Everyone remembers when the rug was pulled out from under Huawei’s feet the day before they planned to announce a partnership with AT&T to sell the new Mate 10 Pro. It was the talk of CES 2018 and the result of the US government’s claim that the Chinese company was a threat to national security. ZTE was next in the crosshairs, but the penalty thrown on them was much harsher. They were ultimately banned from using US parts and software for seven years, meaning no Qualcomm, Intel, Microsoft and most importantly, Google. That last one meant no Android OS. The phone maker was finished… Until a last minute deal between China and the White House threw them a lifeline.
ZTE is China’s 2nd largest telecommunications company after Huawei and they agreed to a Trump administration’s deal to pay a $1 billion fine and overhaul their top brass, which would lift the US ban. In addition, they have to put another $400 million in escrow. A new 10-year ban has also been set, but is suspended as long as ZTE follows the rules. The deal is a result of trade negotiations between the White House and China as both sides are trying to avoid an all out trade war.
ZTE’s troubles started last year when they pleaded guilty in US district court for ignoring US embargoes by selling equipment to Iran. They first bought US components, used them in their equipment, sold them to Iran and then created elaborate schemes to hide the activity. They then lied to the US about disciplining executives that were responsible, which ultimately led to the US ban. Soon after, ZTE shut down major operations. In addition to the fines, ZTE must change both its board and management within 30 days. Any violation of this deal can activate the new 10-year ban.
Secretary of Commerce Wilbur Ross said, “We will closely monitor ZTE’s behavior. If they commit any further violations, we would again be able to deny them access to U.S. technology as well as collect the additional $400 million in escrow.” He also said that the penalty is the largest that the Commerce Department has ever imposed.
As the Trump administration tries to negotiate trade policies with China, many US senators aren’t on board. Mark Warner, the top Democrat on the Intelligence Committee, said, “ZTE is a state-controlled telecommunications company that poses significant espionage risks, which this agreement appears to do little to address.” Chuck Schumer, Senate Democratic leader, said, “It’s a 180-degree turn away from the president’s promise to be tough on China.”
The US company most affected by this is Qualcomm, whose chips are in the majority of ZTE handsets. In a separate deal, Qualcomm is working to get Chinese approval for a $44 billion acquisition of NXP Semiconductors NV, so easing US/China tensions are very beneficial for the US company. Qualcomm’s shares rose as much as 4.7 percent and NXP shares increased as much as 6.7 percent as the approval became more likely.