ZTE got busted; don't mess with Uncle Sam!

29 Mar 2016 Stephane Teral

How foolish can a company be to set up shell companies to circumvent US export control? As this is all about growing and expanding the business, this rule breaking belongs to the same register as the Volkswagen emission cheating case. During my few trips in Africa and the Middle East, and particularly around the so-called Arab Spring of 2011, I was stunned to witness Western companies fleeing unstable areas en masse while the Chinese companies were taking this as an opportunity to reinforce their existing positions or simply move in to conduct and expand business. Iran is a special case: It’s not a war zone but is under tight Islamic control and severe embargo along with Cuba, Sudan, Syria and North Korea.

This is very bad timing for ZTE because the US is expected to lift sanctions on Iran this year, and major companies including Cisco and HP have already begun actively exploring market entry. I would not be surprised to see telecom giants Ericsson and Nokia to follow as well—they’re probably exploring too, but I could not get any quick confirmation.

Now what? Expect severe consequences for ZTE. First, unlike its archenemy Huawei, which remains a private company, ZTE is listed on the Hong Kong stock exchange with a market value of $1.4 billion, and its shares have been suspended from trading after Reuters reported the news on March 7, 2016.

Second, ZTE is the only Chinese smartphone brand with substantial handset sales in the US market. Although many consumers may have not paid attention to this news, the top 4 US mobile operators offering ZTE smartphones—AT&T, Sprint, T-Mobile US and Verizon—may think twice before continuing to support the brand, which in turn has the potential to negatively affect ZTE’s business.

Third, the restrictions essentially bar US companies from supplying ZTE with various components and subsystems, including computers, software, communications platforms and telecommunications equipment. The consequence is enormous and directly affects ZTE’s global business because Broadcom, Intel and Qualcomm are key ZTE suppliers. Now ZTE needs to consider new sources for key smartphone chipsets and baseband units for radio access networks. In the fall of 2015, the Chinese government made the decision to fund and back up homegrown chipset vendors to develop its secure platform and chipset and cut the dependency on US companies. The question is, how far behind Qualcomm are they?

Finally, this is about to cause significant supply issues for ZTE’s whole business, and those restrictions are not going to improve the current tensions between China and the US. Despite the recent US government decision on March 22, 2016, to lift sanctions against ZTE for now, expect a continued diminishing presence of US companies in China.

The bottom line is very clear: Don’t mess with Uncle Sam—you’ll lose every time!

Stephane Teral is a Sr. research director, mobile infrastructure & carrier economics for IHS
Posted on 28 March 2016


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