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

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(Bloomberg) -- China’s ZTE Corp. was fighting for its very survival when U.S. President Donald Trump came to its rescue with a stunning Sunday morning tweet. Just last month, 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. Trump’s shocker called for ZTE to “get back into business, fast” and commanded the Commerce Department to “get it done.”

1. How did ZTE land in trouble with the U.S. government?

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 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 American suppliers to ZTE?

Essential. ZTE makes both smartphones that are sold to consumers and communications equipment that goes into networks of telecom operators and corporate customers. To build those products, it needs semiconductors from Qualcomm Inc. and Intel Corp. and optical components from suppliers such as Lumentum Holdings Inc. and Acacia Communications Inc. Last week, ZTE revealed that the “major operating activities” of the company had “ceased.” It sent an email to employees saying the next two weeks would be critical in determining its future.

3. Why did Trump intervene on the ban?

It’s not clear at this point why Trump jumped in. 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 his tweet, Trump signaled that he plans to walk back those penalties and said the “Commerce Department has been instructed to get it done!” It’s not clear how or if Ross and Commerce were involved in Trump’s declaration. The White House later said the president expects Ross to “exercise his independent judgment, consistent with applicable laws and regulations, to resolve the regulatory action involving ZTE based on its facts.”

4. 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’ve since become central to the discussions. Trump and Ross have criticized China for its trade practices. The U.S. threatened 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. For example, Chinese regulators still need to approve Qualcomm’s proposed purchase of NXP Semiconductors NV.

5. 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 Co. 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.

6. So is ZTE saved at this point?

It’s not clear yet. The U.S. hasn’t clarified how the ban will be modified after Trump’s tweet. It could be shortened or revoked altogether if ZTE pays a fine and disciplines workers. Investors certainly believe something has changed fundamentally. ZTE suppliers rallied after the Trump tweet. Mobi Development Co. jumped as much as 18 percent in Hong Kong, while Nextronics Engineering Corp. rose as much as 8.5 percent in Taiwan and Zhong Fu Tong Group surged the daily limit of 10 percent in mainland trading.

The Reference Shelf

  • Bloomberg News article on how the technology ban hit ZTE.
  • QuickTake on the trade spat between the U.S. and China.
  • Wilbur Ross statement on the 7-year technology ban.
  • Bloomberg Opinion’s Tim Culpan on what Beijing needs to do.

©2018 Bloomberg L.P.

With assistance from Editorial Board

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