Guo Liqin & Li Na
(Yicai Global) April 18 — The US Department of Commerce’s ban on the country’s companies from selling chip products to ZTE Corp., the world’s fourth-largest telecommunications equipment supplier, not only damages the company itself but also US suppliers, several industry insiders told Yicai Global.
US authorities announced plans yesterday to block the Shenzhen-based firm from buying sensitive products such as chips from domestic companies for seven years following an alleged false statement it made by to officials.
The firm will take a significant hit should the punishment be implemented. “If the ban is enforced, ZTE is about to go bust,” said one telecoms expert. “The ban has really got ZTE by the throat,” added Fang Jing, an electronics analyst at China Merchants Bank.
At present, virtually all base station chips used in China are imported from foreign countries, which is why the supply ban could have devastating effects on the Chinese firm.
Chips used in base stations are far more sophisticated and have much higher reliability requirements than those installed in consumer electronics, he pointed out, adding that it takes at least two years to trial a new integrated circuit for use in base stations before it can be sold on the wholesale market.
“Base station chips have the highest [technical] barriers, meaning that it will take China a relatively long time to replace foreign imports with domestic production,” Fang added.
It still remains to be seen how the ban will impact the Chinese telecommunication equipment industry, and it ultimately depends on how the Commerce Department’s plan is carried out, an anonymous source at a telecoms supply chain company told Yicai Global.
China’s vast market has acted as a catalyst for the domestic telecoms sector, but it remains weak in basic physical-layer technology, such as essential products like chips and terminal filters, Wang noted.
The implications of the ban will spill over into ZTE’s Chinese and overseas supply chains, he added. “If ZTE cannot sustain its operations, its suppliers will be badly affected — that’s for sure. ZTE can’t sell its equipment without the core components. It will also affect 5G technology commercialization in the long run,” Wang said.
Over the longer term, ZTE’s foreign rivals, Nokia Networks and Telefonaktiebolaget LM Ericsson, are not going to benefit from the ban, he said, adding that there is still plenty of time for mediation on the ban.
The pressure could also prompt Chinese companies to ramp up innovation, a veteran of China-US negotiations told Yicai Global. Chinese enterprises are very resourceful, and if they cannot obtain the key components from other sources, they will try to solve the problem through technological innovation, but it might be a lengthy process, he said.
Given the large number of entrepreneurs in China, someone will seize the opportunity and fill the gap, by doubling down on research and development efforts, another market insider suggested.
ZTE Crackdown to Hurt US Firms
If the US government enforces the ban to the letter, it will have not only an immense impact on ZTE, but it will also backfire on US companies as well, several semiconductor market insiders told our reporter.
The world’s largest mobile chip maker Qualcomm sells about six to 10 percent of its products to ZTE, so it will also take a hit if the supply ban really comes into force, one source predicted. “ZTE has many software and chip suppliers in the US, and the decision will harm their interests as well.”
The market has become pretty edgy lately over the tit-for-tat standoff related to trade between the world’s two largest economies, pointed out Sun Yuanzhao, executive dean of Asia Pacific Legal Institute and a visiting professor at Peking University.
Share prices of ZTE’s major US-based suppliers slumped on the news. Among the biggest fallers, Qualcomm Inc. fell by 1.72 percent yesterday, and Micron Technology Inc., Acacia Communications Inc. (which ships 30 percent of its products to ZTE), Oclaro Inc. and Lumentum Holdings Inc. by 1.11 percent, 35.97 percent, 15.18 percent and 9.06 percent, respectively.
US Blocks Trade With Chinese Tech Firms
US firms have made up a 48 percent market share of the global semiconductor sector for many years. Intel Inc.’s annual spending on semiconductor R&D is four times higher than of total R&D expenditure among all Chinese chip makers combined.
Of the USD100 billion worth of semiconductor products sold in China every year, imports from US firms account for more than USD50 billion, and domestic products account for less than 10 percent of total sales, according to data from the US Semiconductor Industry Association.
The US government has been relentless in its clampdown on Chinese chip firms and domestic firms have a very strong ‘aversion’ to Chinese players, a technician from a US semiconductor company told Yicai Global. Some implement complicated internal review processes when key technical staff members visit China.
The escalating trade war has further compounded the relationship between US tech firms and their Chinese counterparts.
Editor: William Clegg