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Home / Asia / ZTE has few cards left to play to avoid “death penalty” – TechCrunch

ZTE has few cards left to play to avoid “death penalty” – TechCrunch

ZTE has few cards left to play to avoid “death penalty” – TechCrunch

It’s not every day you see a company that employs 75,000 and once had a market cap of $20 billion facing instant doom on an hour-by-hour basis.

But that’s the situation that Chinese telecom firm ZTE finds itself in right now. Following revelations that the company sold equipment with U.S. technology to Iran and North Korea in violation of U.S. sanctions, President Trump decided to kill the company. Then he decided not to kill it. Now, this week, Congress is deciding whether to kill it or not, much to the chagrin of the White House, who thought the matter closed. Senators like Tom Cotton (R-AK) this week have said they believe that the “Death penalty is right penalty for ZTE’s behavior.”

Before we go further, let’s step back for a moment and just muse about what is happening here. Congress and the White House are politicking back and forth over the fate of one of China’s crown jewel tech companies, with tens of billions of dollars and tens of thousands of jobs at stake. If that isn’t the definition of hegemonic power, I don’t know what is. And remember that both branches of government are run nominally by the same party.

China has been leveraging its long-awaited approval of Qualcomm’s acquisition of NXP Semiconductors to push the Trump Administration to concede to ZTE’s survival. The Trump administration has gotten that message loudly and clearly, which is among many reasons why it ended up selecting a $1 billion fine as the penalty and trying to move on.

Congress, though, knows no such logic. It can’t handle the sort of multistep logic that connects Qualcomm’s success on NXP to U.S. dominance in 5G to ZTE’s survival. That’s three steps, and that’s probably three steps too much for the collective wisdom of Congress to comprehend.

ZTE’s execution has now taken on its own political momentum. Worse for ZTE, the momentum is bipartisan, with perhaps even more aggression on the Democratic side than the Republican one. Senator Chris Van Hollen (D-MD) was quoted by The Hill saying that saving ZTE “… would send a bad signal to anybody around the world watching that you can violate U.S. sanctions law with impunity and we shouldn’t be doing that.”

For Democrats, hitting Trump hard on trade, National Security, and China is a very powerful political weapon in an election year. Since the administration has come to an agreement with ZTE, its position is now fixed, allowing the senators free rein to be tougher than Trump on the issue.

Ironically — and to be clear on this view, I am not getting this from sources, but rather pointing out a unique strategy vector here — it might well be Qualcomm that uses its DC policy shop to try to save ZTE. Those lobbyists protected Qualcomm from a takeover by Broadcom earlier this year, and it could try to make the case to Congress that it will be irreparably damaged if legislators don’t back off their threats.

The irony of course is that the renewed trade jingoism in Congress is a function of Qualcomm’s fight against nominally Singapore-based Broadcom. Qualcomm got the deal blocked on national security grounds, and now has to face those same national security concerns hitting it on the closure of its most important corporate transaction. That classic short-term political thinking earlier this year will make moving forward for the company very difficult here.

ZTE’s cards are few outside of Beijing’s direct interventions. First, it is applying for loans that might reach as much as $10.7 billion from two banks in China according to the Financial Times. It’s also adding a slate of new directors to its board, to match its agreement with the Trump administration. That’s smart, since the more the deal seems to accomplish, the less impetus Congress has to act to kill the company.

ZTE has other cards it could play. One would to push for a massive expansion into the U.S. That of course contradicts its past history as well as its telco brother Huawei, who has been mostly barred from entering the U.S. market. Nonetheless, given the priorities of this administration, I am surprised that there hasn’t been more attempts by ZTE to move jobs and manufacturing to U.S. soil as a peace offering, while gaining the vital support of at least some senators who see jobs springing up in their backyards.

Another option for ZTE would be to increase its corporate transparency. Again, like Huawei, ZTE’s leadership remains relatively opaque, with Communist Party links that have never been fully explained. ZTE is a valuable asset for the Chinese government and economy, and there is a way of potentially blunting some of the momentum in Congress if it was willing to come forth with more info and commit to future work on its transparency.

I don’t expect ZTE to use any of these cards. I am not even sure the Chinese government wants to prevent the company’s death. An execution ordered by Congress is about the clearest sign the CCP leadership could send to its population that economic development must continue at any cost. Li Yuan in the New York Times called this China’s Sputnik Moment, and I think that is apt. If Congress kills ZTE, it won’t be the death of a major Chinese company, but rather the death of open economies and the birth of a renewed nationalism around trade.

About David Wiky

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