ZTE’s $2.7bn loss shows tough challenges

Bloomberg

ZTE Corp. unveiled a settlement with the US government to rescue the Chinese telecom-equipment maker. But investors put a steep initial estimate on the cost of the deal: at least $2.7 billion.
ZTE agreed to pay at least
$1 billion in penalties and overhaul its leadership to escape essentially a death sentence. That still leaves it with the challenge of replacing its entire senior management and board just as it tries to rebuild trust with phone companies and corporate customers.
The Shenzhen-based company didn’t explain how it would recruit new managers or who would lead the business following the departures of executives like Chairman Yin Yimin and President Zhao Xianming. Typically, those decisions would be handled by the board — but that group is also in flux. That leadership tumult comes as telecom operators around the world prepare to pick suppliers and spend billions on blazing-fast fifth-generation wireless technology.
ZTE had struggled against far larger rival Huawei Technologies Co. even before Washington laid bare serious holes in its internal culture. That’s unlikely to win it much credibility as gear-makers bid for expensive 5G network contracts and distrust of Chinese corporates grows from Australia to the US. Meanwhile, there’s no guarantee American lawmakers won’t come back with further sanctions.
“The biggest challenge is that internally, they have to reorganise,” said Edison Lee, an analyst at Jefferies.
“It’s going to be a tough period of adjustment.”
The US blocked ZTE’s ability to buy from US suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about it. That choked off supply of the chips and other components from American names such as Qualcomm Inc. that it needs to make networking gear and smartphones, forcing the company to grind to a halt just weeks later. The Shenzhen-based company is likely to incur losses of at least $3 billion as a result of the US action. ZTE became one focal point in a trade dispute between China and the US.
An agreement that allowed the company to reopen was seen as a key Chinese demand as the world’s two largest economies try to avoid a trade war that could undermine global growth.
After a plea from Chinese President Xi Jinping to help the company get back into business, President Donald Trump said the action against ZTE would lead to “too many jobs in China lost.”
But forces in Washington are lining up against the president.