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 was 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 allowed ZTE to resume purchases from U.S. suppliers, provided it pay a penalty of at least $1 billion and replace senior management and its board of directors, actions that ZTE has taken so it can get back to making phones and networking equipment. In July, the U.S. formally lifted its suspension.

1. How did ZTE land in hot water?

China’s second-largest maker of telecommunications equipment 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?

For now, yes. While lawmakers in the U.S. Senate pushed to restore the penalties and the House of Representatives sought a procurement ban, negotiators from both houses agreed to abandon those efforts, people familiar with the matter said in July. The White House strongly opposed any efforts by Congress to block its deal for ZTE to resume business. Still, the ban led to more than $1 billion of losses, the share price was battered and ZTE was unable to bid for valuable contracts to build new wireless networks. Larger crosstown rival Huawei also continues to gain market share in smartphones and networking and ZTE will remain under intense scrutiny.

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 billions of dollars worth of 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. One deal that may have been held up by U.S.-China tensions was Qualcomm’s purchase of NXP Semiconductors NV, which required approval from the world’s biggest consumer of chips.

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.

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

©2018 Bloomberg L.P.

With assistance from Editorial Board