How ZTE Ended Up in Middle of U.S.-China Trade War: QuickTake

(Bloomberg) -- China’s ZTE Corp. was fighting for its very survival when U.S. President Donald Trump came to its rescue and helped engineer a settlement. In April, the telecommunications giant had been banned by the U.S. Commerce Department from buying American technology for seven years, essentially ending its ability to operate as a business. The settlement will allow ZTE to resume purchases from U.S. suppliers, provided it pays a penalty of at least $1 billion and replaces its senior management and board of directors. ZTE has already revamped its board and has been given temporary clearance to resume some activities, such as supporting contracts signed before the ban took effect. But the company’s fate is still uncertain with a bipartisan group of U.S. lawmakers pushing to reimpose restrictions on the company.

1. How did ZTE land in hot water?

China’s second-largest telecommunications equipment company ran into trouble in 2016 for violating U.S. laws restricting the sale of American technology to Iran. An agreement in 2017 called for the Shenzhen-based 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 led to the seven-year ban on buying from American suppliers.

2. How important are U.S. suppliers to ZTE?

Essential. ZTE makes smartphones that are sold to consumers as well as communications equipment that goes into networks of telecommunications operators and corporate customers. To build those products, it needs semiconductors from Qualcomm Inc. and Intel Corp. and optical components from suppliers such as Acacia Communications Inc. In May, ZTE revealed that the “major operating activities” of the company had “ceased.”

3. Why did Trump intervene on the ban?

It’s not clear. When the ban was imposed in April, Commerce Secretary Wilbur Ross himself blasted ZTE in a sharply worded statement, saying that its “egregious behavior cannot be ignored.” In a surprise tweet in May, Trump signaled that he plans to walk back those penalties and said the “Commerce Department has been instructed to get it done!” It’s also not clear how or if Ross and Commerce were involved in Trump’s declaration. Trump has said he reviewed the penalties as a personal favor to Chinese President Xi Jinping. Lifting the sales ban on ZTE was a key demand China made in broader trade talks with the U.S. to avert a trade war.

4. And that saved ZTE?

Maybe not. On June 18, the U.S. Senate voted for legislation that restores the penalties in a bipartisan measure that was part of a defense bill, reimposing bans on exports to ZTE unless Trump can certify that it’s cooperating with the U.S. The Senate legislation will have to be reconciled with a version of the National Defense Authorization Act passed by the House of Representatives in May, which would ban government agencies from using technology made by ZTE and Huawei Technologies Co. Once Congress returns from recess the week of July 9, negotiations over restrictions on ZTE are expected to pick up in a House-Senate conference on the annual defense policy bill. Lawmakers want to send the defense bill to Trump for his signature by the end of the month. Even if Trump’s reprieve holds up, the market has its doubts that ZTE can pull through. Its shares plunged as they resumed trading June 13 in Hong Kong, falling as much as 41 percent that day and slumping more than 20 percent after the Senate vote. Investors remain concerned about the distraction of a management overhaul, the challenge of finding appropriate candidates in a short time frame and its ability to regain credibility in global markets. Larger crosstown rival Huawei also continues to gain market share in smartphones and networking.

5. How does this fit into the U.S.-China trade war?

The U.S. actions against ZTE began before the latest trade tensions, but they later became central to the discussions. Trump and Ross have criticized China for its trade practices and the U.S. is 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. China has myriad ways to affect American businesses, from overseeing manufacturers that produce for U.S. customers to weighing regulatory decisions on mergers and acquisitions. While Chinese regulators are said to have approved Qualcomm’s proposed purchase of NXP Semiconductors NV, a formal announcement hasn’t been made.

6. What’s at stake for China?

This is about more than pride for the country. ZTE is a major employer with about 75,000 workers, and is second only to Huawei Technologies among Chinese makers of communications gear. As the country works to build up its domestic technology industry, it wants to support local champions like ZTE. There’s money at stake too: Tsinghua Unigroup, which is backed by the state, is among ZTE’s biggest shareholders. Further, Huawei and ZTE are expected to play key roles in China’s effort to develop 5G technology.

The Reference Shelf

  • Bloomberg news article on the resumption of trading at ZTE.
  • The Senate vote could set up a showdown between Trump and Congressional Republicans.
  • Wilbur Ross April statement on the 7-year technology ban and the May Trump tweet.
  • QuickTake on the trade spat between the U.S. and China.

©2018 Bloomberg L.P.

With assistance from Editorial Board

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