U.S., Britain Issue Warnings Over Chinese Telecom Equipment Maker ZTE

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U.S. and British officials struck separate blows at telecommunications-equipment giant

ZTE
Corp.

, ratcheting up national-security scrutiny of a big Chinese company amid broader economic tensions between Washington and Beijing.

British cybersecurity officials warned U.K. phone carriers to stay clear of ZTE’s equipment and services, citing concern about the potential that Beijing could force the company to help it infiltrate or sabotage telecoms infrastructure. The U.S. Commerce Department, separately, banned American companies from selling products to ZTE, saying the company violated the terms of a deal last year settling allegations of sanctions busting involving North Korea and Iran.

A ZTE spokeswoman said in a statement that the company is aware of the Commerce Department action. ZTE is “assessing the full range of potential implications that this event has on the company and is communicating with relevant parties proactively in order to respond accordingly,” she said. The company has in the past denied its telecom gear poses any national-security risk to countries where it is sold.

In a statement that only addressed the U.S. actions, China’s Commerce Ministry said it is looking at the export controls on ZTE and urged the U.S. to provide “an impartial, fair and stable legal and policy environment.” Otherwise, it said, China is prepared to adopt unspecified measures to defend the interests of Chinese firms.

The twin developments Monday escalate a broader battle about trade and economic policy playing out between the U.S. and China—one that has drawn in allies of both powers.

The Trump administration has enacted sweeping tariffs on steel and aluminum that target China metal output. Washington also has threatened sanctions on some $150 billion worth of other Chinese goods in response to what officials say is China’s unfair trade practices. Beijing denies it is acting unfairly, and has promised tit-for-tat response to any measures.

Amid those wider currents, the technology industry has become a particular flashpoint, infused with national-security implications by a growing number of U.S. officials.

Washington stepped in last month to halt a hostile takeover attempt by Singapore-based

Broadcom
Ltd.

of

Qualcomm
Inc.,

citing among other worries, the deal’s potential to cripple Qualcomm in its mobile-communications-technology race with Chinese rival Huawei Technologies Co., the world’s biggest telecom-equipment maker.

Earlier this month, China slowed its regulatory review of Qualcomm’s separate deal to buy Dutch rival NXP Semiconductors NV.

The U.S. is examining ways to retaliate against Beijing’s restrictions on U.S. providers of cloud computing and other high-tech services, effectively opening a new front on its trade offensive against China.

For years, the U.S. has accused Chinese telecom-gear makers of being susceptible to Beijing influence should China ever want to tap or disable telecommunications systems built with Chinese equipment. In 2012, a congressional report labeled Huawei and ZTE national-security threats.

Both companies have denied they pose a threat. Huawei says it is privately held by its employees. ZTE trades publicly on stock exchanges in Shenzhen and Hong Kong, though one of its largest investors is a holding company with ownership stakes held by state-owned companies.

ZTE is the world’s No. 4 telecom gear maker, behind Finland’s

Nokia
Corp.

and Sweden’s Ericsson.

The U.S. has taken a series of recent steps to further circumscribe Chinese equipment makers. Earlier this month, for instance, the Federal Communications Commission proposed rules to make it more difficult for Chinese firms, including Huawei and ZTE, to sell gear to the few small, rural, U.S. providers that use it.

On Monday,

U.S. Sen. Tom Cotton

(R., Ark.) and FCC Chairman

Ajit Pai

warned in a FoxNews.com op-ed that a hostile foreign power could exploit the U.S. telecommunications supply chain to “spy on Americans or attack our critical infrastructure by injecting viruses or launching denial-of-service attacks.”

In the op-ed, the two called for “more concerted federal action,” including the FCC taking steps to rein in sales to small U.S. carriers.

Europe has been a much more accommodating market, particularly for Huawei. The company has an especially large presence in the U.K., where it has invested heavily. Addressing British concerns in the past about cyberspying, Huawei agreed years ago to fund a center where its components can be broken down and inspected.

British officials have said they work with Huawei and have been able to manage cyber-security risks. On Monday, however, London didn’t offer the same comfort regarding ZTE. British officials cautioned they were specifically concerned about new Chinese laws they described as giving Beijing “wide-ranging powers of compulsion,” according to an official familiar with the matter.

They warned that if ZTE became a big supplier in the U.K., too, systems in place to mitigate risks from Chinese suppliers overall might be compromised. British officials believe one way to manage the risks posed by having Huawei as such a big part of the U.K. telecommunications infrastructure is to have non-Chinese equipment installed alongside the Chinese-made gear. This would make it harder to exploit any accidental or intentional vulnerability in the Chinese technology, they say.

“The U.K. telecommunications network already contains a significant amount of equipment supplied by Huawei,” wrote

Ian Levy,

technical director of the U.K.’s National Cyber Security Centre, in a letter to telecommunications firms in the country, according to a person familiar with the letter. “Adding in new equipment and services from another Chinese supplier would render our existing mitigations ineffective.”

The NCSC is part of the U.K.’s communications intelligence agency, called Government Communications Headquarters.

BT Group

PLC, one of the country’s biggest providers, said it has partnered with ZTE on limited research projects but those endeavors didn’t necessarily deploy ZTE gear in the U.K. It said it “takes the security of the U.K.’s critical national infrastructure very seriously and has a robust testing regime in place to ensure that the equipment from all suppliers in our network remains secure.”

Separately in the U.S., the Commerce Department said Monday that ZTE had violated the terms of a previous settlement, alleging it illegally evaded sanctions. The department said ZTE agreed last year to combined civil and criminal penalties and forfeiture amounting to $1.19 billion for allegedly shipping sanctioned telecom gear to Iran and North Korea.

The agency said Monday it has since determined ZTE made false statements during and after the settlement talks. Moreover, the company didn’t discipline executives involved, as agreed, and paid them full bonuses.

It said as a result, ZTE would no longer be able to buy components from U.S. manufacturers. The move could impact ZTE supply lines and U.S. firms that have come to rely on ZTE as a customer.

Maynard, Mass.-based

Acacia Communications
Inc.,

which got 30% of its $385.2 million of total revenue last year from ZTE, shares fell 36% in Monday trading. The company said in a statement it is “taking steps to suspend affected transactions” and would assess the impact of the Commerce Department’s order.

ZTE last year bought between $1.5 billion and $1.6 billion worth of products from U.S. chip makers, according to

Handel Jones,

a consultant at International Business Strategies Inc. who tracks China’s high-tech sector. Cushioning the blow for ZTE, Mr. Jones said, is its likely ability to obtain most components it currently buys from the U.S., elsewhere.

The Chinese firm is a customer of some of the U.S. industry’s biggest players, including

Intel
Corp.

and Qualcomm. Qualcomm declined to comment. A spokesman for Intel said it is aware of the Commerce Department order and “will comply with it.”

Write to Jason Douglas at jason.douglas@wsj.com and Robert Wall at robert.wall@wsj.com

Appeared in the April 17, 2018, print edition as ‘U.S., Britain Tighten Vise on Chinese Firm.’



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