With Sino-US trade frictions escalating and the Trump administration seemingly bent on reining in China’s technology companies, telecom equipment players ZTE and Huawei are facing mounting challenges.
Targeted on the grounds that they pose a risk to US national security, the Shenzhen-based firms find themselves in a situation where they need to rethink their business plans and operational strategy.
Sanctions from the US, as well as some headwinds in Europe, couldn’t be coming at a worse time for the Chinese entities, given their ambitions to emerge as leaders in 5G mobile technologies.
If things get out of hand and the deadlock between Washington and Beijing is not resolved soon, ZTE and Huawei will have no option but to go back to the drawing board on some key aspects of their business.
On Monday, the US Commerce Department announced that it was prohibiting American firms from selling components and software to ZTE for a period of seven years.
The action against ZTE came after the Chinese firm was found in breach of an agreement that was reached last year to settle allegations of violation of US export sanctions on Iran and North Korea.
Adding to that, authorities on Tuesday outlined new rules that would bar American telecoms firms that receive federal subsidies from buying from products from foreign entities that are a deemed a security threat. Huawei and ZTE were apparently the main targets.
And that was not all.
On the other side of the Atlantic, UK authorities wrote to the nation’s telecoms providers warning them that the use of ZTE’s equipment and services could pose a national security risk.
Prior to the moves against ZTE by the US and UK governments, Huawei had been suffering a series of obstacles in selling its flagship smartphone in the US market.
The Chinese firm had planned a partnership with AT&T to sell its smartphones in the key market, but the deal was called off just hours before a scheduled press conference in January, with the US carrier apparently bowing to political pressure.
Later, another US telecoms carrier — Verizon — also dropped plans to sell Huawei phones.
The moves in the US and UK represent a fresh blow for the Chinese telecom equipment vendors and smartphone manufacturers, who have in a way become pawns in the broader trade war between the West and China.
For ZTE, the pain from the US sanctions will be acute as it is said to have been depending on American firms for about 30 percent of its overall component needs.
In chip procurement, the reliance on an American supplier — Qualcomm — is as much as 65 percent, according to an estimate.
Following the new US ban, ZTE needs to figure out a way to ensure continued supply of critical components or look for alternative options. Else, its manufacturing ability would be seriously undermined.
As developments continue to unfold, there will be apprehensions and fears among all of China’s telecoms and tech players, and not just ZTE and Huawei, about the fallout of a US trade war.
For smartphone players, mostly of which depend on Qualcomm and Intel for their semiconductor needs, the US action against ZTE serves as a reminder that they need to cut their reliance on foreign suppliers and develop their own technologies.
Huawei, for one, will be thanking itself for the foresight in launching its own chip and may now step up efforts on use of the Kirin 970 processor.
As for ZTE, it may have to seek out some Chinese firms for its mobile processor needs or turn to a Taiwanese player, MediaTek.
MediaTek has seen its processors being treated as underdogs compared to those from Qualcomm, but the new situation now may help the Taiwan firm’s offerings get propelled to the fore in the fast-growing China market.
Another important issue that ZTE faces is in relation to the use of the Android operating system.
Given that Android is a Google product and the fact that the US ban also covers software, there is uncertainty as to whether ZTE can continue rolling out Android products.
The fact remains most of the operating systems running on Chinese smartphones are based on the Android system. Though Chinese players have given their own names to the operating systems they use, the foundation is supported by US software.
It could be a huge challenge for ZTE and Huawei to develop their own mobile operating systems in the short term.
The only choice, as of now, may be to rely on the Alibaba-backed Aliyun OS, which is a Linux-based platform but is compatible with most of the Android software.
For the long term, what needs to be done by Chinese phone makers is to go down the path of developing their own foundational software and the supporting eco-system, however arduous the task may seem.
They should prepare for the worst-case scenario in the US trade war and cut the reliance on American technologies and products and build comprehensive domestic supply-chains.
The US sanctions on ZTE and Huawei, if anything, should serve as a reminder to Chinese firms that if they want to become world leaders, they need to develop new technologies on their own.
Otherwise, they will remain mere followers and be at the mercy of suspicious Western powers.
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