TALK of restricting the use of Chinese telecoms equipment in the West is growing. This week the curbs went the other way, when America banned its companies from selling hardware and software for seven years to one of China’s state-owned tech champions, ZTE. On April 16th America’s Department of Commerce said that China’s second-largest telecoms firm had trampled on a settlement reached in March 2017 over ZTE’s illegal shipments since 2010 of American-made technology—telecommunications equipment to Iran, and routers, servers and microprocessors to North Korea—in known violation of trade sanctions.
The one at risk of being crippled by an embargo is now ZTE. In 2016 UBS, a bank, estimated that 80-90% of its products relied on American parts. Jean Baptiste Su of Atherton Research, an American technology-research outfit, described the ban as “devastating” for ZTE, especially the loss of chips made by America’s Qualcomm used in about 70% of ZTE’s smartphones. Although ZTE makes most of its money from its telecoms-equipment business, nearly a third of its revenues come from phones.
Switching to other suppliers (and it must seek out those with zero parts sourced from America) would require handset redesigns to match new specifications that would take years to bring to market, says Mr Su. The software restrictions are just as bruising. ZTE’s phones use the Android operating system developed by Google, which under the ban may no longer be able to license its apps to ZTE. It does not have its own operating system. As The Economist went to press, ZTE’s shares had been suspended from trading in Shenzhen and Hong Kong for three days.
America had dangled the threat of this sort of ban (known as a denial of export privileges) last year but shelved it when ZTE confessed to wrongdoing and paid $890m in penalties. As part of the deal ZTE pledged to discipline senior staff. But although it fired four people, it was found to have neither reprimanded nor cut bonuses to 35 others, as promised. That seems incredibly foolhardy. According to the Department of Commerce, ZTE admitted it had submitted false statements but said it had no intention of misleading the government. The department decried “a pattern of deception” and “repeated violations”.
ZTE stood out as the only Chinese handset-maker to have cracked the American market; half of its phones are sold there. It is the country’s fourth-largest seller of smartphones, with a 12% share—despite its inclusion in a report from America’s House Intelligence Committee in 2012 that urged domestic telecoms firms purchasing networking equipment to shun its products over espionage worries. (The report also targeted Huawei, ZTE’s larger Chinese rival, which, because of deeper concerns over its possible ties to the Chinese government, has struggled to make inroads since.)
Although the sanctions row predates the administration of President Donald Trump, it will make an example of ZTE, reckons Mr Su, as tensions mount between America and China over trade disputes and technological dominance. Since the start of the year a bill has been proposed in America’s Congress to block the government from using telecoms equipment made by Huawei and ZTE; and Mr Trump has halted the takeover of Qualcomm by Broadcom, a rival chipmaker, on national-security grounds, for fear it would give China the edge in setting standards for 5G, a wireless technology.
A parallel salvo this week, by the Federal Communications Commission, was all of a piece. America’s telecoms regulator voted unanimously to move forward with a plan to stop federal subsidies to domestic carriers who use suppliers that are considered to be a risk to American national security. It pointed in particular to congressional scrutiny of Huawei and ZTE.
Edison Lee of Jefferies, an investment bank, thinks that ZTE has a shot at negotiating the ban away, but that if it fails it will hope to involve the Chinese government in a mediation process. Even if ZTE’s fate becomes a bargaining chip in a trade dispute, a resolution may take many months. Until then the firm will at best limp on.
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