ZTE Is Said to Face at Least $3 Billion in Losses From U.S. Ban

(Bloomberg) -- ZTE Corp. is estimating losses of at least 20 billion yuan ($3.1 billion) from a U.S. technology ban that’s halted major operations as clients pull out of deals and expenses mount, people familiar with the matter said.

The telecoms gear and smartphone maker however is hopeful of striking a deal soon and already has a plan in place -- dubbed “T0” -- to swing idled factories into action within hours once Washington agrees to lift its seven-year moratorium on purchases of American chips and components, said the people, who asked not to be identified talking about private negotiations. The company declined to comment.

Shenzhen, China-based ZTE depends on U.S. components, such as chips from Qualcomm Inc., to build its smartphones and networking gear. The ban, for breaching terms of a settlement over sanction-breaking sales to Iran, has all but mothballed China’s second-largest telecoms gear maker and become entangled in a trade dispute between the world’s two largest economies. On Tuesday, President Donald Trump said he’s reconsidering U.S. penalties as a favor to Chinese President Xi Jinping and may instead fine the company more than $1 billion.

The U.S. action has spooked potential clients during the crucial first-half IT spending season and even prompted some to renege on agreed deals, the people said. ZTE’s shelling out an estimated 80 million to 100 million yuan in daily operational expenses alone while most of its 75,000 employees sit idle, the people said.

But it’s hopeful of ramping up swiftly once a settlement is reached: thousands of workers biding their time in the company’s dormitories stand ready to flood its factories once a green light is given, the people said.

It’s unclear what ZTE can do to prompt a reprieve, though it’s expected to reshuffle executives and possibly its board. Chinese government officials however are undertaking negotiations on behalf of ZTE and the company, which doesn’t have much influence in the process, will have to accept the terms of any settlement reached between Beijing and Washington.

ZTE first ran into trouble in 2016 for violating laws restricting the sale of American technology to Iran. An agreement in 2017 called for the company to pay as much as $1.2 billion and penalize the workers involved, in what was the largest criminal fine for the Justice Department in an export control or sanctions case.

But in April, the Commerce Department said ZTE instead paid full bonuses to employees who engaged in the illegal conduct, failed to issue letters of reprimand and lied about the practices to U.S. authorities. That triggered the seven-year suspension, and its shares have been suspended from trade in Shenzhen and Hong Kong since.

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.

The moratorium on ZTE threatens a swathe of components needed to hawk gear to clients like China Mobile Ltd. and Europe’s Telefonica SA. The Chinese firm relies on suppliers from chipmakers Qualcomm and Micron Technology Inc. to optical developers and Acacia Communications Inc. The ban may also stop the company from using Google’s Android operating system, the heart of its smartphones.

©2018 Bloomberg L.P.