ZTE becomes flashpoint in China-U.S. trade war

10/05/2018

ZTE, China’s large smartphone and telecom gear manufacturer, has halted its main operations a month after the U.S. government banned American companies from selling it crucial components.

 

The news comes as tension between the world’s two largest economies over trade and technology continues to ramp up. Some have called ZTE’s uncertain position a casualty of a new cold war between the two nations.

“Major operating activities of the company have ceased” as a result of the U.S. Commerce Department “denial order” issued last month, ZTE said in a statement released Wednesday. ZTE employs about 75,000 people, and its products are sold around the world.

The telecom network equipment manufacturer said it “maintains sufficient cash and strictly adheres to its commercial obligations subject to compliance with laws and regulations,” in the statement issued to the Hong Kong stock exchange.

The fourth largest provider of smartphones in the U.S., ZTE said it is communicating with U.S. officials to try to mitigate or reverse the denial order “and forge a positive outcome in the development of the matters.”

Last month, the Commerce Department barred U.S. firms from exporting parts to the Chinese telecom equipment maker for seven years, saying that ZTE breached a deal struck last year in which it agreed to pay a $1.2 billion fine for violating sanctions on Iran and North Korea.

Without the microchips from Intel, Qualcomm and Broadcom, and optical components from Lumentum, Oclaro, Maynard and Acacia, ZTE simply couldn’t produce its smartphones. The ban also potentially included Android, Google’s operating system, that power ZTE’s phones, Fortune reported.

 

ZTE said it is communicating with U.S. officials to try to mitigate or reverse the denial order “and forge a positive outcome in the development of the matters.”

 

The move has hurt the U.S. companies who profited off the exchange, with smaller companies suffering most, CNN reported.

Acacia, based in Massachusetts, sold about $116 million worth of chips and modules to ZTE last year, accounting for roughly 30% of its annual revenue, CNN said.

The ban was brought up last week during trade talks between Washington D.C. and Beijing, but no resolution was reached.

China’s intentions to dominate high-tech industries has fueled the U.S. government’s recent tough trade stance. ZTE had plans to become one of the first vendors in the U.S. to offer a smartphone connected to the next-generation 5G wireless network.

But many experts believe that this move will only cause China to move more quickly to become an independent technological force – exactly what the U.S. fears.

“China will devote even more effort and resources to the quest for core technology,” Louis Kuijs, head of Asia Economics at research firm Oxford Economics, wrote in a note to clients.

“The doubling down will make China an even fiercer competitor sooner,” the note said.

Now the international business and tech community is focused on the fate of Huawei, China’s other major player in Android smartphones and telecom equipment. Huawei is also reportedly under investigation in the U.S. for violating sanctions against Iran.

The Defense Department has already ordered U.S. military bases to stop selling Huawei and ZTE phones, arguing that they could be national security risk because their connection to the Chinese government.  Government officials are worried that China could create backdoors on the devices to spy on users, and potentially track soldiers’ movements.

 

 

“China will devote even more effort and resources to the quest for core technology,” Louis Kuijs, head of Asia Economics at research firm Oxford Economics, wrote in a recent note to clients.

 

 

Huawei responded to the news in a statement to The Verge, saying their products “are sold in 170 countries around the world and meet the highest standards of security, privacy and engineering in all the countries in which we operate globally, including U.S.”

It added that they “remain loyal to openness and transparency in everything we do and we want to be clear about the fact that no government has ever asked us to compromise the security or integrity of any of our networks or devices.”

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