ZTE looks set to climb out from under crippling U.S. sanctions by agreeing to pay $1 billion in new fines, revamp its top leadership, and hire compliance officials picked by the U.S. government. As a side benefit, U.S.-based Qualcomm might see a Chinese hurdle to its pending $38 billion acquisition of NXP eliminated.
The U.S. Department of Commerce this morning announced the ZTE deal, which will allow the China-based equipment vendor to again be able to acquire critical components from U.S. companies necessary for its telecommunications equipment.
A recent CNBC report suggested that Qualcomm’s pending $38 billion acquisition attempt of NXP was tied to broader trade negotiations between the U.S. and China, with the deal being held up by a Chinese government review. That deal was originally announced in late 2016.
Qualcomm CEO Steven Mollenkopf this week told an investor conference that he hoped the ZTE agreement would benefit Qualcomm.
“I hope it means something good to us, but we are really focused more on our individual application,” Mollenkopf told The Deal’s annual corporate governance conference in New York, according to a Reuters story.
Qualcomm’s stock began trading this morning up more than 3 percent compared with its close yesterday. It was trading up an additional 1.4 percent early Thursday.
For ZTE, the new fines include a firm $1 billion that has to be paid and another $400 million to be set aside in an escrow account in case the company gets caught again violating the trade ban.
ZTE posted $17 billion in revenues and a $715 million net profit last year.
The vendor also must replace its board of directors and senior leadership. It will also be required to house compliance officials selected by the U.S. government at its corporate offices.
“Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws,” the U.S. Department of Commerce noted in a statement.
ZTE has already paid nearly $900 million in fines tied to a settlement with the U.S. government reached early last year. That fine was the result of the China-based telecom equipment vendor being found to have sold equipment to Iran and North Korea that used components from U.S. companies in violation of a long-standing trade ban.
That initial agreement also included a seven-year suspended denial of export privileges, which could be activated if any aspect of the agreement was not met. That provision was activated this past April after the U.S. found the vendor had lied about taking action against company officials that were tied to the initial violations.
Shortly after the ban, ZTE said it had stopped all “major operating activities” in its Shenzhen, China, factory.
President Donald Trump late last week took to Twitter to announce work on a deal that would allow ZTE to “reopen with high level security guarantees and changes of ZTE’s management and board.” Trump tweeted that the deal also would require the company to purchase components from the U.S. and pay a $1.3 billion fine.
However, those “statements” were followed by an official White House announcement that it was moving forward with its plans to impose 25 percent tariffs on $50 billion of imported Chinese goods. In addition, it said that the U.S. will restrict investments and enhance export controls on goods from China.