US tough penalty hurts ZTE and many others

Max Wang, Taipei; Willis Ke, DIGITIMES Asia 0

Seen as an extension to the ongoing bilateral trade spats, the US Department of Commerce has imposed a ban on ZTE for sanctions violations, prohibiting American firms from selling components to the China telecom equipment maker for seven years. The move has not only dealt a heavy blow to ZTE, but may also threaten the development of industry value chains.

It remains uncertain whether ZTE may eventually be given some kind of repreive by the US, but the development has sounded a grave warnign for everyone in the IT industry. Taiwan makers must not feel upbeat about possible order shifts resulting from the ZTE ban, and must instead speed up their R&D and improve their technological prowess to avert possible risks associated with the escalating US-China trade tensions.

If the ban stays as it is for the next seven years, ZTE's future looks grim, facing a possibility that the company might not last that long.

ZTE operations

In 2017, ZTE posted revenues of CNY108.8 billion (US$17.27 billion), surging 7.5% on year. Revenues from the domestic market accounted for CNY61.9 billion, up 5.8% on year, and those from overseas markets showed a higher annual growth of 9.8% to reach CNY46.9 billion.

Among the firm's three business sectors, equipment supply to telecom operators commanded the largest revenue portion at CNY63.8 billion, followed by CNY35.2 billion from sales of consumer products mainly including smartphones, home routers and wireless routers, and CNY9.83 billion from B2B sales of communication products and technologies.

At the moment, ZTE is China's second largest telecom equipment supplier, next to Huawei. With 5G communication networks to start official run in 2020, ZTE has invested heavily in R&D projects associated with 5G frequency spectrums, core networks, base stations and chipset solutions, and has also completed 5G network equipment tests for more than 20 telecom operators in China and other countries.

In the consumer business sector, ZTE has sustained steady growth in smartphone sales in the US and China, with its total smartphone shipments estimated at 46 million units for 2017. The growing demand for 4K HRD TVsets has also helped ZTE register good shipment numbers for its fixed-network broadband products.

In the B2B sales sector, ZTE has zeroed in on transportation, energy, finance, enterprises and education segments for priority promotion of its communication products and technologies, which mainly include virtualized datacenters, distributed databases and big data analysis.

Impacts facing ZTE

As ZTE has maintained close partnerships with many US firms in the fields of telecom equipment, fixed networks, smartphone chips and radio frequency devices, the company will be unable to deliver shipments due to the ensuing lack of key components.

Some industry observers estimate that ZTE's chip inventory can last only for one month, and therefore ZTE will suffer irreversible operating losses if it fails to get a reprieve by mid-May.

ZTE will definitely be hit hard, but it won't be alone. The globalization of industry value chains means many other firms in both the US and China will also feel the impact of escalating trade tensions between the two countries.

China has achieved major advancements and strong competitiveness in such industrial sectors as display panels, passive components, LED, computer chassis, and PV power. The only major exception is semiconductor, a sector where China still lags the US by a few generations. China now still relies on foreign makers for the supply of over 90% domestic chip demand, and can hardly see a clear future for its semiconductor industry despite aggressive deployments in wafer foundry, IC design and memory production.

US partners to suffer major losses

Although ZTE will bear the brunt of the impact from the ruling by the US Department of Commerce, relevant US partners will suffer as a result. For instance, smartphone chipmaker Qualcomm will incur operating loss of some US$500 million based on a unit price of US$25 for chips needed for 46 million smartphones delivered by ZTE in 2017.

Once the trade row spreads to other China smartphone vendors such as Huawei, Xiaomi and Oppo, US partners in the smartphone supply chains will face unimaginable business losses, given their combined total shipments of over 350 million units estimated for 2018, observers indicated.

On another front, China now boasts the largest number of 4G users in the world and also shows the biggest demand for telecom equipment, given that China Mobile alone has operated up to 1.47 million 4G base stations. Accordingly, once US suppliers are prohibited from selling equipment and components to China, such major players as Broadcom and Skyworks may also face substantial losses.