZTE. However, during the investigation, ZTE Corporation tried to conceal the facts. The relevant information led the United States to distrust ZTE Corporation. In the end, the three U.S. government claims against ZTE included not only the conspiracy to illegally export, but also the obstruction of justice and the making of false statements to federal investigators, and accordingly judged ZTE. Pay approximately $890 million in criminal and civil penalties.
In March 2017, the U.S. government accused ZTE Corporation of illegally exporting telecommunications equipment (including U.S. products included on the restricted export list) to Iran and North Korea and made false statements and obstructs justice. ZTE Corporation agreed to merge civil and criminal penalties with the U.S. government. Paid a fine of US$1.19 billion and agreed to suspend implementation of the 'export privilege limit for seven years', but if ZTE fails to meet the requirements of the agreement or violate the US Export Administration Regulations (EAR), this restriction may be activated. There is an item in the settlement negotiations. The content is ZTE’s employees engaged in illegal activities. According to the announcement of the US Department of Commerce, ZTE not only failed to dispose of these employees, but also issued full bonuses. At the same time, it reported to the US Department of Commerce that these employees had been disposed of. Z. Ross, US Secretary of Commerce Said that ZTE Corporation lied when it was first caught, lied during probation, and lied again during the observation period. As a result, the sword of Damocles hanging over ZTE's head finally collapsed.
Second, the impact on ZTE Corporation and other companies
It should be said that in this incident, a series of responses from ZTE Corporation were very stupid and passive. The U.S. sanctions imposed a high-risk impact on ZTE itself and other central enterprises.
According to statistics, about 20% to 30% of ZTE's components are supplied by U.S.-based manufacturers, and more commonly used components such as high-speed ADCs/DACs, modulators, high-performance phase-locked loops, and mid-range VGA products, etc. Most of them have to rely on the supply of foreign chip makers and cannot obtain equivalent substitutes at home temporarily. Therefore, once the United States bans ZTE's procurement, it is almost equivalent to holding ZTE's throat. In addition to procurement of spare parts, ZTE Corporation also has close cooperation with US companies in the research and development of mobile phone chips and 5G technologies. For example, ongoing 5G commercial testing is closely linked with Qualcomm, Intel and other companies.
After the United States announced its ban on ZTE Corporation, the National Cyber Security Center of the UK also issued a new warning, suggesting that the telecommunications industry not use equipment and services from ZTE. In addition to ZTE, many people believe that the next one is targeted. The meeting will be Huawei. Huawei is currently worried that the operators that have talked about before will cooperate. It is very likely that the US government will say that Huang is yellow.
Therefore, the U.S. government’s sanctions on ZTE Corporation will likely extend to all companies associated with ZTE Corporation. Upstream and downstream enterprises may involve, or even affect, all enterprises in the industry. To a certain extent, not only the communications industry, but also State-owned enterprises, many domestic companies are paying a terrible price for the short-sighted and untrustworthy operations of ZTE Corporation, and our country’s diplomatic layout and national image are also inevitably affected.
Third, lessons to be learned and suggestions
ZTE Corporation was sanctioned by the U.S. government, and its subsequent impact is still difficult to estimate. Some people think it may be a 'destructive blow' because ZTE relied too much on chips imported from the United States. 'Lack of core' is a common difficulty faced by domestic industries. In the context of the war, this incident caused many worries. Some people accused the United States of imposing a technical blockade on China, and some people enthusiastically believed that this is a catalyst for the localization of the chip industry. This is a good opportunity. It is necessary to think calmly about this. Take appropriate measures. We must correctly understand our gaps and shortcomings. We must adhere to the principle of independent governance and openness to reform and opening up. Insist on governing the country according to the law and manage enterprises in accordance with the law. With the ZTE event as a turning point, the central enterprises should make up for the shortcomings of the system in a timely manner. The following steps will be taken to participate in international competition and cooperation. Suggested measures are as follows:
(i) At the national policy level
1. Insisting on reform and opening up, we must never go out of the old road of closing the country.
At the 2018 annual meeting of the Boao Forum for Asia, General Secretary Xi Jinping pointed out: 'The reform and opening-up of China's second revolution not only profoundly changed China, but also profoundly affected the world!' It profoundly clarified the reform and opening up to China and the world. It is important to realize that under the current pattern of world division of labor, China is the beneficiary of the current pattern of world division of labor, but we still have a long way to go in reshaping the value chain system of the global division of labor. We must not go back to the old road of closure and lock-up because of various challenges. We can only accelerate the pace of opening up, promote reform through openness, promote development through reform, and we can step by step to shorten the gap between China and advanced countries in the world.
2. Strengthen key industries, focus on key technologies.
Historical experience and reality tell us that core technologies can not be purchased with core competitiveness, and true core competitiveness needs to be nurtured and innovated. China’s independent research and development in the most difficult period completed two bombs and one star, followed by ultra-high voltage transmission. Nuclear power technologies, high-speed rail technologies, etc. are all based on the nationwide system, and they have the advantage of concentrating their efforts on handling major issues. They are completed in a relatively short period of time. Gradually changing the current situation in which most of our industry’s core technologies are controlled by people. On the one hand, we must actively introduce new technologies and implement them. 'Focus on tactics', on the other hand, must focus on breakthroughs in key technologies that are more urgent at the moment and have a greater impact on the industry chain. To strengthen scientific research, we need to reform and innovate systems, and we must respect knowledge in society as a whole. Respect the atmosphere of talented people, and vigorously increase the salary incentives for scientific research teams. Most of the state key laboratories are located in central enterprises, to stimulate the vitality of independent innovation.
3. Do a preliminary plan for temporary assistance to related industries.
ZTE Corporation, the leading domestic industry leader, is being sanctioned for violating regulations, which may affect the entire industry. It may have an impact on the three major telecommunications companies, some foreign trade companies, and various supporting companies. As China's chip industry is heavily constrained by Western developed countries, communications The domestic market concentration of the industry is relatively high, there may be more related transactions, and therefore there is an increased risk. In particular, ZTE Corporation is a subsidiary of the more sensitive military-industrial group - China Aerospace Science and Industry Corporation. It is necessary to fully estimate the follow-up to the group. The company's influence.
For this reason, it is suggested that under the premise of severely chasing and punishing relevant persons in accordance with the law, all possible state-owned leading enterprises should be retained and advance plans for the corresponding industries and key enterprises should be prepared in advance.
4. Strengthen the investor's supervision of the company's major issues and prevent internal controls.
ZTE Corporation, as a state-owned listed company, carries out high-risk business activities for a long period of time, which explains the lack of supervision to a certain degree. This incident once again shows that in order to monitor capital of state-owned assets, we must adhere to the principle of 'three combinations, three unifications, and three separates'. The principle of "management of capital must be combined with corporate governance of corporate governance, combined with appropriate managers and stewardship. Without supervising major corporate events, supervision will inevitably take the form and trigger internal control risks."
5. To cultivate an atmosphere of integrity management, strengthen corporate legal training.
ZTE Corporation’s legal affairs are in name only. According to reports, the Texas court in the United States issued a letter of subpoena to ZTE’s subsidiary in the United States in 2012. Before the investigation of ZTE, the legal department of ZTE Corporation estimated the company in 2009. It will face risks in export trade. On August 25, 2011, it submitted to the company’s leadership a report on the comprehensive rectification and regulation of the company's export control-related business. Later, it should also require leaders to formulate the "Import and Export Control Risk Evasion Program." Unfortunately, these two documents have not been implemented. Instead, they have fallen into the hands of the U.S. government and become evidence that ZTE intends to evade U.S. export control policies.
In addition, ZTE’s senior officials visited the United States, and all the meeting minutes of the chairman’s secretary’s computer conference on exporting equipment to Iran, decisions made by high-level officials, etc. were stopped by the United States Customs when they were inspected. According to state regulations, such confidential information was Absolutely not allowed to go abroad!
From this we can see that the relevant leaders of ZTE Corporation have no sense of law and confidentiality. Many of their risks involved in illegal business operations are related to the general environment where social integrity in the country is not high, and they have brought domestic non-integrity abroad. To this end, it is urgent for China to establish a social atmosphere that respects intellectual property and respects the law. In particular, companies that go out to work must strengthen legal education, know laws and understand laws, and all business activities should be conducted under the legal framework.
6. Strengthen the guidance of basic national conditions.
The Nineteenth Party Congress made it clear that: 'The basic national conditions in which China is still and will remain in the primary stage of socialism have not changed, and our country is the world’s largest developing country’s international status has not changed.' Guided by public opinion, we need to address China’s current situation. At the historical stage of development, we must face the huge gap between our country and the developed countries. We must adhere to the goal of maintaining a low profile, refraining from exaggeration, vanity, and self-deception at any time. The reform and development of central enterprises must also face the gap with world-class companies, and work hard to catch up. , Leading China's industrial restructuring and upgrading.
(ii) At the corporate level
1. Effectively change the mode of growth and actively implement innovation to drive development.
In July 2015, when Xi Jinping visited Jilin, he pointed out that 'innovation is the source of the company's driving force, quality is the foundation of the company's conduct, management is the foundation of the company's survival, and we must do a good job in innovation, quality, and management in the fierce market. We must always take the initiative in the competition. We must implement innovation-driven development strategies in depth and place more emphasis on innovation in the drive for development. We should use the multiplier effect of innovation to drive development. ' In the current fierce domestic and foreign market competition, the central enterprises We must effectively change the mode of growth, accelerate innovation and development, cultivate core competencies, and lay a solid foundation for world-class companies with global competitiveness.
2. Conscientiously improve the rules and regulations, and check the risk of foreign-related operations.
The central SOEs should learn from the incidents of ZTE Corporation, further improve the corporate governance structure, and form internal mechanisms that are self-restraining, self-developing, and full of vitality, and eliminate insider control. On this basis, improve the implementation of various rules and regulations and seriously troubleshoot them. Various operating risks, especially foreign-related risks, major risks should be reported to the group company and SASAC in a timely manner.
3. Adhere to the combination of 'going out and introducing' to cultivate a world-class company with global competitiveness.
Central enterprises must speed up the pace of 'going out', make full use of and integrate domestic and foreign markets, and the ability of two kinds of resources, especially the role of the main force in serving the 'Belt and Road' mission.