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ZTE Nearly Back in Business After Inking US 'Escrow' Deal

Iain Morris
7/12/2018
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ZTE's share price closed up more than 25% on the Hong Kong Stock Exchange Thursday after the Chinese equipment vendor signed an important agreement with the US Department of Commerce that will allow it to resume purchases of US components.

US authorities are poised to lift a three-month-old "denial order" ban on ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) once it has placed $400 million in "escrow" as a form of suspended penalty payment.

ZTE has already overhauled its management team, agreed to pay a $1 billion fine and install a compliance monitor who will report to US authorities. (See ZTE Appoints New CEO – Report, US Lifts Some Restrictions on ZTE, ZTE Unveils New Board in Effort to Appease US Lawmakers and ZTE Fined Another $1B in Rescue Deal With US.)

"Once ZTE has completed the $400 million escrow deposit, BIS [the Bureau of Industry and Security] will issue a notice lifting the denial order," said the US Commerce Department in a statement. "Once the monitor is selected and brought on board, the three-pronged compliance regime -- the new 10-year suspended denial order, the $400 million escrow, and the monitor -- will be in place."

The company, which competes against the likes of Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. and Nokia Corp. (NYSE: NOK) in the market for network equipment and services, was banned from dealing with US component makers earlier this year after violating US sanctions agreements. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

ZTE was last year fined $900 million for selling equipment containing US components to Iran and North Korea. It had returned successfully to business after paying that fine until US authorities in April charged it with issuing misleading and false statements.

Despite what it told US authorities, ZTE appeared not to have taken disciplinary steps against staff responsible for the wrongdoing, among other things.

The deal signed today comes after a torrid few months for the Chinese vendor, which has reportedly racked up billions of dollars in losses as a result of the US components ban. (See ZTE Ceases Business Operations After US Ban and ZTE Racks Up Losses of $3B After US Ban – Report.)


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A manufacturer of consumer devices, as well as network gear, ZTE is heavily reliant on components from the likes of Qualcomm, Intel and Broadcom, as well as specialists such as Acacia Communications Inc. and Oclaro Inc. (Nasdaq: OCLR), and had been forced to suspend share trading and cease all business operations when the ban came into effect.

While US hardliners from both the Democratic and Republican parties seemed to relish the prospect of watching ZTE's death throes, the US Commerce Department last month said it would lift the ban if ZTE agreed to its stringent demands and paid another hefty fine. (See ZTE Ban Gets Murkier as US Senators Seek Clarification and Trump Tweets on ZTE… & Gives the Chinese Vendor a Lifeline!)

Today's move has met with a predictable backlash from leading critics. "Allowing ZTE to resume business is a direct betrayal of Donald Trump's promise to be tough on China and protect American workers," said Senator Chuck Schumer in a statement. "The Trump administration's terrible ZTE deal will undermine our national and economic security, which is exactly why the Senate overwhelmingly passed bipartisan legislation to retroactively tear it apart."

While ZTE continues to face strong US opposition, the increase in its share price to HK$13.94 in Hong Kong signals some investor confidence about today's move.

Even so, the share price is still way down from HK$24.62 in mid-April, when ZTE suspended trading.

The full financial impact on ZTE may not become apparent until the company issues its next earnings report. As a result of the US action, however, ZTE has lost many of the senior managers that propelled it back to earnings growth last year.

Its customers may also continue to regard it with a degree of wariness while Schumer and his allies are spitting venom at the Chinese. Indeed, ZTE already appears to have lost a major deal with Italy's Wind Tre, one of its flagship customers, which was confirmed to have struck up a relationship with Ericsson just a few days ago. (See ZTE Is Still in the Danger Zone.)

US authorities continue to insist both ZTE and larger Chinese rival Huawei are a threat to national security and have warned the main US service providers off using their equipment and services.

This year's ZTE saga takes place against the backdrop of a trade dispute between the US and China, with Trump's administration imposing tariffs on billions of dollars of Chinese imports.

— Iain Morris, International Editor, Light Reading

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