ZTE signs initial agreement to end US ban on Chinese company

The agreement will allow telecommunications equipment maker to get back into business

ZTE headquarters in Shenzhen, China. The company has signed an agreement in principle that would lift a US Commerce Department ban on buying from US suppliers. Giulia Marchi / Bloomberg

ZTE has signed an agreement in principle that would lift a US Commerce Department ban on buying from US suppliers, allowing China's No 2 telecommunications equipment maker to get back into business, according to sources.

ZTE ceased major operations since the seven-year ban was imposed on the company in April for breaking a 2017 agreement reached after it was caught illegally shipping goods to Iran and North Korea.

A Commerce Department spokesman said on Tuesday that “no definitive agreement has been signed by both parties”.

ZTE did not immediately respond to requests for comment.

The preliminary deal includes a $1 billion fine against ZTE plus $400 million in escrow to cover any future violations, sources said. The terms were in line with Reuters reporting on the US demands on Friday, they said.

The Commerce Department plans to amend its 2017 settlement agreement and count the $361m ZTE paid as a part of that, allowing the United States to claim a total penalty of as much as $1.7bn, the sources said.

Over the weekend, ZTE signed the agreement drawn up by the US, the sources said, but the amended settlement has not been signed.

ZTE’s survival has been a topic of discussion in high-level US-China trade talks.

US President Donald Trump planned to meet with his trade advisers on Tuesday to discuss China’s offer to import an extra $70bn of American goods over a year as a way to defuse a potential trade war between the world’s two largest economies.

Mr Trump tweeted last month that he told commerce officials to find a way for ZTE to resume operations, later suggesting penalties of a $1.3bn fine and changes to its board and top management.

As part of the deal, sources said, ZTE promised to replace its board and executive team in 30 days. It would also allow unfettered site visits to verify that US components are being used as claimed by the company, and post calculations of US parts in its products on a public website.

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ZTE’s resuscitation with US help has met strong resistance in Congress, where Democrats and Mr Trump’s fellow Republicans have accused him of bowing to pressure from Beijing to help a company that has been labelled a threat to US national security.

“By letting ZTE off the hook, the president who roared like a lion is governing like a lamb when it comes to China,” US Senate Democratic leader Chuck Schumer said in a statement in response to Reuters’ report of the preliminary agreement. “Congress should move in a bipartisan fashion to block this deal right away.”

US companies provide an estimated 25 per cent to 30 per cent of components in ZTE’s equipment, which includes smartphones and gear to build telecommunications networks.

The ban was imposed after ZTE failed to comply with an agreement with the Commerce Department in 2017, when it pleaded guilty in federal court in Texas to conspiring to evade US embargoes by illegally shipping US goods and technology to Iran. Shenzhen-based ZTE has a subsidiary in Richardson, Texas.

ZTE had agreed to dismiss four senior employees and discipline 35 others either by reducing their bonuses or reprimanding them, according to senior Commerce Department officials.

But the company admitted that while it had fired the four senior employees, it had made false statements about the others, the officials said.

The US government launched an investigation into ZTE after Reuters reported in 2012 the company had signed contracts to ship hardware and software worth millions of dollars to Iran from some of the best-known US technology companies.

The probe found that ZTE had conspired to evade US embargoes by buying US components, incorporating them into ZTE equipment and illegally shipping them to Iran.

ZTE, which devised elaborate schemes to hide the illegal activity, agreed to plead guilty after the Commerce Department threatened to cut off its global supply chain. The company was allowed continued access to the US market under the 2017 agreement.

As part of a new agreement, the sources said, ZTE will retain another compliance contractor in addition to the three-year court-appointed monitor imposed by the plea agreement.

The sources said ZTE also agreed to allow US representatives to make site visits without co-ordinating with Chinese government officials, as required by a non-public agreement between the countries.

Last year, ZTE paid over $2.3bn to US suppliers, a senior ZTE official told Reuters last month.

The suppliers include Qualcomm, Broadcom and Intel, as well as smaller optical component makers Acacia Communications and Oclaro.

Shares of Acacia and Oclaro extended their gains on Tuesday in heavy trading after news of the preliminary deal, ending up 1.7 per cent and 1.8 per cent, respectively.