Inside this feeble brain resides a significant amount of skepticism. Perhaps from age or maybe the result of life’s encounters – the result is there is a difficulty in accepting anything at face value. Especially when it’s a moving target – otherwise known as a changing story line. Another case in point is the curious case of ZTE (ZTCOY) which exploded into our consciousness in major form this past week due – in no small part – to tweets from the president.
To set the stage, ZTE agreed to enter a guilty plea and pay a fine to settle a 2017 case that they violated export sanctions by shipping products with US components to Iran. On April 16, 2018 the Commerce Department enacted a ban on American companies conducting business with ZTE for seven years as a result of ZTE allegedly breaching said settlement. In addition, the US military had previously raised concerns of potential espionage by ZTE’s equipment on or near military bases.
This is where a typical sanctions violation story would end. But what can be considered ‘typical’ in this administration? ZTE confirmed the closure of operations on May 9th. Four days later, Mr. Trump was trying to ride to the rescue in a manner befitting his prior triumphs. Making China Great Again?
Now this series of events had me wondering … what was this fascination with ZTE? With about a third of the components sourced from US companies, was it US jobs? Exports? CapEx? Based on the suppliers I found
NOTABLE US ZTE SUPPLIERS
|Acacia Communications||ACIA||92 US Employees
|Oclaro Inc||OCLR||1876 US Employees – pend merger (LITE)
|Finisar Corporation||FNSR||primary mfg Malaysia, China (US-TX,CA,PA)
|NeoPhotonics Corp||NPTN||mfg Japan, China (US-CA)
|II-VI, Inc||IIVI||multiple US plants (plus China, VietNam, Philippines, Singapore, Germany, Switz.)
|Infinera Corp.||INFN||1142 US Employees (CA,PA)
|Applied Optoelectronics||AAOI||mfg TX, GA, China, Taiwan
|Lumentum Holdings Inc||LITE||primary mfg Thailand|
One item I noticed was the companies building lasers generally have those facilities stateside where other distance manual assembly work is outsourced overseas. Ignoring Qualcomm, there appears to be limited current exposure to existing US jobs – some of which would be reallocated to other suppliers in the event the ban continues. Also, Oclaro did file with the SEC of a possible material impact to earnings. Others to follow?
This question was also raised by The Register, particularly when the inevitable backtracking by Trump began. To highlight – minimal US job impact, major China job impact, a guilty plea entered (wrongdoing acknowledged) and now the narrative is being framed as a ‘trade issue’. The genesis of the ‘fake news’ for this topic has at least been determined.
But the real question remained, “Why the potential easing of ZTE sanctions”? The answer may reside in reporting by the Jakarta Post. Their report, subsequently picked up by some US news outlets, indicates a $500 million loan was recently provided to the Trump organization. Cautionary notes: 1) this timing could be coincidental and 2) the Trump organization is a separate and distinct entity from Trump the president. And how is quid pro quo currently defined?
You can’t be blamed if you missed the Jakarta report as its release coincided with the media show that Rudy Giuliani has embarked on in an attempt to distance the president from the issues with his attorney, Michael Cohen. Which is an interesting story on its own. If you have nerves of steel, you too could be front and center to the soap opera by adding First Republic Bank (FRC) to your portfolio!
Update 22 May 2018: the WSJ reports an agreement has been reached between the US and China settling the dispute allowing US suppliers to resume sales. Ed. note – obviously the Trump team was successful in reframing the issue as a trade spat rather than a sanction violation. Early reports indicate no significant additional penalties other than a promise to abide by the agreement.