How China's ZTE Could Move Back From The Brink After Trump Tweet

(Bloomberg) -- Workers at ZTE Corp.’s offices showed clear relief this week after U.S. President Donald Trump’s surprise tweet that he planned to help get the Chinese company get back into business. “Definitely good news,” said engineer Kevin Lin, as he made his way into ZTE’s research and development center in Beijing.

But ZTE isn’t out of danger yet. The country’s second-largest maker of telecom gear had to cease major operations after the U.S. imposed a seven-year ban on its ability to buy American technology and that prohibition hasn’t been lifted. Trump didn’t explain what steps the U.S. would now take to help ZTE and the U.S. Commerce Department, which had imposed the original penalty, will decide how to implement any changes.

ZTE faces two likely scenarios: Commerce may conclude ZTE’s violation is a careless mistake and will lift the ban without additional penalty -- or the U.S. agency will suspend the ban temporarily subject to further investigations and negotiations, according to analysts Edison Lee and Timothy Chau at Jefferies. The pair said the second scenario is much more likely, which means ZTE will lose a month or six weeks of revenue and then may struggle to sign up new business because of the uncertainty over its future.

“ZTE may have more difficulty in securing new, overseas carrier customers over the next 12 months, since customer confidence is now lower given this incident,” Lee and Chau wrote.

Uncertainty remains high because the ZTE ban is one part of a broader trade war between the world’s two largest economies. China and the U.S. have escalated their dispute over trade practices this year with Trump threatening tariffs on $150 billion in Chinese imports for alleged violations of intellectual property rights, while Beijing vowed to retaliate on everything from American soybeans to planes.

Trump’s tweet appeared to be a step toward easing tensions ahead of tough negotiations. It came just as China’s Vice Premier Liu He -- Xi’s top aide for economic matters -- heads to Washington for talks with Treasury Secretary Steve Mnuchin. China made a similar move: Its regulators restarted their review of an acquisition by Qualcomm Inc., a deal critical to the U.S. chipmaker’s future, according to people familiar with the matter.

Still, the most difficult part of negotiations lies ahead. They haven’t worked through thorny issues of trade deficits, tariffs, currency valuations and alleged theft of intellectual property. Indeed, Mnuchin traveled to Beijing last week for trade talks that resulted in little but an agreement to keep talking.

“In our assessment, this does not mean that Trump will not impose tariffs on China but rather that he will make the decision and will choose a timing he prefers,” wrote Paul Triolo and other analysts at Eurasia Group.

How China's ZTE Could Move Back From The Brink After Trump Tweet

Tensions could easily escalate. There have been concerns the U.S. would impose a ZTE-like ban on China’s largest mobile and telecommunications company, Huawei Technologies Co. Bloomberg News reported last month that the U.S. is conducting a broad investigation into whether Huawei violated sanctions against trading with Iran, similar to the allegations against ZTE.

In the U.S., there was also bipartisan criticism of Trump for his Twitter politics. Both Republican and Democratic lawmakers have expressed concerns that Chinese telecom companies, such as ZTE, have ties to the Chinese government and pose a cyber espionage threat as they move into the U.S. market.

Still, Trump’s defense of ZTE on Twitter fueled optimism about the company’s future. Analysts anticipate the company will have to pay additional fines and remove some workers involved in alleged wrongdoing, but it will be able to resume buying essential technology from the U.S.

“I can envision another modest fine and specific reporting requirements as well as replacing some at the top of the company,” said Erick Robinson, director of patent litigation at Beijing East IP Ltd. “Ultimately, killing ZTE cannot happen, or the trade fight goes ballistic.”

Jay Huang, founding partner of Jadestone Capital, which invests in technology startups in China, said Trump’s ZTE move is a step back from a trade war.

"I don’t think the target is ZTE,” he said. “It’s more like, in my opinion, a bargaining chip in this trade dispute between the U.S. and China. So this is a good sign. Maybe this potential trade war can be averted."

Trump’s Commerce Department imposed the ban on ZTE in April as punishment for violating the terms of a 2017 sanctions settlement, then lying about it. The move prohibited ZTE from buying American technology, including Qualcomm’s semiconductors, that it needs to build most of its products. That forced the suspension of most operations at ZTE, which employs about 75,000 people. The firm’s shares were suspected from trading in Hong Kong last month.

At the company’s Beijing location, workers streamed into the office Monday through a small door at the back of the building as its lobby was sealed off for renovation. Twitter is banned in China, but Lin, the engineer, said “almost every one” of his colleagues had posted about the news on WeChat, the country’s most popular messaging service.

He said the company has been able to maintain a sense of stability, despite the fierce trade talk between the two nations. “The businesses have always been normal from what I can see,” he said.

To contact Bloomberg News staff for this story: Gao Yuan in Beijing at ygao199@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Gao Yuan