ZTE could resume operations ‘within weeks’ following Trump’s pledge to help the company

PUBLISHED : Monday, 14 May, 2018, 2:19pm
UPDATED : Monday, 14 May, 2018, 10:57pm

An unexpected tweet from US President Donald Trump over the weekend could soon see China’s No 2 telecoms equipment maker ZTE Corp resume normal operations after it was hit with an export ban a month ago, signalling a potential compromise between the world’s two largest economies amid a looming trade war.

China’s top economic official Liu He will lead a Chinese trade delegation to Washington between May 15 and 19, after talks with the US government’s seven-man delegation in Beijing earlier this month failed to produce any concrete result over simmering trade tensions.

Liu’s trip was confirmed soon after US President Donald Trump pledged in a tweet on Sunday to help give ZTE “a way back into business, fast”, after it was banned from buying from US suppliers for seven years. “Too many jobs in China lost. Commerce Department has been instructed to get it done!” Trump tweeted, adding that he was working with Chinese President Xi Jinping to help the company resume operations.

Donald Trump ‘working together’ with President Xi Jinping to help restart China’s ZTE

Shenzhen-based ZTE, which was forced to halt “major operations” because of its high reliance on US technology, is expected to resume production within the next two to three weeks, according to analysts.

“We always believed ZTE would eventually be removed from the export ban [but] bear in mind that China also has some leverage in the negotiation process, ranging from North Korea to China’s regulatory approval of Qualcomm’s acquisition of NXP,” Edison Lee, head of telecoms research at Jefferies Hong Kong, said in a note on Monday.

ZTE claims to have 80,000 employees worldwide. Its main businesses include telecom equipment manufacturing, including 4G and 5G development, and smartphones. Prior to the current crisis it was the fourth largest smartphone vendor in the US.

Under the export ban, ZTE was not able to receive products from US chip suppliers Qualcomm, Intel and Micron Technology, optical component suppliers Maynard, Acacia, Oclaro and Lumentum, as well as software suppliers Microsoft and Oracle, among others.

Chinese regulators have restarted their review of Qualcomm’s application for approval of its acquisition of NXP Semiconductors after earlier shelving the process in response to growing trade tensions with the US, Bloomberg reported on Monday. Officials of China’s Ministry of Commerce have been asked to hasten the long-delayed review of the purchase and Qualcomm’s proposed remedies to protect mainland Chinese companies from potential monopoly practises if the acquisition proceeds.

ZTE has noted the tweet from Trump and welcomed this latest progress, a person close to the company told the South China Morning Post on Monday. ZTE will continue to communicate with relevant parties, under the guidance of the Chinese government, to facilitate a final resolution, said the person, who declined to be named as they were not authorised to speak to the media.

China’s Ministry of Commerce did not immediately respond to a faxed request for comment.

Analysts said there are two scenarios likely to play out with respect to ZTE. The US Department of Commerce could either lift the export ban temporarily, subject to further investigation and negotiation, or conclude that ZTE’s violation was a “careless mistake”, therefore lifting the ban but subjecting the company to more scrutiny of its compliance processes moving forward.

The first scenario could mean that ZTE resumes operations in “two to three weeks”, Jeffries’ Lee said.

Charlie Dai, principal analyst with Forrester, said the tweet shows that the business and political negotiations between the governments of two countries is working. “It will still take a few weeks for ZTE to resume normal operations, but it will be resolved eventually,” Dai said.

ZTE’s Chinese suppliers and other tech stocks rose on Monday after the reconciliation signal from the US side, with Mobi Development surging as much as 30 per cent in Hong Kong, the most since 2013, while Zhong Fu Tong jumped by its daily limit of 10 per cent in Shanghai. Both companies derive a significant portion of their revenue from ZTE.

Dollar bonds from Chinese hardware manufacturers Huawei Technologies and Lenovo recouped some of their losses after Trump’s tweet about ZTE.

Although the market responded positively to the US President’s intention to lift the US export ban on ZTE, Lee said it does not mean the tech-focused trade conflict between China and the US is over.

The conciliatory signal from the American side comes almost a month after the US government banned sales by American tech suppliers to ZTE because the Chinese firm failed to discipline 35 employees involved in the illegal sale of telecommunications equipment to Iran, paid them full bonuses and lied about it to US authorities.

ZTE asks employees to ‘welcome coming of dawn’

ZTE said in a stock filing on May 9 that the ban has forced it to cease “major operating activities”, while chairman Yin Yimin indicated earlier that the move plunged the company into a “state of shock”.

Trump’s tweet follows an internal memo from ZTE in early May which said it had requested a stay of the denial order that forbid US companies from doing business with it.

The company is striving to resolve the matter “as soon as possible” and will continue to maintain close communication with relevant parties, the memo said.

Jia Mo, a Shanghai-based analyst with industry consultancy Canalys, said the original seven-year export ban was a catastrophic move for ZTE, and pointed out that the company still faces many challenges even if the ban is lifted. 

“[ZTE will need to] resume its relationships with its suppliers as soon as possible to get business back to normal,” said Jia.

“The other challenge is repairing its brand image in the US. Many US consumers view ZTE as a security threat, and convincing them to keep buying ZTE smartphones could be a real challenge.” 

In the first quarter of this year, ZTE shipped 6.6 million smartphones globally, 72 per cent of which were to the US market, according to Canalys data.