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April, 2018

China's ZTE banned from buying U.S. components for 7 years 

Original article: Hket.com

The Trump administration has banned American companies from selling equipment and software to ZTE for seven years, alleging that the Chinese telecoms firm failed to uphold a settlement agreement it made after being found guilty of illegally shipping U.S. equipment to North Korea and Iran. Washington maintains that ZTE gave full bonuses to employees involved in the illegal action after promising it would not, and fired just four of the 35 workers who violated the sanctions. 


ZTE believes that the U.S.'s actions are unreasonable. “It is unacceptable that BIS [U.S. Commerce Department's Bureau of Industry and Security] insists on unfairly imposing the most severe penalty on ZTE even before the completion of investigation of facts," the company said in a statement quoted by Reuters. “The denial order will not only severely impact the survival and development of ZTE, but will also cause damages to all partners of ZTE including a large number of U.S. companies." 

Analysis:

ZTE is right that the export ban will adversely affect U.S. firms. Telecommunications equipment supply chains are global, and ZTE relies on American suppliers for key components as well as software. Qualcomm, Intel and Micron Technology supply chips to ZTE; Maynard, Acacia, Oclaro and Lumentum provide it with optical components; Microsoft and Oracle are two important software suppliers for the Chinese telecoms firm.  


Among U.S. companies, the ban will hit Qualcomm hardest, analysts say. The San Diego-based chipmaker provides about half of the chips in the 45 million smartphones ZTE ships globally, according to Counterpoint Research data cited by Reuters in an April report. If Qualcomm earns $25 per chipset it sells to ZTE, it may lose $500 million in annual revenue, Counterpoint analyst Nick Shah told Reuters. 


U.S. consumers could also be hurt by the ban, says Jason Perlow, a senior technology editor for ZDNet. "If we start wholesale denying Chinese companies the ability to purchase components from US companies, then it is going to result in significantly higher prices in consumer electronics and it will create large artificial monopolies," he wrote in an April post. 


The damage to ZTE will be far worse though. To begin, the company has no way in the short run to replace the components it can no longer source from American suppliers. That augurs ill prospects for its smartphone business, especially the important U.S. market, notes Eddie Han, an analyst at the Taipei-based Market Intelligence & Consulting Institute (MIC). The U.S. accounts for about 30% of ZTE's annual handset sales, Han says. 


Forebodingly, the export ban covers the licensing of Google's Android operating system. The mobile software market is a virtual duopoly: The one viable alternative to Android is iOS, which only runs on Apple mobile devices. Without access to a licensed version of Android, ZTE has few good options for mobile software. Indeed, the Windows Phone - which was supposed to grab market share from Apple and Google - bombed, taking down Nokia's whole smartphone business with it. Samsung's Tizen OS has been nearly as unpopular, except that the South Korean electronics giant hasn't given up yet. Regardless, Tizen's scant app selection and security vulnerabilities make it unattractive to ZTE. 


Worse still, it's not just smartphones ZTE has to worry about. The company's products cover a wide range of telecoms infrastructure. According to Taipei-based research firm TrendForce, ZTE has deployed roughly 110 networks in 60 countries. It has signed 5G (the next generation of wireless standards) strategic cooperation agreements with Wind Tre in Italy, Telenet in Belgium, Telefonica in Spain and KT in Korea. Further, it is working with Intel to build the world's first 5G wireless access product based on a software-defined architecture and network. 


"These cooperation opportunities will all be reviewed if the ban is enacted," says Kelly Hsieh, a TrendForce analyst. 


Hsieh further points out that the ban could stymie ZTE's ambitions in the field of artificial intelligence. The Chinese firm has been using servers and storage systems equipped with Intel Skylake processors. "Once Intel processors are unavailable due to the ban, ZTE’s AI deployment will be seriously influenced," she says. 


Given the importance of American suppliers to ZTE's business, is the Trump administration's punishment of the company excessive? Ross Feingold, a Taipei-based political risk consultant and close watcher of U.S. foreign policy, sees national-security calculations at play. "One of the major concerns with communications equipment purchased from China is that it is built with an open backdoor that can be exploited either by Chinese companies to commit corporate espionage" or by Beijing for political and military objectives, he says. 


Feingold says that past China-based hacking efforts have hardened resolve in Washington to push back against potential security risks. "The Trump administration’s decision will have broad support in Congress and among security professionals both inside and outside government," he says. 

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