Trump may give ZTE a stay of execution in its 'death sentence' – here are the real reasons why

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Update: Our in-depth ZTE story has seen several updates, which we have added below, including responses to Trump from Senator Marco Rubio and the US Commerce Sectary. We've also added information about US-based Qualcomm's deal for NXP Semiconductors, which has been on-hold because of China. It may make ZTE's redemption a bargaining chip.

Chinese phone maker ZTE is seeking a much-needed stay of execution in its so-called 'death sentence', and it just may get that reprieve thanks to US President Donald Trump.

"Everything ZTE is doing right now is designed to get the denial order rescinded, modified, or suspended," said people familiar with the situation to TechRadar.

That may be working, as President Trump tweeted some good news for the company on Sunday: "President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast."

Trump finished by saying, "Too many jobs in China lost. Commerce Department has been instructed to get it done!"

On Monday, Commerce Secretary Wilbur Ross told reporters that his department is looking into "alternative remedies" to punish ZTE instead of upholding the seven-year ban, noting the speed at to which it will be done: "that’s the area we will be exploring very, very promptly,” 

Trump's tweet drew some rebuke, too. Florida Senator Marco Rubio tweeted that his "problem with ZTE isn’t jobs & trade, it’s national security & espionage. Any telecomm firm in China can be forced to act as tool of Chinese espionage without any court order or any other review process." 

Rubio concluded "We are crazy to allow them to operate in U.S. without tighter restrictions." He didn't offer any evidence backing this up, though UK government has raised similar warnings about ZTE for all British telecom companies.

What happened with ZTE in the first place?

ZTE, the No. 4 smartphone manufacturer in the US, was blocked from importing and licensing American technology and services by the US Department of Commerce in April. This ban stems from the fact that, in 2017, the Chinese company pleaded guilty to illegally and deceptively shipping devices, ones containing US-made components, to a sanctioned Iran and North Korea, under a prior CEO.

Under the terms of its plea deal with the US government, ZTE paid a fine of $1.19 billion (about £876m, AU$1.6b), had to fire four senior employees and was supposed to discipline or reduce bonuses to 35 other employees. It didn't do that last part completely, according to the US government, even though ZTE originally stated it had done so in a compliance letter.

The US Commerce Department saw this as another systematic cover-up by ZTE, but the people we spoke described the new denial order as "grossly disportioncate to the progress ZTE made to build out its export compliance program."

ZTE is said to have spent more than $50 million (about £37m, AU$66m) to build out its export compliance program, going as far as designing next-generation robotically automated compliance processes. None of this is mentioned in the US government's denial order, however.

ZTE's defense and why Trump may make a deal

ZTE's defense is that it has demonstrated a culture of compliance since last year's settlement with the US government, and last month's ban stems from a human resources failure at ZTE – not more orchestrated deception – with clear evidence that HR was in fact instructed to make the necessary employee bonus reductions.

Calling it a "process failure" at ZTE,  our sources indicate that it's one that was "self-identified, self-reported within days of its discovery, and self-corrected very quickly after that." A seven-year ban, essentially a corporate death sentence, seems excessive.

But an even better defense, alluded to by Trump today, is how many jobs are on the line with this ban. Trump cited jobs at risk in China, and ZTE does have over 70,000 employees worldwide. But he could just have easily talked up saving jobs in the US by overturning ZTE's 'death sentence'.

ZTE uses components and software from several US companies, and American consumers and allied governments are at risk without software updates.

"Millions of US consumers, hundreds of US suppliers, and allies around the world are affected by this," said people familiar with the impact of the commerce ban. "ZTE supports thousands of high-tech jobs around the United States."

In 2017, ZTE procured $2.3 billion (about £1.7b, AU$3b) of goods, software and technology spread out of over 200 US suppliers. Its biggest suppliers, of which ZTE spent $100 million on each in the last year, include Qualcomm, Broadcom, Intel, Texas Instruments, Xilinx, Akasha Communications and SanDisk.

Qualcomm may lose $500 million if the denial order were to stay in place, but talking to people familiar with these firms, a company like Akasha Communication is more at risk. 

"Akasha may not be as big of a name. It's actually a smaller company that's probably been hit hardest in many ways by what's happened," we were told by these people. "They only have about 350 employees, but since the denial order has come out, their stock has dropped 35% in a single day and has remained pretty depressed."

There's even more money on the line for the US if you consider reports that ZTE is being used as a bargaining chip, as laid out by Bloomberg. China could green light San Diego-based Qualcomm's deal to buy Dutch-based NXP Semiconductors. The deal was announced in October 2016 and is worth $44 billion (about £32b, AU$58b), according to Investors' Business Daily. It's cleared antitrust hurdles in every country – except the China.

US allies and you, the consumer

Saving jobs in both hemispheres may play a huge part in lifting the ban on ZTE. But the needs of individual American consumers and key US allies are also at hand. 

"ZTE is not able to obtain routine software updates, service and security patches for its devices," said a person familiar with the ban repercussions. "Google simply cannot send ZTE this, as they try to comply with the denial order."

The overall replacement cost to ZTE-device-owning consumers is enormous, as an estimated 30 million US consumers own ZTE products. The company has routinely been a part of TechRadar's best cheap phones in the US, and these budget handsets sell even better than its flagship products, like the ZTE Axon 7 and Axon M. Budget phones are how it has climbed to No. 4 among US smartphone makers.

More broadly, implications of the ZTE ban are entangling US allies, including key NATO countries, where the company has more infrastructure in place than it does in the US. ZTE has deployed over 600 communication networks to 100 countries, including about over one hundred 3G/4G wireless networks in more 50 countries.

Its biggest deployments are in India, where its networks support 100 million users and Indonesia where it supports 30 million users. Italy and Austria, two NATO allies of the United States, are supported by ZTE's cellular network infrastructure, too, with 29 million and 3.7 million users, respectively.

"It's essentially half of the population of Austria," said our sources, noting that ZTE supports almost the entire network for the country's core operator there. "If ZTE isn't able to service, repair, provide upgrades to software, and fix bugs because the software or equipment is subject to [the ban], there's a risk that the network could crash and Austria could risk losing access to their cellular network."

There's a lot at stake

ZTE has had to suspended its production lines because its devices depend so heavily on US equipment and software. Although US stores with ZTE devices have been able to continue to sell ZTE-made products in their current inventory, ZTE can't continue to manufacturer or develop additional devices.

In fact, the language of the denial order mentions that ZTE can't move, transport, or destroy the US-made components it has on hand. It technically can't even store the equipment, either, so it's become impossible to comply with.

"If ZTE doesn't have a resolution sooner than even a new administration, assuming its a one-term administration, it's unlikely that the company could continue operate that long and resemble anything like it does now."

"It would be very difficult for ZTE to operate as a company, the size that they are, if it can't get the ban lifted in the very near term."

On the flip side, ZTE's troubles could signal that operating in the US has the potential to become a minefield for Chinese companies. It may hasten the growth of sourcing chips from foreign firms like MediaTek or developing in-house chip solutions instead of from Qualcomm or Intel, and spur alternatives to Google's Android and mapping software. This is something that the Trump administration doesn't want either.

ZTE going forward

Last month, ZTE appeared to have been the first telecom casualty of the US-China trade war. It also now faces uphill battles in the UK over the sale of its networking equipment. Huawei, the other Chinese phone maker under fire in the US, is also finding little love from American carriers and stores, though it's still able to be sold elsewhere in the world. But, today, the work-in-progress relations between China's President Xi and US President Trump appears to be ZTE's best hope to stay alive.

President Xi is said to have played a key role in bringing North Korea to the table with the US and South Korea, and to give up its nuclear ambitions (North Korean leader Kim Jong Un recently made his first two trips outside of his country as a leader, and they were both to visit Xi).

So while ZTE may have been the first US-China trade war casualty last month, this month, it may be among the first beneficiaries of Washington's more harmonious relations with North Korea, care of China's influence in the region.

ZTE's 2018 plans, before last month's ban, were said to include further developing a foldable smartphone sequel and launching the ZTE Axon 9. While we can't be sure how the ban has impacted the devices, both are likely to require sourcing components from Qualcomm and other US companies that ZTE has spent $2.3 billion (about £1.7b, AU$3b) on in the last year.