As the Sino-US trade war rages, ZTE Corporation (00763.HK, 000063.CN), China’s second-biggest supplier of telecommunications equipment, remains vulnerable to punishment by the US side and enjoys less protection from Beijing.
A ban on buying US components in 2018 forced the firm to close production temporarily and led to a loss of 7.8 billion yuan (US$1.16 billion) in the first half of the year. It violated US law by selling to Iran and North Korea equipment that contained American components.
It remains highly dependent on US companies, with 25 to 30 percent of the components used in its products coming from the US, including high-end chips from Qualcomm and Intel.
Last year President Donald Trump removed the “death penalty” which the US Congress had imposed on ZTE by lifting the ban on US firms selling to the company and replacing it with a fine of US$1.4 billion in order to improve his relationship with President Xi Jinping.
“I view ZTE as far more vulnerable to continued US sanctions than Huawei,” said Daniel Levin, a China expert and member of the Board of the Liechtenstein Foundation for State Governance.
“Several members of Congress and officials in the Justice Department are very upset that President Trump saved the company last year. A few weeks ago a bipartisan group of US senators introduced a bill that would impose sanctions on ZTE if it was caught violating US law again.
“Actions against ZTE remain on the table and crippling sanctions or penalties could be issued by judicial authorities rather than Congress, which would make it far more difficult to President Trump to intervene as part of a trade bargain,” he said.
ZTE accounts for about 10 percent of the global telecoms equipment market and 30 percent of the Chinese telecoms market.
Founded in 1985, it listed on the Shenzhen stock exchange in 1997 and in Hong Kong in 2004. According to its website, it has individual consumers, carriers, businesses and public sector customers from over 160 countries around the world.
“ZTE invests more than 10 percent of annual revenue in R&D. It has established state-of-the-art R&D centers in the USA, Sweden and China and employs over 30,000 research professionals in the development of next-generation technologies including 5G, the Internet of Things, NFV, SDN, Cloud Computing and Big Data,” it said.
Analysts said that ZTE enjoyed less political backing from Beijing than Huawei Technologies, which it sees as a national champion.
Since the arrest last December of Meng Wanzhou, chief financial officer of Huawei, in Vancouver, relations between the company and the US have gone from bad to worse. The US has banned government agencies from buying equipment from Huawei.
Last week the company sued the US government, saying the ban violated a constitutional prohibition on passing a law that singles out an individual or group for punishment without trial. It said that Washington had produced no evidence for its ban.
Beijing has given strong public backing to Huawei. “We support the company and the individual in seeking legal redress to protect their interests and refusing to be victimized like silent lambs,” Foreign Minister Wang Yi said at the National People’s Congress last week.
In 2012, a report by the US House Intelligence issued a scathing report on Huawei and ZTE and classified both as risks to the US national security and infrastructure.
Since then, Huawei has grown in markets including those allied with the US, like Germany and the United Kingdom, in important infrastructure areas like 5G. But ZTE never developed this degree of leverage.
Analysts said ZTE was resistant to changing its operations, with sales teams unwilling to sacrifice business in Iran and North Korea. This resistance persists despite lukewarm instructions from headquarters in Shenzhen, they said.
A major uncertainty is whether and when China and the US sign a trade agreement. Last Friday, a senior White House official said President Donald Trump was prepared to “walk away” from a “bad” trade deal with China, stressing that there is “work left to be done” in the negotiations before an agreement can be finalized.
The original target was late March at the Mar-a-Lago resort in Florida, but this is likely to be pushed back.
“There will be a deal,” said a foreign businessman in Beijing. “Both Trump and Xi need one for domestic reasons. They need to show some success to their public. China will commit to buying large amounts of US goods. But it will not change China’s industrial policy, the 2025 plan, or the model of state-led capitalism. Nor will it settle the Huawei dispute. That is a different track.”
– Contact us at [email protected]