The US Government’s ban on Chinese telecoms giant ZTE Corporation using US-made components will have huge ramifications — for ZTE, its US partners and other international tech firms.
Could this be the death of ZTE? Or does it bring game-changing opportunities for non-US companies to move in to fill the technology gaps? And could other Chinese companies come under similar pressures, making this a broader issue than one facing ZTE?
The situation is complex and the details aren’t yet all clear. But any companies with relevant technology need to be urgently asking the right questions, analysing what this means for their business and taking action.
What has the US done?
In March 2017, ZTE agreed to a settlement with the US and a $1.2 billion penalty after, in the US Department of Commerce’s words, “illegally shipping telecommunications equipment to Iran and North Korea, making false statements, obstructing justice [and] misleading the US Government”.
The US has now discovered ZTE hasn’t stuck to the terms of this settlement, so has enforced a further punitive measure: a seven-year export ban on US firms supplying to ZTE.
At the same time, the US has decided to block some Chinese firms from selling products to US telecoms companies on security grounds. It’s widely believed ZTE (and Huawei) will be on the list. This action will hit affected Chinese tech firms hard – especially ZTE, as the US is the largest market for its smartphones.
The ban on working with US suppliers looks of even greater significance to ZTE as 20-30% of the components it uses are reportedly from US firms. Especially important are chips from Qualcomm and Intel — and these are core to its fifth generation (5G) high speed mobile development plans.
China’s own chip industry
The US ban puts a spotlight on how reliant many Chinese companies are on foreign technologies.
Haier, for example, exports millions of TVs and fridges, but most use foreign chips. If Haier, Gree or any other Chinese consumer electronics companies were cut off from foreign technologies as ZTE has been, they would have no immediate viable alternatives.
So, one big consequence will surely be an increased focus on China’s own semiconductor industry to build greater self-reliance.
Even before the US ban was announced, Tsinghua Unigroup — which China’s Government would like to become the ‘Chinese Qualcomm’ — announced a $100 billion development investment.
News of the ban has since sparked patriotic fervour in China and I expect we’ll now see even more government focus on its semiconductor sector. No doubt, we’ll also see strong government support for domestic CPU companies such as C-Sky, who were recently acquired by Alibaba.
However — and this is a big caveat — Chinese self-reliance would be a very long-term move. The Chinese chip industry is still far behind the US. And, as most Chinese companies designing their own chips are likely to be doing so using ARM architecture, Cadence or Synopsys tools, Japanese or Korean memory and so on, this doesn’t mean opportunities for overseas firms will be over.
Indeed, the likes of ARM and Intel have done so well because they have mature ecosystems around them, which take a long time to build. ZTE has its own semiconductor subsidiary, but its success to-date has been limited. Domestic firms may struggle to create a competing ecosystem globally, but an open source architecture such as RISC-V may provide a useful platform for them. I expect to see much more attention on this, not just from Chinese companies but also the Chinese government.
What will ZTE do?
So, as home-grown chips aren’t a viable option in the near term, what will ZTE do now?
Assuming the export ban applies to US firms only, big opportunities suddenly open up for non-US companies to forge links with ZTE. And I’d expect ZTE to be highly receptive to approaches as it’s very survival is at stake.
Effectively, any company which competes with an existing US supplier to ZTE would have a potential ‘in’ by playing the “not US” card. And this effect could translate to other companies in China that don’t want to be reliant on US technology, for fear they could be hit with similar bans in the future.
Good news for MediaTek?
Amongst the non-US alternatives to Qualcomm for semiconductors, the most obvious is Taiwan’s MediaTek.
The US ban might well spell happy days for MediaTek — if the company can gear up to meet ZTE’s needs quickly enough. Could this, in turn, bring opportunities for other non-US firms to license technologies to MediaTek to help it support ZTE?
(There could also potentially be a role for China’s Tsinghua Unigroup, through its Spreadtrum semiconductor subsidiary. But, as this only makes chips for low-end handsets, it would hardly be able to replace Qualcomm for phones for overseas markets in the near-term.)
Only time will tell which route ZTE will choose, but it needs to do something decisive. With an immature Chinese chip industry, finding alternative, non-US, overseas partners seems a must.
What about Google Services?
Of course, this isn’t only about chips. All ZTE’s smartphones are currently based on the Android operating system. Even though Android is a Google invention, ZTE may be able to continue to use it because it’s open source and free. But Google Services are licensed so would definitely be subject to the US export ban.
How will ZTE address that? No Android phone outside China will sell without Google Services.
ZTE could turn to Alibaba’s YunOS mobile operating system instead, but would then suffer the same ecosystem issues as Microsoft’s mobile operating system. It could continue to sell in China, but it’s not even in the top five smartphone vendors domestically, competing with Huawei, Oppo, Vivo and Xiaomi.
Could this spell the end for ZTE’s handsets? Or does it put even more importance on ZTE and its partners finding alternative components which aren’t tied in any way to US technologies, and hence to even greater opportunities for non-US firms?
ZTE’s telco equipment
What about the impact of the US ban on ZTE’s telco equipment business?
Here, it looks even harder to replace Qualcomm and Intel as core component providers — although there are some potential Chinese suppliers of powerful processors such as HXT (which, as a Qualcomm joint venture, may be ruled out) and Phytium.
ZTE could develop alternative processors itself, and its Microelectronics subsidiary does have a base station modem team. But it would take a long time to get to the advanced development levels needed for 5G base stations.
It looks clear that ZTE will have to find non-US partners, at least in the short to medium term. And while the company has been leading in 5G development, unless it can do this swiftly, its 5G strategy could be out the window — putting a big question mark over its future in this market.
So, the situation is complex and many of the practical details will only emerge in the days and weeks ahead.
But what’s clear to me is that, as doors close on ZTE’s US suppliers, others will surely open to non-US companies which could fill the gaps. And, as the US and China continue to lock horns on trade, this could well become a broader issue than one facing ZTE alone.
Despite the unanswered questions, potential new suitors can’t afford to sit back and watch the situation unfold. They need to be analysing the situation and making targeted approaches if they’re to be in with a shot at what could be some game-changing business opportunities.