ZTE vs Washington: hostility is bad for business

As China’s ZTE struggles to survive crippling US sanctions, what does the whole debacle mean for the future of China’s reliance on American tech?
10 May 2018

Trump imposed several trade tariffs on China recently. Source: Reuters

Chinese mobile phone maker, ZTE, survives to fight another day, but its business continues to be hampered by restrictions imposed last month by the US administration.

As punishment for breaking US sanctions against Iran and North Korea, the Trump administration slapped a seven-year ban on American suppliers selling components, chips, and software to the firm.

The move, according to reports, has forced the ZTE to halt sales of its smartphones in China. The firm relies heavily on chips from US-based Qualcomm that are inserted into almost half of its phones.

In a bid to get the ban removed, the company has submitted an application to the U.S. Commerce Department’s Bureau of Industry and Security (BIS) requesting it be suspended.

However, it’s not certain how long ZTE, which accounted for 10 percent of the US smartphone market last year, can hang on without its supply of chips and other technology from US manufacturers.

The future of the company and its roughly 74,000 employees hang in the balance if a resolution is not found soon.

Although US officials have said the action taken against ZTE is not related to trade policy, some believe it is reflective of the wider treatment of Chinese technology firms by America.

Mobile phone maker Huawei, too, has been stifled in the US, after a deal with AT&T collapsed allegedly due to political pressure.

Furthermore, the two countries have been locked in a trade spat, with US slapping around US$50 million worth of trade tariffs on China, following a seven-month long investigation into American intellectual property theft by the one-party state.

These recent events have made it clear that for Chinese companies wanting to operate in America or use US made technology, things can get volatile, and quick. It also highlights an over-reliance from the Chinese on US technology.

According to Vice-President and Principal Analyst at Atherton Research, Jean Baptiste, in Forbes, many Chinese companies, including BATX, Didi, China Telecom, Petro, all rely on US technology in some way.

Will these companies, supported by China’s super-state, ramp up R&D to reduce their reliance on technology from an increasingly temperamental source?

Yes, says Baptiste: “Its current pace, with extensive government subsidies [form the “Made in China 2025” initiative], China could reach its objective of becoming self-sufficient in core technologies like processors, memories, storage, networking or wireless in the next 7-years, and even perhaps in just 5 years.”

He adds that it would ‘likely take 3 to 6 months for advanced Chinese tech companies to duplicate U.S. core hardware components and software, which most are already available in open source anyway.’ Though it would be illegal to sell outside China.

Fractured US-China relations are simply bad news for businesses in both the West and the East. According to Neil Shah, research director at Counterpoint Research, speaking to Reuters said Qualcomm alone stands to lose half a billion dollars in revenue from the ZTE ban.

Furthermore, as the situation heats up Qualcomm is a clear target for retaliation, especially as the company is seeking the regulator’s approval in China for a US$44 billion takeover of NXP Semiconductors.

China is one of the world’s largest market, and one US firms won’t want to be disconnected from; in fact, Apple and other tech firms have gone out their way to be accommodating to the country’s stringent censorship laws.

Although it might be too late for ZTE, if this hostile trend continues, there will be more casualties in between, but eventually, China will look closer to home to fulfill its technology needs, and the US will miss out.