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20 April 2018

US bars sales to ZTE – Qualcomm’s loss could be MediaTek’s gain

The US’s trade war with China intensified this week as the government imposed a seven-year ban on sales of components to the network and handset vendor. Meanwhile, the UK warned that ZTE represented a national security risk.

The US Commerce Department said ZTE had violated the terms of a sanctions settlement announced last year, which saw the Chinese firm paying fines for shipping telecoms equipment illegally to Iran and North Korea. However, the US organization said ZTE had subsequently paid full bonuses to the employees responsible for this illegal conduct, and that it lied about the practices to US authorities.

This comes against a backdrop of rising hostility from President Trump towards China. He has threatened tariffs on many types of Chinese imports including steel and has accused the country of devaluing its currency deliberately.

China’s Ministry of Commerce responded, saying it would take necessary measures to protect the interests of Chinese businesses. It said ZTE works with hundreds of US companies and creates jobs in the country.

This is not just about barring US organizations from buying equipment. Both Huawei and ZTE are effectively excluded from selling infrastructure to US telcos or government departments, and in the past couple of months, AT&T and Verizon have also reportedly cancelled deals to sell Huawei smartphones.

But the new attack on ZTE goes further because it prevents the Chinese company from buying chips and other components from US suppliers such as Qualcomm or Intel. That will be a challenge for ZTE’s handset division, which has already slipped behind Huawei in the global rankings – while Huawei has its own modem and processor technology courtesy of its HiSilicon unit, ZTE does not.

Optical components vendor Acacia Communications was one such US firm which saw its share price nosedive on news that it would be barred from selling to a major customer for the seven-year period of the ban. “All hell breaks loose,” wrote Edison Lee and Timothy Chau, analysts at Jefferies, after the export ban was announced, while ZTE shares were suspended in Hong Kong.

One ironic outcome may be to strengthen some of the very Chinese electronics firms Trump is so worried about. If ZTE cannot buy from Qualcomm and Intel, it will be driven to turn to a local supplier like MediaTek or Spreadtrum, boosting a homegrown mobile chip industry which has, so far, failed to catch up with Qualcomm in sales or technology.

Across the pond, the UK’s National Cyber Security Centre (NCSC) warned telcos and the regulator, Ofcom, that “the national security risks arising from the use of ZTE equipment or services within the context of the existing UK telecommunications infrastructure cannot be mitigated”.

ZTE has an R&D partnership with incumbent telco BT but BT said this did not necessarily mean it would deploy ZTE hardware in commercial systems.

“BT takes the security of the UK’s critical national infrastructure very seriously and has a robust testing regime in place to ensure that the equipment from all suppliers used in our network remains secure,” a spokesperson told the Financial Times.

Huawei has not attracted the same warnings in the UK – indeed, it remains a key supplier to several UK telecoms players, and a significant backer of the country’s 5G Innovation Centre. However, given the climate of suspicion gathering in the west, it is hardly surprising that the company has pledged increased commitment to ASEAN (Association of Southeast Asian Nations), the group of 10 countries which collectively forms the world’s sixth largest economy, and China’s third largest trading partner.

ASEAN has set out plans to support increased cross-regional connectivity, and eventually a single digital economy and telecoms market have been mooted. The amount of cross-border bandwidth that is used grew 45-fold between 2005 to 2016, and is projected to increase by an additional nine times by 2021.

“Technological innovation and an open ecosystem are critical to the success of digital initiatives,” said Daniel Zhou, Huawei’s president for the enterprise business group in South Pacific.  “As ASEAN sets the foundation for a unified digital economy, close collaboration between key industry players are key to ensure a solid foundation for a thriving digital economy.”