By Dan Strumpf and Newley Purnell
HONG KONG--In the five years since ZTE Corp. was branded a
national-security threat by U.S. lawmakers, the Chinese
telecommunications giant has quietly been building its own American
success story.
While locked out of the market for networking technology, ZTE
has grown its smartphone business, which is now the fourth largest
among U.S. consumers. Last year alone the Shenzhen-based company
almost doubled its market share to 11.2%, selling 19 million
handsets and making the country its biggest market, according to
research firm Canalys.
Now, ZTE executives are grappling with a new roadblock that they
say threatens the company's very survival. The U.S. government
moved on Monday to block sales of American products to ZTE, saying
the company violated the terms of a deal last year settling
allegations of sanctions-busting involving North Korea and
Iran.
The ban has forced the Chinese telecom titan to assess whether
it must--or even can--replace key components such as semiconductors
supplied by Qualcomm Inc. and the Android mobile operating system
it uses, made by Alphabet Inc.'s Google.
ZTE shot back at the U.S. in a statement on Friday calling the
Commerce Department order "unacceptable," and saying it will "not
only severely impact the survival and development of ZTE, but will
also cause damages to all partners of ZTE including a large number
of U.S. companies."
"This is a body blow to them," said Duncan Clark, chairman of
BDA China, a Beijing-based consulting firm that specializes in
technology. "It's sort of hitting at a homegrown hero."
Qualcomm and Google declined to comment.
ZTE is the latest company to be caught in the crosshairs of an
increasingly rancorous trade dispute between China and the U.S.
that is placing increasing emphasis on the technological race
between the countries amid heightened national-security concerns.
The sales ban is likely to accelerate China's efforts to develop
its own technology supply chain and wean the country off imports
from U.S. companies--a feat viewed by some officials in Washington
as an even more worrying long-term threat to American
interests.
The U.S. Commerce Department's announcement of a seven-year ban
on sales of U.S. parts and software to ZTE has cast a renewed
spotlight on China's telecoms firms. ZTE and its bigger and
better-known rival, Huawei Technologies Co., were the subject of a
2012 investigation by the U.S. House Intelligence Committee that
recommended American telecom operators not use gear from those
companies in building cellular networks, citing national security
risks. Both ZTE and Huawei have long denied that their products
pose a security threat.
Among the issues singled out by the House report was the
ownership structures of the two companies. Huawei is privately held
and owned by its employees. By contrast, ZTE, founded by five
Chinese engineers in the 1980s, is publicly traded on stock
exchanges in Shenzhen and Hong Kong and regularly discloses
quarterly earnings.
That transparency earned ZTE softer treatment than Huawei.
However, the House report still singled out the state ties of its
largest investor, which today holds 30% of the company, according
to public records. ZTE has said the state-owned investor isn't
involved in any direct or indirect decision-making at the
company.
The 2012 report set Huawei and ZTE on dual paths, with Huawei
focusing on expanding outside the U.S., and ZTE nurturing its
existing ties with U.S. mobile-phone operators to expand its market
share there. To grow its U.S. business, ZTE opened five research
and development centers in the country, upped its spending on
Washington lobbying and now sponsors NBA teams like the Houston
Rockets, the New York Knicks and the Golden State Warriors.
The result: Huawei now dominates the global telecom landscape
virtually everywhere except the U.S., while ZTE commands a sizable
share of the coveted U.S. smartphone market, which Huawei has
failed to crack, though ZTE is an also-ran globally. Last year, ZTE
unveiled a new flagship phone, a foldable handset called the Axon M
that retails for $725 via AT&T Inc. in the U.S.
ZTE has delayed its first-quarter earnings, which were set to be
released Thursday, to weigh how the Commerce Department order will
affect its business.
The sanctions could hamper ZTE's ability to make and sell
products world-wide--and thus help its rivals, which include
Huawei, Finland's Nokia Corp. and Sweden's Ericsson AB.
ZTE's woes might not end up helping Ericsson or Nokia, which
generally sell more expensive equipment, said Roger Entner of Recon
Analytics. Instead, it might help Huawei, which also sells
lower-priced electronics. "If you're shopping for a Kia, you're not
going to upgrade to a BMW," he said.
In 2017, Huawei led with a 27% share of the global
telecom-equipment market, followed by Nokia at 17% and Ericsson at
13%, according to research-firm Dell'Oro Group. ZTE was fourth with
10%. But in the U.S., Ericsson and Nokia each held a 48% market
share, while Huawei and ZTE had less than 1%.
Spokesmen for Ericsson and Nokia declined to comment.
In its home market of China, ZTE is a small player in
smartphones but has grown into a major supplier of networking
equipment like cell towers and routers. Backed by the Chinese
government as a tech national champion, it works alongside Huawei
in the race to develop next-generation 5G wireless technology, a
competitive area in which Qualcomm is seen by U.S. officials as a
crucial competitor. ZTE sent 11 representatives to an
industry-sponsored meeting last month in the Indian city of Chennai
to discuss 5G specifications, according to conference records.
International trade experts called the U.S. sales ban
wide-ranging, affecting not just exported items, but also software
and components marketed by American companies but manufactured in
other parts of the world.
That would include a broad slate of hardware critical to ZTE,
including Qualcomm semiconductors. It also potentially covers
software like the Android operating system, which powers ZTE
smartphones. ZTE is working to find ways to preserve its access to
Android, according to a person familiar with the matter.
"If they're unable to use Google Android, I think that's a big
blow because there's no real viable alternative at this point,"
said Neil Shah, an analyst with research firm Counterpoint.
Without access to parts from U.S. companies needed for its
networking gear, ZTE will have a tough time selling its products
and being competitive in the rollout of 5G equipment, said Edison
Lee, a telecom analyst at Jefferies.
"If this ban really continues and the U.S. really enforces it, I
think ZTE is in big trouble," he said.
Write to Dan Strumpf at daniel.strumpf@wsj.com and Newley
Purnell at newley.purnell @wsj.com
(END) Dow Jones Newswires
April 20, 2018 05:44 ET (09:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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