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May, 2018

Chinese media: U.S. sanctioned ZTE to get ahead in 5G race 

Original article: 168.com

Washington's ban on U.S. firms selling equipment and software to Chinese smartphone maker ZTE is intended to slow China's progress in 5G, Chinese media reports say. That decision will have ramifications for the entire global telecoms market and the development of 5G standards, Chinese observers say. The Trump administration maintains it is punishing ZTE for violating U.S. sanctions on Iran and North Korea. 

Analysis:

When the Trump administration announced it would cut ZTE off from its U.S. suppliers a few weeks ago, many of us thought that the company would take a hit, but ultimately emerge intact. ZTE's recent announcement that it is "shutting down major operations" - ceasing production of telecom equipment and smartphones - has forced us to reconsider our assumptions. 


ZTE needs Qualcomm chips and Google's Android operating system to produce smartphones. There aren't viable substitutes for either the hardware or software right now, especially Android. Without a repeal of the ban, ZTE could become insolvent. 


Chinese media reports depict ZTE as the victim of Washington's attempt to stay ahead of China in 5G wireless technology. According to the 168 website report, "In the 4G era, Chinese firms began to challenge the monopoly that U.S. and European companies have enjoyed over telecoms standards. ZTE is already regarded as an important builder and promoter of 5G technology." The report alleges that "the US is naturally unable to bear" the decline of its dominance over telecoms standards. Therefore, Washington's decision to sanction ZTE "is not surprising." 


It is unlikely the Trump administration is naive enough to think crippling ZTE will curb China's 5G ambitions. A May report on the Sdxcentral website points out that China has been "particularly aggressive" with its 5G plans and may be the first country to have 5G mass deployed commercially. Indeed, China Mobile is already conducting large-scale 5G trials in five Chinese cities. ZTE is just one of the vendors supplying equipment to the state-run Chinese telecoms giant. 


Meanwhile, the Trump administration levied sanctions on ZTE because the company illegally sold U.S. technology to the rogue states of Iran and North Korea for years, lied about it to American officials, and rewarded the executives responsible for the scheme with full bonuses. 


The April 15 letter from the U.S. Commerce Department activating the ban notes that ZTE hatched an elaborate scheme to evade U.S. export controls in order to do business with Iran. "As a result of the conspiracy, ZTE was able to obtain hundreds of millions of dollars in contracts with and sales from Iranian entities to ship routers, microprocessors and servers controlled under the Regulations for national security, encryption, regional security, and/or anti-terrorism reasons to Iran," the letter says. 


ZTE underestimated the degree to which the U.S. considers Iran a security threat. Tehran has been a nemesis of Washington ever since the portentous fall of the country's last Shah, Mohammad Reza Pahlavi, in December 1979. In the 1980s, the Ronald Reagan administration backed Saddam Hussein's Iraq as it went to war with Iran. In 2002, President George W. Bush named Iran as part of a tripartite "Axis of Evil" also including Iraq and North Korea. Further, for years the U.S. has been trying to halt Tehran's nuclear-weapons program. 


Chinese media reports are also focusing on the global effects of the ZTE ban. "With the deepening of economic globalization, links between communications companies worldwide have become very close," Gao Xudong, deputy director of Tsinghua University's Center for Technological Innovation and Research, was quoted as saying in a May report on the Imobile news site. "The US sanctions against ZTE will not only hurt ZTE and China's communications industry. They will also cause losses to the U.S. and global communications industry."


That's probably true. Shares of U.S. optical components suppliers fell in the wake of the announcement of the ZTE ban. If the ban isn't lifted, telecoms operators worldwide will have to jettison ZTE equipment and replace it with something else. 


A recent tweet by President Trump suggests that Washington may be willing to lift the ban, but The Donald did not say what Beijing would offer Washington in return. Some observers believe Trump wants more help from Beijing with North Korea ahead of a historic summit in June between the US President and Kim Jong-un, the Kim dynasty's third-generation supreme leader. 


Others say that Trump wants China to withdraw tariffs on U.S. agricultural exports, fearing the fallout from plunging soybean sales among his heartland constituencies in the fall mid-term elections. We doubt that: Democrats may prevail in the House of Representatives, but to control Congress, they also need to win the Senate. In our April 11 newsletter, we explained how six of the ten states most likely to be affected by soybean tariffs are reliably Republican: Nebraska, Indiana, Missouri, North Dakota, South Dakota and Arkansas. Democrats hold just 3 of those 12 Senate seats (1 each in Indiana, Missouri and North Dakota). To take control of the chamber, Democrats must retain all 26 of their seats in play and win two GOP seats. It's "one of the worst Senate landscapes in history" for the opposition party, New York Magazine said in a May report. 


More likely is that Trump worries the ban will harm U.S. consumers, who currently cannot update Android software on their ZTE phones, and may cost thousands of American workers their jobs. "ZTE supports thousands of high-tech jobs around the United States," a source familiar with the matter told Tech Radar in a May 15 report. 


Still, lifting the sanctions on ZTE won't change the fundamentals of the souring Sino-U.S. commercial relationship. If anything, Beijing will deploy greater state resources in support of technology initiatives. A technology lawyer quoted by The Financial Times in a May 10 report said that the U.S. sanctions on ZTE would accelerate the technology "arms race" between Washington and Beijing.  “ZTE’s major recourse will be through diplomatic channels, not legal ones," the lawyer said. 

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