Severing ZTE's Head Leaves the U.S. Battling a Hydra
(Bloomberg Opinion) -- Penalties meted out by the U.S. on ZTE Corp. were meant to punish the company for breaking trade sanctions.
They certainly hurt its shareholders. Stock in the Chinese telecoms equipment maker plunged as much as 41.5 percent to the lowest in a year Wednesday in Hong Kong, as trading resumed after being suspended since mid-April.
ZTE won’t be the only one to feel the impact of this pay-for-play deal by the Trump administration.
A $1 billion fine to be paid to the U.S. Department of Commerce before Aug. 8 is enough to wipe out a year of operating profit. What’s more, ZTE is required to get rid of its board and senior management at both the parent company and affiliate ZTE Kangxun Telecom Co. Terms for those layoffs were clarified in a ZTE filing to the Hong Kong stock exchange late Tuesday.
ZTE shall terminate all current members of the senior leadership of both the Company and ZTE Kangxun at or above the senior vice president level.
That paragraph goes on to explain that ZTE must also expel any staff member responsible for illegally shipping telecommunications equipment to Iran or North Korea.
ZTE’s annual report lists 30 people under the heading of director, supervisor and senior management – with nine holding the title of executive vice president. Another dozen or so are likely connected to the embargo-busting team.
Losing so many senior leaders at once will be a major blow. Business continuity and decision-making will probably be severely impacted, and the resulting turmoil will at some point make for a great business school case study.
If you look at this as the U.S. cutting off the head of the snake, then perhaps its goal will be achieved. But China’s state-backed tech industry more closely resembles a Hydra.
If more than 30 senior leaders at one of China’s biggest and most-powerful tech companies are let loose, we’re not likely to see a rise in mid-week golfing. The risk to the U.S. is that at least some staff start their own businesses, or move to firms that will benefit from their years of experience, and corporate and government connections.
A litter of mini-ZTEs isn’t in the best interests of the U.S. as it faces a determined and aggressive Beijing intent on making China technology independent.
Cutting off ZTE from U.S. semiconductor manufacturers was a wakeup call for the entire nation. Cutting its senior leaders from the company is merely an invitation to go forth and prosper.
©2018 Bloomberg L.P.