ZTE Needs Help From Team China After U.S. Ban

(Bloomberg) -- Now is not the time for China to let one of its leading technology companies go to the wall.

ZTE Corp.’s announcement that it will cease major operations after a U.S. trade ban should be setting off alarms in Beijing.

Nationalization seems to be the obvious answer. I don’t mean the government, or an SOE, buying out the listed shares of ZTE — that would be too overt. Chinese telecom-equipment makers, Huawei Technologies Co. chief among them, have been trying for decades to shed any perception that they’re patsies for the nation’s surveillance apparatus. A direct purchase might reinforce that view.

Instead, tech-focused funds could do the job. China’s government has seeded a number of semiconductor funds aimed at the development of that sector. A new or existing outfit could be tasked with a ZTE bailout. 

Beijing also could invoke national service and get major companies to do their patriotic duty. Last year, Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. joined a consortium of more than a dozen investors that took a 35 percent stake in China United Network Communications Ltd., the Shanghai-listed parent of China Unicom (Hong Kong) Ltd.

In that kind of scenario, Xiaomi Corp.’s Lei Jun and Lenovo Group Ltd.’s Yang Yuanqing could expect a call from the coach of Team China to join the ZTE Bailout Squad. After its Hong Kong IPO, Xiaomi is likely to pitch for a listing of Chinese depositary receipts. Lenovo is facing its own struggles. Both might benefit from doing a favor for the government.

A bailout would allow ZTE to continue the research and development work that’s made it one of the world’s most prolific filers of patents. In theory, that intellectual property could be sold or transferred to another entity, but patents are merely a legal mechanism: Their ownership doesn’t teach the holder how to make or build the underlying technology. For that, China still needs ZTE’s 29,000-strong R&D team to remain on the job.

A non-government nationalization wouldn’t solve the immediate problem of ZTE being unable to source critical components from the U.S. But it would serve the dual purposes of providing a financial lifeline until a long-term solution is found, and signal to Washington that foreign powers won’t be allowed to impinge on China’s strategically important sectors.

To contact the author of this story: Tim Culpan at tculpan1@bloomberg.net.

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