Analysts say firm still faces impact for years
ZTE Corp announced in a filing that the company has been removed from the U.S. Department of Commerce trade blacklist effective Wednesday (U.S. time), after it agreed to pay up to .2 billion in fines to the U.S. government.
The move means that the Chinese telecommunications equipment maker has ended more than a year of tension with the U.S. government. However, in the view of experts, the negative impact of the case on ZTE's earnings and operations is not over yet.
Last year, the U.S. Department of Commerce placed export restrictions on ZTE as a penalty for violating U.S. sanctions on Iran. The department's action prohibited U.S. suppliers from doing business with the Chinese company.
The removal from the blacklist is crucial for ZTE, which is the world's fourth-largest telecom equipment supplier, although it mainly relies on chips from U.S. companies such as Qualcomm and Intel, Wang Yanhui, secretary-general of the Mobile China Alliance, told the Global Times Wednesday.
This partially explains why ZTE agreed to pay criminal and civil penalties of 2 million and an additional penalty of 0 million to U.S. Commerce Department's Bureau of Industry and Security.
“ZTE acknowledges the mistakes it has made, takes responsibility for them, and remains committed to positive change in the company,” said Zhao Xianming, chairman and CEO of ZTE, said in a press release on March 7. Zhao was appointed in April last year, which was perceived as a move to revamp the company's management in the wake of U.S. allegations.
Following the U.S. fines, ZTE reported a net loss of 2.35 billion yuan (1 million) for 2016. It said it would have reported net profit of 3.83 billion yuan last year, up 19.2 percent, if it had not made a provision for the U.S. penalty, according to its annual earnings report to the Hong Kong stock exchange.
The penalty not only will continue hurting ZTE's profit but also its ability to pursue innovation, Xiang Ligang, chief executive of domestic telecom industry portal cctime.com, told the Global Times Wednesday
“It probably doesn't have much money to support its internal research and development, as the profits for three years will all be used to pay the U.S. fines,” said Xiang.
The total fine of up to .2 billion is the largest sanctions-violation fine imposed against a Chinese company by the U.S. government, reportedly even exceeding ZTE's overall profit of 7.3 billion yuan over the past seven years.
Wang has an optimistic view of the future of ZTE, which he suggested would not face capital issues, as fundraising will not be hard for the State-owned company.
Both Wang and Xiang said that the U.S. penalty was a good thing for companies like ZTE, which will definitely learn a lesson from the case. Wang believed that ZTE would strictly follow local rules and laws in the future when it makes deals overseas.
Moreover, Chinese companies will see the significance of developing their own core technologies in case they are handicapped by excessive dependency on U.S. patents, said Xiang. “What ZTE experienced may also happen to other Chinese technology companies at a time when Sino-U.S. relations are full of political uncertainties.”
On March 21, the U.S. government published an online statement saying that it had imposed sanctions on 11 foreign entities and individuals including nine from China for transfers to Iran's missile program.
Xiang said that those six Chinese companies won't all reach agreements with the U.S. easily, if they have alternatives.
“I don't think Huawei Technologies Co would be as vulnerable as ZTE, because it is strong in intellectual property,” Xiang said.