ZTE Deal Expected to Bolster Telecommunications Plays

By Joyce Yu

Philadelphia, PA–Telecommunications sector is expected to get a boost from the ZTE deal just agreed by the U.S. and China. American chipmaker Qualcomm jumped as high as 5% on Thursday. “The Street is relieved this ZTE situation is [now] resolved as it’s an olive branch that will help the broader tech sector with a thawing of tensions, especially on the [telecommunications] front,” GBH Insights analyst Dan Ives told CNBC.

The deal, announced by US Commerce Secretary Wilbur Ross, imposes 1 billion fine on ZTE which also agreed to put $400 million in an escrow account, and retain a new U.S.-selected compliance team. Ross said on CNBC that the deal will impose “the most strict compliance that we’ve ever had on any company, American or foreign,” forcing ZTE to replace its top management and board. According to a separate Reuters’ report, the deal also includes a suspended 10-year ban on buying U.S. components that could be activated by any violations.

ZTE’s fate has been a major focal point in trade tensions between the United States and China. In April, the US Commerce Department asked American firms to stop selling parts or providing services to ZTE for violations of a 2017 deal in which the Chinese company admitted to evading sanctions on Iran and North Korea. This ban has, however, affected American corporations, such as Qualcomm, a major chip supplier for ZTE.  In addition to poor performance of the company’s stocks, Qualcomm’s business proposal to merger with Dutch semiconductor company NXP has been blocked and is still awaiting Chinese approval.

The U.S. side seems to be pleased with the outcome. “We think this settlement, which brought the company, a $17 billion company, to its knees, more or less put them out of business … should serve as a very strong deterrent not only for them but for other potential bad actors,” Ross told CNBC.”I’m very, very happy with this arrangement.”

This however is not quite in line with comments from Treasury Secretary Steven Mnuchin who has said that the enforcement of the ban wasn’t meant to put the company out of business, and that any changes being considered would support U.S. national security.

For ZTE, the deal undoubtedly could mean end of a ban on ZTE buying American parts, but is likely to cost ZTE billions of dollars in lost revenue, tarnished its brand and strained its relationships with customers around the world.