ZTE moves ahead with US settlement steps as investors wipe US$3 billion off market value

ZTE moves to implement US settlement measures but investors punish company on expectations ban could force company into a loss

PUBLISHED : Wednesday, 13 June, 2018, 2:51pm
UPDATED : Wednesday, 13 June, 2018, 11:38pm

ZTE has appointed a three-person team to oversee implementation of its settlement with the US government as investors on Wednesday wiped about US$3 billion off the Chinese telecom maker’s market value, underscoring the need for the company to resolve the matter quickly.

The team’s key responsibilities include replacing the board of directors and firing senior executives at ZTE. The Shenzhen-based company appointed Shen Nan to lead the team, with two assistants, according to an internal memo seen by the South China Morning Post. Shen is ZTE’s chief intellectual property officer and acting chief compliance officer. ZTE declined to comment.

ZTE shares fell 42 per cent in Hong Kong to HK$14.96 and by the daily limit of 10 per cent to 28.18 yuan in Shenzhen. The shares resumed trading after ZTE said it had agreed to pay an additional US$1 billion in fines to the US Department of Commerce and put US$400 million as surety as part of its settlement for violating US prohibitions against selling equipment to Iran. The agreement also required the company to replace its board and terminate all executives ranked above senior vice-president as well as anyone involved in the Iran violations.

ZTE to replace board, fire senior management under US deal

The company is trying to speed up the process of paying the fine and has applied to the US commerce department’s Bureau of Industry and Security to open a bank account in the US to deposit the US$400 million escrow payment, according to people with knowledge of the matter.

ZTE has also rolled out plans for all of its 80,000-plus employees to undergo compliance education, all in the hopes of resuming operations as early as possible, the people said. The company had shut major operations last month after the US activated a ban prohibiting it from buying American parts.

In a meeting for senior management on Tuesday, ZTE chairman Yin Yimin said that the company needs its 80,000 employees to have “thorough knowledge” and “thorough supervision” of each other when it comes to compliance, rather than rely on a few people from a compliance team.

Tough ZTE penalty a costly reminder for firms to obey rules

Yin, who with most of the senior managers present at the meeting will be replaced or fired as part of the settlement, said employees must “remind each other of problems, correct each other and supervise each other” whenever they notice any problems, according to the people with knowledge of the discussions.

“The most important point is that the US will not lift the export ban until it receives the payment of US$1bn in fines and US$400m in escrow,” Edison Lee, an equity analyst with Jefferies wrote in a research note sent by email late Tuesday. “We believe ZTE will make the payment as soon as possible (we estimate in a few days). Therefore, ZTE will most likely be able to resume operations in the middle of next week”.

Even so, a degree of uncertainty has permeated ZTE’s internal ranks, as the final decision to lift the ban lies with the US even if the company meets all of the terms, according to one of the people. The company can only strengthen its compliance study while waiting for the green light to resume operations, the person said.

ZTE mess shows need to change the ‘Chinese way of doing business’

Clouding the outlook is the challenge by a bipartisan group of US senators to reverse the Trump administration deal, by using an amendment in the annual defence bill.

The amendment will appear in the 2019 National Defence Authorisation Act, which is expected to go to the Senate for a vote this week. The Senate’s bill will have to be reconciled with the US House version of the defence bill that passed in May.

ZTE will hold its annual general meeting on June 29 where shareholders will review a revised company charter and board rules as well as vote on director candidates. All current board members will resign after new directors are elected.