ZTE’s fight for survival

After much negotiation with the Trump Administration, Secretary of Commerce Wilbur Ross confirmed this morning that ZTE, the Chinese telecommunications giant, has agreed to a $1 billion fine. That penalty was assessed following an investigation showing that ZTE had violated U.S. sanctions by selling telecom technology to Iran and North Korea. Ross made the comments on CNBC’s morning show Squawk Box.

This was an incredible scare for ZTE. As part of the original settlement with the U.S. government last year, ZTE had agreed to accept a $1.19 billion fine and made personnel changes to satisfy U.S. regulators. The Trump administration then took that penalty even further, banning U.S. companies from selling components to ZTE for seven years, components critical to ZTE’s entire product line. That decision was expected to kill the company, which employs roughly 75,000 workers and had been worth about $20 billion before the ban.

While the ban seemed to be the end of the company, President Donald Trump seemed to offer it something of a reprieve on May 13, when he tweeted that he would instruct the Commerce Department to try to work out a deal that would offer “a way to get back into business, fast.” While the president is known for mercurial decision-making, the turnabout deeply surprised DC insiders, with many national security officials vociferously opposed to any deal to resuscitate the company.

In addition to a $1 billion fine, the company has made several personnel changes, including rotating out the company’s Communist Party leader. The company is also believed to have agreed to a $400 million escrow that would be used to pay for future penalties. An American monitoring team will join the company to ensure compliance with the law as well.

Discussions about the future of ZTE have not been in a vacuum. The United States and China have been hurling barbs on trade back and forth over the past few months, over tariffs, market access, and the widening trade deficit between the two countries. The U.S. position has been that the fine against ZTE is a law enforcement action, which should not be included in the continuing discussions around trade.

However, some sources who corresponded with me say that the Chinese government has purposely held up the acquisition of NXP Semiconductors by Qualcomm while it negotiates a more positive outcome for ZTE. China remains the only country that has not approved the deal worldwide, and it has repeatedly delayed the deal in recent weeks. That provided a valuable chip to negotiate trade deals with the U.S. more effectively.

In addition, President Trump is expected to head to Singapore next week to open talks with North Korean leader Kim Jong Un. China’s influence over North Korea is likely to prove pivotal for the success or failure of those talks, which gave Beijing even more leverage in its discussions with the Trump administration on ZTE.

Whatever its hand, the Trump administration now faces a deeply hostile reaction from Congress, where there is bipartisan opposition to any deal that rehabilitates ZTE. Senate minority leader Chuck Schumer (D-NY) has said publicly that “Both parties in Congress should come together to stop this deal in its tracks.” Senator Marco Rubio (R-FL) has floated a proposal for Congress to block this sort of deal. Now that the deal is final, we will see if these comments are just hot air, or whether there really is a “supermajority” ready in Congress to overrule the president’s decision here.

This story has been updated with analysis and further information. It’s developing, and we will add more information as we have it.

Although top senators, including Democrat Chuck Schumer and Republican Marco Rubio, are urging the administration not to bend on ZTE, President Trump is planning to ease penalties on the Chinese telecommunications giant for violating sanctions against Iran and North Korea.

But what Mr. Trump may not realize is that ZTE is also one of the world’s most notorious intellectual property thieves — perhaps even the most notorious of all. And since stopping Chinese theft of U.S intellectual property is supposed to be one of the President’s top trade objectives, he should not ease up on ZTE until it stops its high-tech banditry and starts playing by the rules in intellectual property (IP) matters.

To get a sense of just how egregious ZTE’s behavior truly is, we need only to consult PACER, the national index of federal court cases. A search of PACER reveals that in the U.S. alone, ZTE has been sued for patent infringement an astonishing 126 times just in the last five years. This number is even more shocking when you consider that only a subset of companies who believe their IP rights have been violated by ZTE has the means or the will to spend the millions of dollars needed to wage a multi-year lawsuit in federal courts.

But ZTE’s IP thievery is not confined just to the United States. According to one Chinese tech publication, ZTE has also been sued for patent infringement an additional 100 times in China, Germany, Norway, the Netherlands, India, France, the United Kingdom, Canada, Australia, and other countries. As an intellectual property renegade, ZTE certainly gets around.

Even when it’s not being sued, ZTE thumbs its nose at the traditional rules of fair play in intellectual proper matters, commonly engaging in delay, misrepresentation, and hold out when dealing with patent owners. While ZTE is more than happy to accept royalty payments for the use of its own intellectual property, it rarely if ever pays for the use of others’ IP.

Consider ZTE’s treatment of San Francisco-based Via Licensing Corp, a Swiss-neutral operator of patent pools covering wireless, digital audio, and other building-block components of complex products. Patent pools offer one-stop shopping for product makers to acquire licenses to patents from multiple innovative companies at once. Pools are generally a more efficient, and less litigious, way for product makers to acquire the IP rights they need at reasonable prices.

In 2012, ZTE joined Via’s LTE wireless patent pool, whose members also include Google, AT&T, Verizon, Siemens, China Mobile, and another Chinese tech powerhouse, Lenovo, maker of Motorola-branded smartphones. It helped set the royalty pricing of the pool’s aggregated patent rights, and even received payments from other product makers for their use of ZTE’s own patents within the pool.

But in 2017, precisely when it was ZTE’s turn to pay for its use of other members’ patents in Via’s LTE pool, it suddenly and without ceremony quit the patent pool. Via and its member companies are still trying to get ZTE to pay for its use of their intellectual property — and to abide by the very rules it helped establish in the first place.

Even among much-criticized Chinese companies, ZTE’s behavior is completely outside the norm. Despite what you may hear, some Chinese companies are actually good IP citizens — Lenovo for one. In fact, Via’s various patent pools include more than two dozen Chinese companies who play by the rules.

But ZTE is not one of them. It is a blatant serial IP violator who gives other Chinese companies a bad name. And our government should not reward such behavior.

Ease sanctions on ZTE only when it finally starts respecting intellectual property rights.

U.S. President Donald Trump has claimed that Chinese telecom firm ZTE will pay a $1.3 billion fine and undergo a significant overhaul of its management team in order to remain operational in North America.

ZTE looked to be in dire straits when it ceased its business in the U.S. earlier this month after a Department of Commerce order banned U.S. partners from selling components to the company in response to it flouting trade bans in Iran and North Korea.

The company has since been reprised — a strategy move within the U.S.-China trade stand-off — but Trump said today that its new life comes at a cost. That’s apparently a $1.3 billion fine, a new management team and board, and “high-level security guarantees.”

Trump previously took to Twitter to break news of ZTE’s reprieve and today, while aiming to score political points, he gave insight into why ZTE is being given another chance.

ZTE has over 70,000 employees, it grossed more than $17 billion in annual revenue and it maintains close ties to the Chinese government. As I wrote earlier this month, a company of its global scale brings significant revenue to U.S. businesses which, beyond more obvious consumer-facing companies, includes component-level partners like Qualcomm, who would be impacted if ZTE were to disappear tomorrow.

Trump’s claim that ZTE “must purchase U.S. parts,” while as yet unconfirmed, suggests the deal is important for ZTE’s U.S. business partners as well as being a key card in working out his administration’s complicated relationship with China.

Still, despite these apparent conditions, the decision to allow ZTE to continue is hugely controversial. Most companies don’t get a second chance for the kind of activities that the Chinese firm has carried out.

The company flouted trade bans to Iran and North Korea, then it lied about them and tried to cover its tracks before finally admitting its guilt. Speaking in April, Trump’s own Commerce Secretary, Wilbur Ross, said:

“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation. ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

Beyond that, the firm’s close links to the Chinese government have long troubled U.S. security agencies concerned that ZTE equipment was being used by American telecom firms and security agencies.

Here’s what FBI Director Chris Wray told the Senate Intelligence Committee in February:

“We’re deeply concerned about the risks of allowing a company or entity that is beholden to foreign governments that don’t share our values to gain positions of power inside our telecommunications networks.”

The United States and China are said to be working on a deal that would keep ZTE from going out of business. According to the Wall Street Journal, the two countries have agreed on a “broad outline” of a deal to settle a trade dispute sparked when the Commerce Department banned American companies from selling to ZTE for seven years after it violated sanctions against Iran and North Korea.

If the deal goes through, the U.S. would lift the ban. In return, ZTE would have to make major leadership changes and also potentially face heavy fines. The deal would enable its business to survive, however, since many of its most important suppliers, including Qualcomm, are American and the ban has the potential to cause irreversible damage to its business. ZTE is also the fourth-largest vendor of mobile phones in the U.S.

As part of the deal, China reportedly offered to remove tariffs that impact billions of dollars in U.S. farm products, though one of the WSJ’s sources said “the White House was meticulous in affirming that the case is a law enforcement matter and not a bargaining chip in negotiations.”

Talk of the deal isn’t a complete surprise. Earlier this month, President Donald Trump tweeted that “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast.” He was met with backlash from officials and lawmakers concerned that the administration is softening its stance in trade negotiations with China. The Chinese government had reportedly demanded that the U.S. roll back sanctions against ZTE as a prerequisite for continuing trade talks, which stalled last month (though the countries agreed yesterday to continue).

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!

— Donald J. Trump (@realDonaldTrump) May 13, 2018

White House economic adviser Larry Kudlow told CNBC yesterday that ZTE is “not going to get off scot-free” and that it still faces fines, “very severe compliance measures, a new board of directors, a new management team.”

The bizarre recent tale of ZTE is getting another wrinkle. Earlier today, a bipartisan House Appropriations Committee unanimously voted to accept an amendment to uphold sanctions against the company.

The amendment to the 2019 Commerce, Justice, and Science Appropriations bill is, of course, being viewed as a rebuke of the president, whose tweets over the weekend appeared to suggest a softening on the seven-year ban imposed by the Department of Commerce last month.

In fact, the amendment’s author, Rep. Dutch Ruppersberger of Maryland, called out Trump by name on social media, adding in a press release tied to the news, “This amendment, which passed with the unanimous support of my colleagues on both sides of the aisle, shows that, when the United States enacts sanctions, we stand behind them.”

Perhaps unsurprisingly, the release name checks not just the sanctions violations that led to the export ban, but also claims of spying that have put the company in the crosshairs of U.S. intelligence agencies. It’s a complicated series of events that I went into a bit more detail over here.

Trump, meanwhile, surprised the world by suggesting that he was working with the Chinese president to help ZTE find a way around the seven-year ban that has threatened to wipe the company off the map. The president cited job losses in China as his major motivator. That statement was met with bipartisan disapproval and Trump appeared to walk it back yesterday in another tweet, accusing The Washington Post and CNN of writing “false stories.”

It’s clear, however, that ZTE is being viewed as an important stumbling block as trade tensions increase between the two superpowers. The bill carrying the new amendment will come under consideration by the House of Representatives next month. 

Here in the States, ZTE has been content with a kind of quiet success. The Chinese smartphone maker has landed in the top five quarter after quarter (sometimes breaking the top three, according to some analysts), behind household names like Apple, Samsung and LG. Suddenly, however, the company is on everyone’s lips, from cable news to the president’s Twitter account.

It’s the kind of publicity money can’t buy — but it’s happening for one of the worst reasons imaginable. ZTE suddenly finds itself in the eye of a looming trade war between superpowers. Iranian sanctions were violated, fines levied and seven-year international bans were instated.

It’s like a story ripped from the pages of some Cold War thriller, though instead of Jason Bourne, it’s that one budget smartphone company that you’ve maybe heard of, who maybe makes that weird Android phone with two screens.

So, how did we get here?

ZTE began U.S. operations in 1998, a little over a decade after forming in Shenzhen (and a year after going public in China) as Zhongxing Semiconductor Co., Ltd. The change of name to Zhongxing Telecommunications Equipment reflects the newfound focus for the company, which employees around 75,000 and operates in 160 countries.

While ZTE has flirted with premium and sometimes bizarre devices, in the smartphone world, the company is primarily known for its budget hardware. It’s no coincidence that the company was tapped by google to be the first to run Android Oreo Go Edition (nee Android Go). The manufacturer has found particular success in the developing world, while making significant gains in the U.S. by releasing dozens of low-cost devices targeted at prepaid users.

In recent years, however, the company has come under increased scrutiny on two fronts. First, there’s the issue of the company’s perceived ties to the Chinese government. It’s the same thing that’s tripped up fellow Chinese handset manufacturer Huawei in its pursuit of the U.S. market.

In Huawei’s case, multiple warnings from top U.S. security agencies has severely hobbled any chance of making significant headway in this country. The company kicked off the year with the one-two punch of having AT&T pull out of a deal last minute, only to have Best Buy stop restocking its product on store shelves. ZTE, on the other hand, has run into less headwind there.

In February, top officials at the FBI, CIA and NSA all warned against buying product from both companies over remote surveillance concerns and later ending their sale at military bases. But after making significant inroads through non-contract carriers like Boost, Cricket and Metro PCS, the warnings appear to have had little impact on the company.

The same, however, can’t be said of a seven-year ban.

In 2016, the U.S. Commerce Department found the company guilty of violating U.S. sanctions. The department disclosed internal documents from the company naming “ongoing projects in all five major embargoed countries — Iran, Sudan, North Korea, Syria and Cuba.” That’s a big issue when selling a product that contains, by some estimates, a quarter of components created by U.S. companies — not to mention all of the Google software.

The following year, the company pleaded guilt and agreed to a $1.19 billion fine, along with the stipulation that it would punish senior management for the transgression. Last month, however, the DOC said ZTE failed to live up to the latter part of the deal, issuing an even steeper fine as a result.

“ZTE misled the Department of Commerce,” the department said in a statement to TechCrunch at the time. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

The new punishment bans U.S. component manufacturers from selling to ZTE for seven years. A few days later, the company told TechCrunch that the export ban would “severely impact” its chances of survival. And then, last week, the company ceased major operating activities.

“As a result of the Denial Order, the major operating activities of the company have ceased,” it wrote in an exchange filing. “As of now, the company maintains sufficient cash and strictly adheres to its commercial obligations subject in compliance with laws and regulations.”

In the meantime, the company was reportedly meeting with companies like Google in hopes of figuring out a workaround, while China was said to be meeting with U.S. officials to discuss the steep ban. For some, the ZTE ban was seen as a political move amidst a potential trade war, and a major roadblock toward negotiations.

That leads us to Sunday, when Trump tweeted, “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!”

Job loss in China seems like an odd motivator for any U.S. president, let along Trump, but things make significantly more sense when you consider the sheer size of a company like ZTE. If a U.S. trade ban caused the company to fold, it’s easy to see how that could severely impact already tenuous relations between the two countries.

“The Chinese have suggested that ZTE was a show-stopper,” international studies expert Scott Kennedy succinctly told NPR, “if you kill this company, we’re not going to be able to cooperate with you on anything.”

And that brings us to this morning — and other Trump tweet. “The Washington Post and CNN have typically written false stories about our trade negotiations with China,” Trump writes. “Nothing has happened with ZTE except as it pertains to the larger trade deal. Our country has been losing hundreds of billions of dollars a year with China[…]…haven’t even started yet! The U.S. has very little to give, because it has given so much over the years. China has much to give!”

Those tweets, it should be noted, were most likely posted in reaction to bipartisan concern about Trump’s focus. “#China intends to dominate the key industries of the 21st Century not through out innovating us, but by stealing our intellectual property & exploiting our open economy while keeping their own closed,” Marco Rubio tweeted earlier this week. “Why are we helping them achieve this by making a terrible deal on ZTE?”

So things are weird. And it’s 2018, so expect that it will only get weirder from here.

In a remarkable development, President Trump has thrown an olive branch to controversial Chinese telecom firm ZTE.

The company, which sells telcom network equipment and consumer devices including smartphones, said on Wednesday that it would cease its main business operations after the U.S. Department of Commerce announced a seven-year export restriction for the company, resulting in a ban on U.S. component makers selling to ZTE.

The company has been banned from selling equipment in the U.S., but shutting out supply chain partners like Intel, Qualcomm and Google is potentially catastrophic. (The fact ZTE postponed its earnings tells you all you need to know.)

Reports suggested that the Chinese government was working on ZTE’s behalf to find a compromise, and it looks like Chinese Premier Xi Jinping himself got in touch with the U.S. President, who said today in a tweet that is he “working[…]to give[…]ZTE a way back into business, fast.”

Somewhat bizarrely, Trump cited a loss of jobs in China as a motivating factor.

Given that U.S. sanctions were imposed on ZTE due to threats to national security and its violation of trade sanctions with Iran and North Korea, Trump’s desire to give the company another chance in the U.S. is truly unexpected.

It also doesn’t align with recent events.

The Trump administration has used the premise of national security to block a number of business deals that would see Chinese companies buying up American firms — including Alibaba’s proposed acquisition of MoneyGram and Broadcom’s effort to buy Qualcomm.

Then, of course, the President is involved in an aggressive trade dispute with China, which, on the U.S. side, included tariffs on about $60 billion of Chinese goods, the bulk of which were focused on the high-tech industry.

Granting a reprieve to ZTE — a firm with over 70,000 employees, over $17 billion in annual revenue and close ties to the government — doesn’t fit with the strategy to hurt China, but then Trump’s administration is hardly by the book and often times seemingly pragmatic. Well, the President’s Twitter account, at least.

Potentially, there may be pressure behind the scenes from U.S. suppliers who fear a loss of business as companies like Taiwan’s MediaTek plan to step up in a bid to work with ZTE in the event that it is blocked from U.S. partners.

Even with Trump’s unexpected backing, ZTE is up against it to roll back the sanctions. There’s clearly a gap of thinking between the President and the rest of government.

Trump has frequently lashed out at the House and the Senate, not to mention his own party, over differences of opinion and his frustration with politics. In this case, ZTE’s infringements are so major — trade violations and national security concerns — that it is hard to envisage the company getting a pass, even with support from the White House.

To recap, here’s what FBI Director Chris Wray told the Senate Intelligence Committee in February:

“We’re deeply concerned about the risks of allowing a company or entity that is beholden to foreign governments that don’t share our values to gain positions of power inside our telecommunications networks.”

And Commerce Secretary Wilbur Ross speaking in April about the violation of sanctions on Iran and North Korea, which ZTE pleaded guilty to:

“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation. ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

Just another day in Trump’s America.

ZTE wasn’t kidding around when it suggested that a U.S. Department of Commerce order would “severely impact” its survival. It’s hard to image a successful path around the seven-year ban on the sale of U.S. products to the company imposed after it reportedly failed to sufficiently reprimand staff for flouting Iranian sanctions.

Earlier today, in fact, the Chinese smartphone/telecom manufacturer announced that it had ceased its main business operations as it attempts to figure out the best way forward.

“As a result of the Denial Order, the major operating activities of the company have ceased,” the company wrote in an exchange filing spotted by Reuters. “As of now, the company maintains sufficient cash and strictly adheres to its commercial obligations subject in compliance with laws and regulations.”

The company has been scrambling since the ban, reportedly meeting with Google to determine if there’s some workaround to what might effectively end its use of Android and Play services. Non-U.S. players like Taiwanese chip maker MediaTek have been stepping up in the meantime, but even with that support, it’s tough to imagine ZTE efficiently rallying.

The Chinese government has also been said to be negotiating with the U.S. on the company’s behalf, in hopes of stemming what is looking more and more like a looming trade war between the two countries. The D.O.C. has reportedly opened up a similar inquiry into fellow Chinese smartphone maker, Huawei. 

ZTE also told Reuters that it’s been in touch with the U.S. Government “in order to facilitate the modification or reversal of the Denial Order by the U.S. Government and forge a positive outcome in the development of matters.” 

We’ve reached out to ZTE for further comment on the matter. We’ll update accordingly. 

The Chinese government is reportedly going to bat for ZTE over a seven-year ban that would have broad ranging consequences for the phone maker. According to a new report from Reuters, the subject was broached during a meeting with between senior Chinese and U.S. officials in Beijing this week.

The ban imposed by the Department of Commerce is the result of a violation against U.S. Iranian sanctions. ZTE pled guilty, agreeing to pay a fine and penalize employees. After the DOC insisted it failed to do the latter, it barred US companies from selling software or components to the phone maker for seven years. Between chip makers like Qualcomm and software providers including, most notably, Google, the restrictions will prove next to impossible for ZTE to circumvent.

For many, the steep penalty appears to be part of a larger looming trade war between the two countries that’s also found ZTE and Huawei caught in the crosshairs over ties to the Chinese government. U.S. officials, however, have insisted that the ban isn’t related to trade issues between the two countries.

Earlier this week, the Pentagon banned the sale of both companies’ phones on military bases — just the latest in a long line tough breaks here in the States.  ZTE has largely weathered the broader U.S. spying concerns better, due in part to a broader footprint in the States than Huawei, but the company admitted that this latest ban would be downright devestating. 

“The Denial Order will not only severely impact the survival and development of ZTE,” the company told TechCrunch, “but will also cause damages to all partners of ZTE including a large number of U.S. companies.”

ZTE has also reportedly been in talks with U.S. companies like Google and has suggested it will take judicial action, if necessary. 

It’s been a hell of a week for ZTE. News Monday that it was being hit with a seven-year export ban sent the company scrambling. The Chinese handset maker suspended its earnings report and reportedly sent its lawyers to meet with Google to see if anything could be worked out about a punishment that could hamper its ability to utilize Android and various key services.

Four days after we first reached out, ZTE has finally offered us an official reaction to the news. And it’s a doozy. The six-paragraph official statement from corporate mulls over the punishment and reasserts ZTE’s compliance to international law, which it “regard[s] as the foundation and bottom-line of the company’s operation.”

ZTE adds that it invested “over $50 million in its export control compliance program and is planning to invest more resources in 2018.” So, why did the company get dinged by the U.S. Department of Commerce for failure to significantly reprimand staff after pleading guilty to violating sanctions on Iran and North Korea?

The company contends that the U.S. Bureau of Industry and Security “ignored” its “diligent work” and progress it has made in complying with the law, calling the punishment, “unfair.” Seven years is certainly severe, given that U.S.-based companies make north of a quarter of the components used in the company’s handsets, according to estimates.

That, coupled with U.S.-based software makers, Google included, put the company in an extremely tight spot moving forward, and will likely require a complete rethink of ZTE’s business model, if upheld.

“The Denial Order will not only severely impact the survival and development of ZTE,” the company says, “but will also cause damages to all partners of ZTE including a large number of U.S. companies.” ZTE adds that it will continue to fight the ruling, taking “judicial measures,” if necessary.

The punishment comes as ZTE finds itself targeted by the U.S. government over spying charges, alongside fellow Chinese handset maker, Huawei.

ZTE will postpone the release of its quarterly earnings report after the United States government banned American companies from selling goods to the Chinese telecom and smartphone maker. In a filing with the Hong Kong stock exchange, ZTE said that its earnings report, originally set to be released on Thursday, is now delayed to an undetermined date.

About a year ago, ZTE pleaded guilty to violating U.S. sanctions against Iran and North Korea. Its deal with the U.S. government included penalties and fines totaling more than a billion dollars, but allowed it to continue doing business with U.S. suppliers.

On Monday, however, the U.S. Department of Commerce announced that ZTE had failed to follow the agreement’s terms. It accused the company of making false statements and failing to punish employees and senior management. As a result, the Department of Commerce slapped ZTE with a seven-year export restriction.

This is a huge blow to ZTE, which sources a significant portion of its most important components, including processors, from U.S. companies like Qualcomm. It also means ZTE may lose access to software licensed from Google, including Android.

This is the latest in ZTE’s string of entanglements with the U.S. government. Despite holding fourth place in the U.S. smartphone market share, after Samsung, Apple and LG, ZTE is under scrutiny by U.S. intelligence agencies, which believe that it and fellow Chinese smartphone maker Huawei may pose security concerns.

Yesterday was a rough one for ZTE. A year after pleading guilty to violating sanctions with Iran and North Korea, the U.S. Department of Commerce brought the hammer down and announced a seven-year export restriction on goods sporting U.S. components.

That applies to more than a quarter of the components used in the company’s telecom equipment and mobile devices, according to estimates, including some big names like Qualcomm. The list may well also include Google licenses, a core part of the company’s Android handsets. According to a Bloomberg unnamed source, ZTE is evaluating its mobile operating system options as its lawyers meet with Google officials.

Many of the internal components can be replaced by non-U.S. companies. ZTE can likely lean more heavily on fellow Chinese manufacturers to provide more of the product’s internals, but it’s hard to see precisely where it goes from here with regard to an operating system. There’s an extremely small smattering of alternatives open to the company, but none are great. Each would essentially involve the company working to build things, including app selections, from the ground up — and likely play a much more central role in the OS’s development.

As for Google’s role in all of this, ZTE certainly isn’t make or break for Android’s fortunes. Still, it’s a pretty sizable presence. As of late last year, it commanded 12.2 percent of U.S. market share, putting it in fourth place behind Apple, Samsung and LG. It’s certainly in Google’s best interest to maintain as many prominent hardware partners as possible — though, not if it comes with the added risk of upsetting the DOC in the process.

This time last year, Chinese electronics giant ZTE pleaded guilty to violating sanctions on Iran and North Korea. This morning, the U.S. Department of Commerce announced a seven-year export restriction for the company, resulting in a ban on U.S. component makers selling to ZTE. 

The company’s initial guilty plea was met with up to $1.2 billion penalties and fines, along with the dismissal of four senior employees, along with more fallout for lower-level employees. As part of the initial agreement, ZTE was allowed to continue to work with U.S. companies, assuming it adhered to the rules laid out in the agreement. The DOC, however, contends that ZTE failed to significantly penalize those employees.

“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” Commerce Secretary Wilbur Ross said in a statement provided to TechCrunch. “ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

A senior department official tells Reuters, in no uncertain terms, that the company, “provided information back to us basically admitting that they had made these false statements.”

The penalty is steep, given that U.S. companies are believed to provide more than a quarter of the components used in ZTE telecom equipment and mobile devices. The list includes names like San Diego-based Qualcomm, which provides Snapdragon processors for the company’s flagship devices.

The news arrives amid fears of a looming trade war between the U.S. and China. ZTE has also been repeatedly name-checked by U.S. intelligence officials over spying concerns, along with fellow Chinese smartphone maker Huawei — though ZTE has managed to make more inroads with U.S. carriers over the years, regularly showing up around fourth place in market share. 

TechCrunch reached out to ZTE for response, but has yet to hear back.