The decision by US President Donald Trump to ban US companies from selling hi-tech parts and software to ZTE for seven years may well deal a fatal blow to China’s second-largest manufacturer of telecommunications equipment.
Even more importantly, it will have wider repercussions on the overall development of China itself. Inevitably, it will hinder the country’s ambition to narrow the technology gap with the developed West.
Under its “Made in China 2025” programme, Beijing envisages becoming a global leader in artificial intelligence, robotics and telecommunications – including a plan to build the world’s largest 5G network.
In an unprecedented move last week, the US Commerce Department announced that ZTE — one of the largest manufacturers of smartphones and telecommunications devices in China and a primary supplier of mobile devices to US wireless carriers such as AT&T, Verizon, and T-Mobile — is banned for seven years from purchasing components from US manufacturers.
Specifically, the order lists “Commodity, Software or Technology” that is now prohibited from sale and export out of the United States to the Chinese company.
That’s a very broad category of items which not only includes semiconductors (such as the Qualcomm SoCs used in the phones) but also the licensed components of the Android OS from Google, among other things which make up the common software and hardware stack used in their products.
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Why did this happen? In March of 2017, ZTE agreed to a combined civil and criminal penalty of $1.19 billion for the illegal (under international treaties) sale to North Korea and Iran of telecommunications equipment that used American technology.
Additionally, at the time the company agreed to a seven-year suspension of export restrictions which would be imposed in the event the agreement was not met, or if it was determined they had committed additional undisclosed violations.
The US Commerce Department now maintains that during the settlement negotiations back in 2016, ZTE made additional false statements regarding violations as well as during their probationary period in 2017 regarding disciplinary actions made against senior executives responsible for the sales to North Korea and Iran.
It is now imposing that seven-year suspension.
Conceivably ZTE could buy core components from other Chinese companies, such as MediaTek. Or possibly even Samsung, which makes its own Exynos SocC semiconductors in addition to designs from Qualcomm (which would be restricted).
But would these firms be willing to sell to a pariah competing company and risk their own reputations in the process?
I don’t see Huawei’s HiSilicon division doing this. Like ZTE, Huawei is also now reportedly under criminal investigation for possible export control violations to North Korea and Iran.
Huawei now has their own issues to worry about. And as a business, banning that company from buying software and hardware components is potentially much more serious becausethey are involved with AT&T in creating the global 5G telecommunications standard.
Another serious problem for ZTE and potentially now, Huawei, is no longer having access to the licensed pieces of Android.
They certainly could run AOSP and their own App Store, much like Amazon does. Or they could run the Open Source Tizen OS.
Neither is a very attractive prospect.
I think that we can say definitively that in the United States, and possibly in a number of other global markets, ZTE’s Axon line of products is officially done.
Huawei is very clearly next on the list.
ZTE Axon M review: A unique dual screen phone optimized for multi-tasking
ZTE produced a really good phone and an excellent value in the Axon 7 and was doing some very interesting stuff with the dual-screen Axon M. It gave consumers additional choices and more ways for carriers as well as software developers to generate revenue within the Android ecosystem. And Qualcomm and other American firms did a decent business with them in the hardware and software components that went into these phones.
I hope this is not the beginning of a disturbing trend. While Huawei is more self-reliant in its supply chain and could survive a seven-year trade ban because of its huge domestic customer base, ZTE is one of several Chinese smartphone companies that buy key components from US firms, which manufacture using fabs in mainland China.
This includes but is not exclusive to Xiaomi, Oppo (sold in the US as OnePlus) and Lenovo (Motorola).
This is extremely disappointing. Yes, ZTE should have to pay the $1.19 billion fine. Perhaps fine them even more if the Commerce Department’s allegations are true. If Huawei is also eventually found guilty, it should also be fined quite heavily.
But ultimately this draconian penalty hurts American customers as well as American firms that were reselling ZTE’s products and selling the company components for use in its products.
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.
The only foreign companies that will be able to compete in the US market are those that have the ability to create their own intellectual property by having a vertically integrated supply chain.
This is a very limited number of companies, which includes Samsung. And the only Chinese company that I know of that is comparable to Samsung in terms of vertical integration — which can make its own semiconductors, displays, batteries, and memory — is Huawei.
Mind you, Huawei makes excellent phones. I have a P20 Pro that I received on loan from the company which contains some truly impressive technology. The 40MP triple camera system is outstanding, and the screen technology is also as good or even better than what Samsung has on the S9. The Kirin 970 chipset with built-in AI co-processing is state of the art.
It is probably the best Android ultra-premium hero phone on the market today.
But if the Commerce Department and the Trump Administration has its way, we will never see this phone imported into the United States and sold by a US carrier.
Given the new criminal investigation by the US Justice Department, this seems like a foregone conclusion now.
Do American consumers and American corporations want to live in a future where our options for purchasing electronics are much more limited and expensive than the choices we enjoy today? I don’t think so.
But this appears to be exactly what the current administration under President Trump wants.
The only way to stop it from happening is to take our collective message to the polls for the midterm elections on November 6, 2018 and to vote members of Congress sympathetic to this line of reasoning out of office. And to rinse and repeat during the presidential elections in 2020.
Is the US Commerce Department and Jeff Sessions’ Justice Department out of control? Are American citizens and businesses being denied choice through draconian export measures? Talk Back and Let Me Know.