Tuesday 11 December 2018

China's rising tech star 'half-dead' after US component ban

ZTE said it was aware of the sanctions and evaluating their impact
ZTE said it was aware of the sanctions and evaluating their impact

Bloomberg

ZTE may have just gone from being a serious contender in the high-stakes world of next-generation networking to, quite possibly, a mobile industry washout.

China's No 2 telecommunications gear-maker was preparing to lead the country's charge into 5G along with local rival Huawei. Instead, ZTE fell foul of Washington for the second time in a year, inciting a moratorium on purchases from US suppliers and dealing a devastating blow to its global ambitions.

The US government slapped a seven-year ban on its purchase of components from US companies for ignoring promises made in 2017 to resolve a sanctions dispute - then lying about it.

The moratorium couldn't have happened at a worse time as 5G arrives. It threatens a swathe of components needed to hawk gear to clients like China Mobile and Europe's Telefonica. The Chinese firm relies on suppliers from chipmakers Qualcomm and Micron Technology to optical developers Lumentum Holdings and Acacia Communications. The ban may also stop the company from using Google's Android operating system, the heart of its smartphones.

"Even if this doesn't kill them, ZTE will be half-dead," said Qian Kai, an analyst with brokerage CICC.

ZTE's best hope may be for intervention from Beijing - but that is a long shot given rising tensions between the US and China. President Donald Trump has threatened tariffs on $150bn of Chinese imports, while Beijing has vowed to retaliate.

Following the ZTE ban, China's Ministry of Commerce said it would take necessary measures to protect the interests of its companies. ZTE said it was aware of the sanctions and evaluating their impact. Its shares were suspended from trading in Hong Kong and Shenzhen.

US-made components account for only 10 to 15pc of ZTE's production costs, estimates Nomura analyst Joel Ying. "But these are essential parts that aren't easily replaced," he said. ZTE's smartphones, for instance, rely on Qualcomm's chips. "At least for the next five to 10 years, ZTE can't exist without American companies."

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