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What Chinese Companies Can Learn From ZTE’s Mistakes

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Pacific Money

What Chinese Companies Can Learn From ZTE’s Mistakes

Some advice for Chinese tech companies looking to go global.

What Chinese Companies Can Learn From ZTE’s Mistakes
Credit: Flickr/ conxa.roda

Starting in 2010, Chinese telecommunications equipment company ZTE violated the U.S. embargo against Iran in order to sell export-controlled technology to Iranian entities. During the course of the U.S. government investigation, ZTE engaged in evasive conduct designed to prevent investigators from detecting their violations. This unprecedented scheme led to a record-high penalty of $1.19 billion. At the time ZTE fully admitted its wrongdoing and promised to bring the company’s practice in compliance with U.S. law. However, only a year later, ZTE was found issuing misleading statements and again violating U.S. sanctions during the probationary period under the 2017 Settlement Agreement.

This time around, the U.S. government placed an export ban on ZTE, cutting the company off from all of its U.S. suppliers for seven years, effectively putting the business on the brink of collapse. This ban was lifted a few days ago, after ZTE agreed to pay another $1 billion fine and let the United States install a compliance team within the company — a deal struck by U.S. and Chinese officials in the midst of intense trade negotiations.

Reportedly ZTE’s top management had an internal debate back in 2012 over how to respond to the U.S. investigation. The executives were divided into two groups: one that wanted to resist investigators and another that wanted to comply. The dark side prevailed, and ZTE chose to resist the investigation, with severe consequences.

A person’s behavioral problems may reveal deeper issues in his or her family; similarly, ZTE’s case reveals some structural issues within the Chinese tech environment. In the Chinese government-enterprise relationship, corporations often play the role of children, while the government wants to act like parents. Like a stereotypical overbearing parent, the Chinese government has been trying to bring up successful kids by giving them the most materialistic help, ranging from subsidies and R&D funding to preferential treatment in government procurement projects. A parent’s measure of success is healthy kids doing well in school; the Chinese government is looking for a company to increase its revenue stream, market share, and physical presence. However, over time this parenting model often produces spoiled grown-ups who lack a moral compass and social awareness. When the coddled young adult takes a serious, criminal misstep, and gets arrested, the helicopter parent over-steps again to bail out the offspring at all cost.

Hopefully last week’s parental rescue is a wake-up call not only to ZTE, but to other mature and growing Chinese tech companies. It is time for Chinese firms to learn how to become independent, responsible multinational corporate adults. Family education is a big part of who you are, but peer-learning in school is equally important. Look no further than cases like Microsoft’s data privacy lawsuit against the U.S. government, or Apple’s encryption dispute with the FBI – questioning and challenging the “parents” (ie, the host government) is the first step in becoming a full-fledged adult.

In addition to becoming independent from the government, Chinese tech companies may consider taking the following steps to become globally-respected players.

1. List on a U.S. stock exchange: Companies have to meet the minimum entry listing requirements in order to be traded on the New York Stock Exchange or NASDAQ. Once a company registers with the Securities and Exchange Commission (SEC) and publicly places securities in the United States, it would be responsible to outside stakeholders and subject to additional disclosure requirements. This process provides a training course for Chinese companies to learn about stakeholder management and improve transparency. As Beijing encourages Chinese tech companies to return to the domestic stock market, it is also establishing the Chinese Depository Receipt mechanism to allow internet giants listed overseas, such as Baidu, Alibaba, Tencent, and, to raise funds in the domestic Chinese capital market in parallel with their existing public offering abroad.

2. Adopt an open communication style: Like many Silicon Valley start-ups, Chinese tech companies are run by introverted engineers. The Economist once called Huawei’s CEO, Ren Zhengfei, “the most reclusive boss in the technology industry.” Despite having been in the middle of the export control scandal for over a year now, ZTE’s leadership hasn’t spoken to any non-Chinese media about the controversy. Last Friday, after closing the second settlement deal, ZTE’s CEO finally penned an apology letter, saying, “I would like to apologize to all employees, customers, shareholders, and partners.”

However, by American standards, a global technology company’s CEO is expected to confront issues, explain corporate strategy, and make human connections with investors and customers. Conversely, a CEO’s silence will send the message to the public that he or she has something to hide. For example, Facebook is also facing an uphill battle in the wake of its privacy scandal. Though its CEO Mark Zuckerberg is a coder, not a communicator, by training, he took a more open approach and testified in front of the U.S. Congress and the EU Parliament. Through the course of Zuckerberg’s 10 hour testimony in Washington, DC Facebook’s stock price climbed up more than 5 percent. Taking note of Zuckerberg’s experience, ZTE’s CEO may want to consider an interview with tech journalist Kara Swisher, who previously grilled Bill Gates and Steve Jobs on stage, to redeem the company’s corporate image.

3. Respect the rule of law and understand the political environment: Many “Doing business in China 101” guidebooks lecture American business people on the need to learn about China’s history and its culture. The same advice is applicable to Chinese businesses in the United States. It is important to respect the long-established norms that honor laws, regulations, and other legally binding obligations in the United States.

In addition, the bilateral relationship between the U.S. and China is increasingly confrontational given the growing sense of competition between the two countries. Both presidents have blended national security with economic security – indicating a worsening investment environment for foreign investors in both countries. It is advisable for Chinese companies to take this political risk into consideration and avoid projects involved with sensitive security elements.