Bottom line: Washington’s new ban on ZTE from buying US-made components is not as political as China is portraying it, and is likely to be resolved within a few weeks after ZTE takes remedial actions related to its violation of an earlier agreement.
An ongoing tiff between Washington and ZTE (HKEx: 763; Shenzhen: 000063) is in the headlines yet again, with word that the US has banned all American companies from selling to the Chinese smartphone and telecoms equipment maker for seven years. This particular story is filled with political overtones due to the anti-China stance of Donald Trump, who has accused Beijing of unfair trade practices. But it’s also a tale that stretches back for at least six years, which means this story began well before the current US administration.
The latest headlines are quite straightforward, and have Washington banning the sale of US-made telecoms equipment to ZTE for violating an earlier agreement reached last year. (English article) The source of this conflict dates back to 2012, when Washington first began probing ZTE for selling American-made equipment to Iran in violation of US sanctions that at that time were designed to punish the country for its nuclear program.
That probe ultimately resulted in a guilty finding against ZTE in 2016, and the US was prepared to impose the seven-year ban on the Chinese company at that time as punishment. But then the two sides reached a last-minute settlement — including a huge fine of as much as $1.2 billion — that led Washington to suspend the punishment.
This latest twist has Washington accusing ZTE of violating terms of the settlement, which is why it has now decided to re-introduce the ban. The actual violation is relatively minor, with Washington determining that ZTE failed to honor its agreement to discipline several employees who were linked to the illegal sales. Specifically, the US found that ZTE failed to issue letters of reprimand to the employees, and continued to pay them bonuses.
This kind of behavior seems quite typical of things that happen in China. Companies often make promises to do things, and then fail to follow up, especially in cases where there are no concrete business ramifications. I can completely imagine the room where this deal was sealed, with the ZTE officials nodding in all earnestness at the requirement to reprimand and punish employees involved in the Iran sales.
Then once the deal was sealed, those same ZTE officials probably figured there was little chance of being discovered if they failed to carry through with that part of the agreement, and simply ignored those obligations. We should point out it’s also significant that ZTE hasn’t been accused of any other major violations, meaning it is probably honoring most of its other commitments.
The official Chinese media are having a field day with the decision, trying to play it up as a political case of Trump trying to block China’s drive to build up its high-tech industries. I wouldn’t completely dismiss that, especially based on a recent string of vetoes by Washington of high-tech acquisitions by Chinese firms. But such claims also seem a little overstated, since this decision will hurt ZTE’s US suppliers as much, if not more, than ZTE itself.
What’s more, ZTE doesn’t really have any major US competitors that would make this action look protectionist, since the US doesn’t really have any major telecoms equipment makers anymore. Apple (Nasdaq: AAPL) is the only US company that can be said to compete with ZTE’s other main product line, smartphones. But comparisons in smartphones from those two companies would make just about anyone laugh, as ZTE’s lower-end, no-name products are clearly aimed at a completely different market segment.
At the end of the day, one analyst astutely pointed out that ZTE and Washington are likely to settle this particular violation very quickly, since it’s not too complex. That would mean ZTE could continue buying components from its US suppliers with relatively little disruption, which is what it wanted all along. At the same time, the move, and disproportionately high volume of headlines it’s generating, would send the strong message that China and its companies must abide by their agreements.