16 July 2019
ZTE will be monitored by the US government over a period of 10 years with regard to its compliance with the terms of the settlement. Photo: Reuters
ZTE will be monitored by the US government over a period of 10 years with regard to its compliance with the terms of the settlement. Photo: Reuters

An expensive and humiliating lesson for ZTE

Chinese telecommunications equipment maker ZTE Corp. resumed trading on Wednesday following a deal with the US government for the lifting of a ban on its business dealings with US suppliers.

Among other provisions of the settlement, the Shenzhen-based company agreed to pay a US$1 billion fine, place US$400 million in escrow in a US-approved bank, and overhaul its top management.

The entire saga offers an expensive and humiliating lesson for the Shenzhen-based company, which now has to report to US officials over the next decade on its compliance with the terms of the deal. It is fair to say that ZTE will be under US monitoring and control over that period.

This is not a proud moment for a state-owned behemoth with ambitions to dominate the telecommunications equipment business on a global scale, and certainly not for the Chinese leadership and its people.

The deal also comes at a time when Beijing is asserting its role on the world stage, and trade and political tensions with Washington are rising.

But ZTE apparently has no choice but to accept the US conditions, or close shop. After all, it has pleaded guilty to evading US sanctions on Iran by doing business with the Gulf nation. It has no one to blame but itself.

While the terms of the settlement with the Trump administration are by themselves quite weighty, ZTE still has to deal with opposition from the US Congress.

Several US lawmakers are seeking to reimpose the export restrictions on the Chinese company on the grounds that it continues to pose a national security risk.

They believe that the Chinese government is using ZTE and other state-owned enterprises for espionage and intellectual property theft.

In Hong Kong, shares of ZTE fell 41.56 percent to close at HK$14.96 on Wednesday. Trading volume reached 229 million shares worth HK$3.576 billion.

The deal between ZTE and the US government cannot be seen simply in dollar terms.

The cash component of the deal is already quite hefty. In fact, it will be the second payment ZTE has to pay to the US government in two years. The company had already paid US$890 million for breach of sanctions imposed by Washington for selling telecommunications equipment to an Iranian company.

But more than that, the company is practically surrendering its independence and decision-making powers during the 10-year monitoring period, with the US government becoming its ultimate boss.

Under the terms of the deal, ZTE must replace its entire board of directors, as well as the board of its subsidiary ZTE Kangxun, and create a compliance committee with regard to the pledges it made as part of the settlement.

Existing members of the company’s senior leadership, from senior vice president to the highest, will have to be replaced within 30 days from June 8.

An independent special compliance coordinator, who is acceptable to both the company’s controlling shareholders and the US government, will also be created.

The coordinator’s job is to coordinate, monitor, assess, and report on compliance by ZTE and its subsidiaries or affiliates worldwide with the terms of the deal as well as the US Export Administration Act of 1979 and other relevant regulations.

The coordinator will report to the company’s new CEO and board of directors as well as the US government.

On Wednesday, ZTE announced that it proposed to change the company articles to meet the latest requirements related to the settlement. It also nominated a number of new independent non-executive directors to the board.

Despite the management revamp, it will take a long while before ZTE can hope to return to normal operations.

And whether it can recover its lost businesses and regain its previous standing in the industry remains a big question.

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EJ Insight writer

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