As the summer of 2011 wound down in the city of Shenzhen, high-ranking executives at the ZTE Corporation, China’s second largest telecommunications equipment company, found themselves strategizing about their American nuisance.
In a series of memos marked “top secret,” they discussed various ways the company might evade American sanctions — the U.S. laws that explicitly bar companies from selling goods containing U.S.-made components to Iran, Sudan, North Korea, Syria and Cuba.
“As our overseas businesses have grown rapidly in recent years, so have U.S. export control risks,” the general counsel, Guo Xiaoming, wrote in an August 25 memo to ZTE’s chief executive, Shi Lirong. “Currently our company has ongoing projects in all five embargoed countries — Iran, Sudan, North Korea, Syria and Cuba.”
At the time of the memo, ZTE’s business was flourishing. Global revenue had topped $10 billion and the company had climbed the ranks to become the world’s fifth biggest seller of mobile handsets. Though not as well known internationally as the other China telecom giant, Huawei, ZTE boasted 80,000 employees and operations in 140 countries. At home in China, ZTE was considered a “national champion,” a state-controlled company that benefited from close ties to the Communist Party. And yet now, it risked losing overseas customers.
But as Guo’s memo went on to detail, U.S. law was a hurdle not a barrier. In Sudan, for instance, Guo explained how ZTE had routed large shipments through third-party suppliers, which kept ZTE’s name off the books. Employees also sometimes snuck smaller loads into Sudan by hand-carrying them through customs, but Guo felt this was risky. In North Korea, the company used a pair of front companies registered in Shanghai and Hong Kong, and overseen by a ZTE sales manager and his wife. The couple facilitated 283 shipments to North Korea for ZTE over the course of several years, laundering millions of dollars through secret U.S. bank accounts. This setup had so far been “fairly effective,” Guo wrote.
Iran, however, was proving a bit trickier. The company enjoyed $2 billion worth of contracts there, including one with a carrier linked to the Iranian Revolutionary Guard — a sanctioned entity in its own right. But Guo feared that their chosen method — shipping products under a ZTE-owned front company known internally as “8S” — wasn’t sophisticated enough.1According to prosecutors, ZTE used two front companies to ship American components to Iran: Beijing 8 Star, a company it controlled, and Far East Cable, a private firm that specialized in bridge cables. In a follow up report, he advocated for more complicated shipping routes to make it “harder for the U.S. government to trace… or investigate the real flow of the controlled commodities.” Getting caught, after all, could mean serious fines and the possibility of arrest for ZTE executives traveling to the United States. Worse yet, a blacklisting by American regulators could jeopardize ZTE’s access to the U.S. supply chain altogether.
Of course, ZTE did get caught — twice. In 2016 and 2017, the U.S. government accused the company of engaging in a nearly six-year-long conspiracy to illegally ship U.S.-origin items to Iran and North Korea, including “dual use” goods with military applications.2In 2016, ZTE was placed on the U.S. Entity List, which restricts exports of American goods to a company. It was the largest global firm ever placed on the list. Soon after, ZTE got an exemption for cooperating with U.S. investigators in a prosecution — one that led to a $900 million fine in 2017; and then additional fines totaling $2.3 billion.
“ZTE Corporation not only violated export controls that keep sensitive American technology out of the hands of hostile regimes like Iran’s — they lied to federal investors and even deceived their own counsel and internal investigators about their illegal acts,” the Attorney General, Jeff Sessions, said at a Washington press conference. “This plea agreement holds them accountable, and makes clear that our government will use every tool we have to punish companies who would violate our laws, obstruct justice and jeopardize our national security.”3Steve Stecklow, an investigative reporter at The Wall Street Journal and now Reuters, broke both the Meng Wanzhou story with Huawei and was the first to report on the possibility that ZTE was evading sanctions with shipments to Iran. Here is the Reuters story from March 2012.
The company was placed on the U.S. Entity List, and hit with a $900 million penalty.4In an unprecedented move, the US also managed to get ZTE to cooperate and allow American monitors in its Shenzhen headquarters to monitor compliance over a 10-year-period. A Commerce spokesperson says the monitors are still operating there. A year later, after more infractions, the U.S. Commerce Department went further, barring ZTE from receiving any American goods for a seven year period, in what would have been a devastating blow had it not been quickly reversed by President Trump, in what he termed a favor to China’s President Xi Jinping.5In a Twitter posting in May 2018, the President reversed the decision after a phone call with China’s leader, Xi Jinping.
Still, the U.S. move against ZTE is a stark reminder that the increasingly hostile relationship between the U.S. and China pivots around technology, especially emerging technologies such as artificial intelligence, robotics, chip making, electric vehicles and 5G — technologies that will help define economic and military power in the twenty-first century. In the technology sphere, it seems, trust between the two superpowers has been lost.
And perhaps for that reason, the U.S. has zeroed in on Huawei and ZTE, not simply because of longstanding allegations of intellectual property theft or evading sanctions but because of their ties to the Communist Party, their growing technical capabilities, and their ambition to build 5G networks in other parts of the world.
“We had long been concerned about Huawei and ZTE… about their relationship with the Chinese government, the Chinese Communist Party,” says Jamil N. Jaffer, who served as senior counsel to the House Permanent Select Committee on Intelligence and now runs the National Security Institute at George Mason University. “They were making significant inroads globally, through a combination of stolen technology and Chinese government direct support in the form of free loans and grants.”
Jaffer adds: “The concerns became so big, we were like, ‘Somebody’s got to talk about them.’”
That was then, in 2012, when the House Intelligence Committee began probing Huawei and ZTE over national security concerns.6At the time, Steve Stecklow of Reuters reported on ZTE’s violations of the US sanctions against Iran. Read here. Now, the U.S. government is acting more aggressively, bearing down on both telecom giants, ripping their equipment out of America’s telecom infrastructure, banning them from doing business in the U.S., and warning that they could be compelled by Beijing to spy on America and its allies.
With the aim of crushing Huawei, the federal authorities are now tightening export controls to deny Huawei access to vital American technology from companies like Google, Microsoft and Qualcomm. And the U.S. is preparing to prosecute Meng Wanzhou, the daughter of the company’s founder, for lying to H.S.B.C. in order to evade U.S. sanctions.7The U.S. requested that Meng be arrested upon arrival in Canada in 2017, and U.S. prosecutors are now awaiting her extradition. Meng and Huawei deny the allegations and are fighting her extradition.
And yet ZTE, while very much still in the hot seat, is in an unusual position. Although the company has paid about $2.3 billion in fines — more than 10 percent of its annual revenue at the time — and had been forced to fire its CEO and to allow American monitors into its Shenzhen headquarters, the company has been given permission to purchase U.S. equipment. (ZTE declined to be interviewed for this article.) All of which begs the question: Why is the U.S. trying to kill off Huawei, and trying to persuade Western allies to shun its equipment, while offering a lifeline to ZTE, a state-backed firm that has repeatedly violated sanctions with so-called rogue regimes like North Korea and Iran?
THE MAKING OF ZTE
For years, American intelligence officials and members of Congress have been asserting, without documented evidence, that Huawei has close ties to the People’s Liberation Army. It’s an allegation that Huawei has repeatedly denied. But for ZTE, there is little dispute.
The company grew out of China’s defense industry. It was founded in 1985 by affiliates of what was once known as the Ministry of Aerospace, the Chinese government agency that developed rockets and missiles for the country’s military and space programs. After economic reforms were introduced in the 1980s, Beijing began restructuring government ministries and setting up government-backed corporations to upgrade the economy. ZTE was one of the early spinoffs.8At least one affiliate of CASIC, the China Aerospace Science and Industry Corp., is on the U.S. Entity list. CASIC is a shareholder today in ZTE. Also, read Christoper Balding’s piece in Foreign Policy, on ZTE and China’s military industrial complex here.
Called the Zhongxing Semiconductor Co., the new firm initially went into business making cheap digital watches, electronic synthesizers and landline telephones. It was led by Hou Weigui, a mild mannered government engineer. But by 1990, the firm had changed its name and turned its focus to telecommunications gear.
It was one of a handful of big state-run telecom firms competing to develop the nation’s networking infrastructure, including Julong Information Technology (or Great Dragon) and Datang Telecom. Alongside them, ZTE began bidding for contracts to build telephone networks in a country that had outdated switchgear and, even in 1990, fewer than 10 million fixed-line telephones. At the time, copying or reverse engineering foreign equipment was common, analysts say, and not illegal inside China. And the government wanted to back its own players.
“It’s a state-owned firm, and it’s made sure to follow state directives more than Huawei,” says Douglas B. Fuller, author of Paper Tigers, Hidden Dragons: Firms and the Political Economy of China’s Technological Development. “Huawei has always been a much more ambitious, entrepreneurial [firm].”
While foreign joint ventures, like Shanghai Bell, targeted big cities, ZTE grew by focusing on underserved, rural areas. And as sales climbed, the company graduated from switchgear and base stations to videoconferencing systems and wifi networks to branded smartphones. ZTE even went public, with stock listings in Shenzhen and Hong Kong.
By the late 1990s, China’s telecom market had evolved into what it is today: a two-horse race between Huawei, a privately-run firm co-founded by a former PLA engineer, and ZTE, a state-backed powerhouse that had outmaneuvered and outlasted Datang, Julong and foreign competitors. It helped that Huawei and ZTE were each headquartered in Shenzhen, one of the country’s most entrepreneurial cities, an electronics manufacturing hub that borders Hong Kong.
“If you look at the most recent procurement by various telecom services in China, basically it’s half Huawei, half ZTE, some crumbs to Datang’s successor firm, some tiny slice to European firms,” says Fuller, who teaches at City University of Hong Kong. “It’s basically a duopoly.”
The company also shopped for opportunities abroad. James Lewis, a former Commerce Department official and now director of the technology policy program at the Center for Strategic and International Studies in Washington, says ZTE “was always kind of the bottom feeder in the Chinese telecom market,” seizing opportunities that Huawei, its main domestic rival, didn’t really want. By the early 2000s, while Huawei sought out contracts in more developed regions and Europe, ZTE had established footholds in places like Algeria, Liberia and Romania.
“They were able to win contracts in difficult places. They were even in Serbia,” says Duncan Clark, the founder of BDA China, a consulting firm, and the author of Alibaba: The House That Jack Ma Built.
The company’s international strategy initially involved “donating” equipment to poorer nations. But later, Chinese state banks began offering vendor financing. If a foreign government agreed to purchase ZTE equipment, it was eligible for Chinese state-backed loans. In Africa, for example, the China ExIm Bank opened a credit line in 2010 to fund purchases of ZTE gear in Mauritius, Zimbabwe and Burundi. Two years later, the China Development Bank opened a $20 billion line of credit that foreign buyers could tap to purchase ZTE equipment.
If there was concern about ZTE’s ties to the military — including ownership stakes the defense industry holds in ZTE to this day — it didn’t seem to impede its entry into the American market. As the company grew, it formed partnerships with American firms like Cisco Systems and Texas Instruments, opened a North American headquarters near Dallas, and then rolled out five R&D labs, logistics centers and millions of low-cost mobile phones, sold in partnership with Verizon and Sprint. By 2007, ZTE had more than 400 employees in the United States.9ZTE even became one of the first Chinese firms to sponsor the NBA, or National Basketball Association.
While far less formidable than Huawei ($120 billion in 2019 annual revenue versus about $13 billion), ZTE has grown into a telecom equipment giant that now ranks as the No. 4 player globally, behind Huawei, Sweden’s Ericsson and Nokia of Finland, according to IHS. It has sold hundreds of millions of mobile phones, filed thousands of patents and won huge market share in networking equipment in China, second only to Huawei. It is also positioning itself as a leader in the rollout of 5G technology — super fast wireless speeds that could foster an “internet of things” platform and allow remote control of infrastructure and even medical procedures.
“ZTE represents the ability of Chinese companies to be really the vendor of choice for a lot of nations, not just in the developing world but in developing parts — Western Europe, the U.S.,” says Eric Harwit, a professor at the University of Hawaii and the author of China’s Telecom Revolution, noting Huawei’s rise too. “Obviously, China is a major exporter of labor intensive products. But in terms of high tech, those companies [Huawei and ZTE] are on the cutting edge of China’s drive to have global telecom success, and maybe even dominance.”
What is also clear, though, is that ZTE has a history of bad behavior, globally. It has sold surveillance equipment to authoritarian regimes, has the distinction of being one of only four companies banned from Norway’s sovereign wealth fund for “gross corruption,” and it’s been accused of bribing government officials in nearly two dozen countries, including Kenya, Mongolia, Liberia and the Philippines.
“ZTE has a very checkered history of violating international law and U.S. law,” says Nicholas Eftimiades, a former special agent with the Defense Intelligence Agency and technical operations officer at the CIA. “Given that background and that history, the question comes down to trust: Do you trust them in your communications infrastructure?”
THE SURVIVAL OF ZTE
The presidential tweet landed at 11:01 a.m. on Sunday, May 13, 2018. “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”
Even Washington was surprised. Just months earlier, the Commerce Department had imposed harsh measures on ZTE for evading sanctions, and repeatedly lying to federal authorities. When U.S. authorities discovered that ZTE had also lied about punishing executives complicit in the corrupt dealings (instead they got bonuses), the U.S. announced the company would be banned from receiving American made goods, including microchips, for seven years. Heavily dependent on American software and chips to operate its phones and networks, it was basically seen as a death sentence.
Until the tweet.
The Commerce Department, which had spent years carefully building what they saw as an economic and corruption case against ZTE, one they insisted was not political, was also taken by surprise. Some believed the president was intervening and using the case as another bargaining chip to use in his trade war with Beijing.
Kevin J. Wolf was in charge of pursuing the Commerce Department’s case against ZTE, back in the Obama administration. By the time of the tweet, he had left Commerce, but says the reversal left him speechless. “A decision was made to unlist [ZTE] based upon a tweet, for jobs in China. It had nothing to do with the law enforcement aspect, or the national security aspect, or the getting ZTE-to-do-anything aspect,” Wolf says. “It was just a tweet, based on a discussion or a phone call with Xi, and so that’s why I was speechless. That’s not normally how it’s supposed to work.”
After the tweet, Commerce officials scrambled to make sense of the president’s order. Some members of Congress, including Republicans, opposed the White House decision and threatened to pass legislation to punish ZTE. Even John Bolton,10See our interview with Bolton and his discussion of ZTE. President Trump’s National Security Advisor at the time, objected. In his book, The Room Where It Happened, Bolton wrote: “I was stunned by the unreciprocated nature of the concession, and because, as [Commerce Secretary Wilbur] Ross later told me, ZTE had almost been destroyed by the penalties imposed. Reversing the decision would be inexplicable. This was policy by personal whim and impulse.”11On pages 291–294, Bolton writes about the ZTE case, including the phone call President Trump made to Xi Jinping and how the DOJ and Commerce were stunned by his linkage of the case to his personal relationship with Xi and the trade deal.
Whether President Trump saw the move as a bargaining chip or something else is still unclear, analysts say.12See this excellent story in The Intercept about how a Trump associate and the son of the U.S. ambassador to China lobbied on behalf of ZTE But there were multiple reasons to spare the company, at least temporarily, they say.
There had, for instance, been aggressive lobbying against the U.S. government taking punitive action and placing ZTE on the U.S. Entity List — effectively barring American exports to the company — as far back as 2013, during the Obama administration, after the FBI and various agencies began probing ZTE for national security risks, sanctions evasion and corruption, according to people familiar with the case.
ZTE had hired former Senator Joseph Lieberman, a Connecticut Democrat, as a Washington lobbyist, and then spent more than $2 million over several years to hire the Podesta Group, a Washington lobbying firm headed by Tony Podesta, whose brother ran Hillary Clinton’s presidential campaign, according to lobbying records tracked by Open Secrets, which is part of The Center for Responsive Politics. The Intercept reported on October 15 that the son of the former U.S. ambassador to China, Terry Branstad, was also involved in lobbying for ZTE while his father was in Beijing.
Secretary of Commerce Wilbur Ross announcing the massive fine against ZTE in March 2017.
Former U.S. officials also say there was pressure from American companies not to place ZTE on the U.S. Entity List because it would have dealt a serious blow to the profits of American technology companies at a time when there was also concern that Huawei could be blacklisted. Both companies were major purchasers of U.S. chips and software.
There was also another reason the White House may have pulled back. Analysts say the Trump administration had ordered the arrest of Huawei’s CFO, and the daughter of the company’s founder, Meng Wanzhou, in Canada13The US is seeking her extradition. for lying to H.S.B.C. about a company that was attempting to evade sanctions. And the U.S. was building a case to place Huawei on the U.S. Entity List.
With two of China’s national champions — and two of the world’s biggest telecom firms — being targeted simultaneously, there was the possibility that each could be put out of business. In other words, if the U.S. government denied them access to core technologies dominated by American companies, there would be major consequences not only in China, but throughout the world.
Rather than kill off ZTE, analysts say, the U.S. may have decided to focus on tightening the screws on Huawei, since it was far bigger, wealthier and more technologically sophisticated — equipping Beijing with its own suite of patents, 5G capabilities and a pathway, if the Chinese government so chose, into global networks.
Lewis, the technology and security expert at CSIS, suggests this is obvious, calling Huawei “Beijing’s pet,” and ZTE an “also ran” that has relied on subsidies and state assistance to “infiltrate” foreign markets.
And so easing up on ZTE, and allowing the firm to continue to purchase American goods, analysts say, might be viewed as not just a bargaining chip, but the administration effectively choosing to spare the weaker of the two Chinese technology giants, to sharpen focus and perhaps unleash more sanctions on the other — Huawei.
“Huawei is the much more capable firm and has had strong sales in NATO countries so if the USG felt they could only go after one, then [Huawei] would be the firm they would target,” says Fuller, the expert at City University of Hong Kong.14Fuller added, in an email, that both Chinese firms are seen by the US as longterm security risks. So why choose one? “In terms of policy, the only thing that makes sense is that the US prioritizes the ‘cleanliness’ of some overseas networks, such as NATO (Japan, Korea and Australia have their own homegrown anti-Huawei policies), over others (e.g. most of sub-Saharan Africa) because Huawei is the Chinese vendor in NATO countries whereas ZTE and Huawei are both big vendors in the developing world.”
Ambreen Ali contributed reporting.
Justin Rohrlich is an investigative reporter based in New York. His work has appeared in The Daily Beast, Quartz, VICE News, Foreign Policy, and others. He won an Emmy in 2008. @JustinRohrlich