More Troubles Ahead For ZTE After Senate Votes To Reinstate Embargo

Shares in Chinese telecommunications equipment maker ZTE closed sharply lower on Tuesday following a US Senate vote to block a deal to lift sanctions against the company.

In Hong Kong the company’s shares dropped 25 percent, and were down by their 10 percent daily limit in Shenzhen.

More than half a dozen US companies that supply parts to ZTE also saw their shares fall by 1.5 to 5 percent.

The deal, announced earlier this month, is aimed at allowing ZTE to resume operations after a month-long hiatus.

Senate vote

It requires ZTE to pay out $1.4 billion (£1.06bn) in penalties and institute a host of other measures, such as changing its entire senior management and board of directors and subject itself to a US-controlled monitoring regime.

In exchange, the arrangement lifts an embargo on buying US parts, a measure that would effectively have meant the end for the $20bn company, which employs 75,000 people.

ZTE incurred the embargo after US officials said it failed to comply with the terms of an earlier deal reached after it was found breaking a US ban on sales to Iran and North Korea.

But critics in the US government said the deal was too lenient, and on Monday night the Senate approved a US military funding bill with language attached that reinstates the embargo.

The vote has no immediate effect, since the National Defence Authorisation Act must go to the House of Representatives for reconciliation before being sent to the president for approval.

The embargo language could be removed by the House. or the bill could be vetoed by the president – but such a veto could face being overridden by Congress.

The bill isn’t expected to become law until later in the summer, and analysts said the vote may only result in a prolongation of the uncertainty around the ban being lifted.

Troubles ahead

In the meantime, ZTE faces a steep challenge in resuming its business, even under the terms of this month’s deal.

It lost $6bn in market value last week when shares resumed trading in Hong Kong and Shenzhen, after having been suspended since mid-April when the sanctions were announced.

Market research firm Forrester estimates ZTE has lost $2bn in sales due to the month-long ban, and Jeffries analyst Edison Lee expects the firm to post a loss for the year, Forbes reported.

Forrester said it expects ZTE to take 12 months to halt the drop in sales.

The company must also replace its board of directors and senior management, including its chief executive and president, within the next 30 days.

US sales

ZTE said last week it had nominated eight new board members, while proposing to arrange a $10.7bn line of credit from two state-affiliated Chinese banks to help it through the transition period.

Longer-term issues include growing pressure on the company’s smarpthone sales in the US, which accounted for as much as 70 percent of its smartphone sales.

Last year ZTE, which sells handsets through major carriers such as AT&T, T-Mobile, Sprint and Verizon, was the US’ fourth biggest smartphone maker by sales, but the US government is pressuring those carriers to stop selling ZTE’s hardware on national security grounds.

Most of the company’s overall revenues come from telecommunications equipment sales, and the turbulence is likely to give rivals such as Nokia and Ericsson a chance to gain market share.