China's ZTE may be subject to $1.7 billion penalty claim by the USA
(Reuters) – According to inside information, a penalty of as much as $1.7 billion may soon be claimed from ZTE Corp (000063.SZ) by the Trump administration, as it attempts to reprimand and obtain tighter control over the Chinese telecom company before it allows it back into business in the United States.
Unfettered manufacturing site visits are a part of the claim by the Commerce Department. These are crucial in making sure that US components are being used by ZTE, as the company claims. In addition, the Commerce Department is urging ZTE to post the calculations of US parts in each product on the website.
ZTE, the #2 telecom equipment manufacturer in China, has taken a major hit when a ban imposed in April 2018 has prohibited it from buying US tech components for entire 7 years. The reason for the ban is the illegal shipment of goods to North Korea and Iran, in violation of a previous agreement.
United States Commerce Secretary Wilbur Ross is heading to Beijing for trade negotiations, and talks with ZTE management are definitely on his list of things to do.
Washington is expected to ask ZTE to replace its board and executive team in just 30 days, an insider claimed, but there has been no finalized deal, and the terms are still in the works, including the amount of penalties and other conditions.
There were no comments available from either the Commerce Department or ZTE representatives.
ZTE products contains approximately 25-30% US-made components, including the smartphones and equipment for telecom network construction.
The status of the company is now a bargaining chip of great significance in the top-level trade negotiations between China and the United States, and may influence China’s decision to purchase more US-made agricultural products if ZTE is given a break by the United States.
POTUS informed the general public in a tweet last month that he urged the Commerce Department officials to assist in finding a way to get ZTE back into business, also making a note of the $1.3 billion fine and major alterations to the top management and the board, as the penalty for the company before it goes back into business.
Congress, however, is not keen on ZTE’s potential recovery, with both Republicans and Democrats accusing Trump of succumbing to the pressure exerted by Beijing in order to help a company that’s considered a threat to the national security of the United States.
Meanwhile, ZTE has paused most of its operations in May, and is currently in a desperate need to return to regular operations ASAP, since its losses since the ban on working with American suppliers, which was imposed on April 15, are approximately in excess of $3 billion, says an inside source.
THE PENALTY MAY BE SMALLER THAN EXPECTED
Reuters was informed by the top-level Commerce Department officials that the April ban was imposed after ZTE acknowledged several misleading actions it conducted. While it did dismiss 4 senior managers partly responsible for the original violation, 35 more remained in place, and have not even had their bonuses reduced, or been otherwise reprimanded, although the company claimed that they were.
The U.S. administration is expected to lay a $1.7 billion penalty on the company, the Shenzhen-based company is actually expected to pay approximately $1 billion after all the calculations are made.
A $400-million escrow deposit is also expected to be part of the negotiations.
In 2017 alone, the company’s payouts in criminal and civil penalties came up to $892 million, and $300 million more were suspended in case of future violations. The new deal will place the suspended $300 million and the additional $100 million into escrow in a U.S. bank.
Moreover, the inside source informed that the $361 million in civil penalties, paid out by the company in civil penalties, is expected to be counted into the $1.7 billion figure, regardless of the fact that is was a part of the $892 million collected in 2017.
The United States also most certainly expects ZTE to find a new compliance manager as part of a new deal. The compliance officer is expected to oversee activities along with an outside monitor who is still in place as a component of the guilty plea that the company took in March 2017.
Manufacturing site visits are also factored into the deal, as the United States wants monitor ZTE’s component claims without having to coordinate their activities with the Chinese government, as would be appropriate under the two countries’ non-public agreement, claim the sources.
In 2017, ZTE paid out more than $2.3 billion to U.S. component suppliers, as a senior ZTE official informed Reuters last month. Qualcomm (QCOM.O), Intel Corp (INTC.O), Broadcom Inc (AVGO.O), along with smaller-scale optical component manufacturers Oclaro Inc(OCLR.O) and Acacia Communications (ACIA.O) are ZTE’s regular suppliers.