ZTE Corporation: In the China-United States Trade War Crosshairs?
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Case Code: ECON072 Case Length: 19 Pages Period: 2012 – 2018 Pub Date: 2019 Teaching Note: Available |
Price: Rs.500 Organization : ZTE Corporation Industry : Telecommunications Countries : Global Themes: International Management, Globalization |
Abstract Case Intro 1 Excerpts
Introduction
In July 2018, the US lifted its trade ban on Chinese telecom giant ZTE Corporation (ZTE), allowing it to once again procure from American companies' critical parts and software that went into products such as its smartphones and networking gear, after three months of not being able to do so. The US Commerce Department cut a new agreement with ZTE that would lift the trade ban so long as ZTE overhauled its management, paid a US$1 billion fine, set up a compliance team to monitor the company's actions, and put another US$400 million in escrow to pay as penalties should it err again. The regulators also threatened to impose a 10-year ban if ZTE did not meet the new terms. Earlier, in April 2018, the US Commerce Department had banned ZTE from purchasing components from US suppliers for seven years as it had allegedly violated the terms of a sanctions settlement that prevented sales of telecommunication equipment to Iran and North Korea. The department claimed that ZTE had paid full bonuses to employees who had engaged in the illegal conduct, failed to issue letters of reprimand, and lied about the practices to US authorities.
The ban crippled ZTE's operations, as about 30% of its components were sourced from US suppliers. Overall, for the six months ending June 2018, ZTE reported a loss of 7.8 billion yuan (US$1.1 billion); its share price was hit; and its long-time customers were scaling back deals with it. In June 2018, US President Donald Trump (Trump) intervened and lifted the sanctions against ZTE amid escalating trade tensions between China and the US. While some analysts regarded the US decision to crack down on ZTE as a protectionist policy and an attempt to curb China’s rapid rise in the telecommunications and technologies sectors, others criticized the company for its blatant noncompliance with contracts and rules.
Though revoking of the ban put ZTE back in business, the company was still reeling from the repercussions that could cost it dearly in the long run. Going forward, the new management led by CEO Xu Ziyang (Xu) faced some daunting challenges including rebuilding market confidence, curbing financial losses, beating the competition, and gaining the trust of corporate customers. Moreover, ZTE's 5G plans were threatened due to the export ban and escalating trade tensions between the US and China. "Even if ZTE manages to return to normal operations, ZTE still needs to face headwinds from rebuilding the company's branding, losing customers, the restructuring change in management team and the introduction of US compliance team," said Ricky Lai, an analyst at Guotai Junan Securities Co., Ltd.
Analysts wondered whether ZTE would be able to regain the trust of corporate customers in the US and recover from the damage that had been caused to its reputation. Could a new board and management successfully revive the company? Was ZTE’s survival at risk as a trade war loomed between the US and China? How could ZTE achieve the global success predicted for Chinese telecom equipment manufacturers amid rising trade protectionism in key countries like the US?
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