U.S. Telecoms Vendors Could Ultimately Be the Biggest Victims of Government Sanctions

John Byrne – Service Director, Global Technology Telecom and Software

Summary Bullets:

  • The U.S. Department of Commerce delivered a stunning blow to Chinese telecoms vendor ZTE, activating a seven-year ban on U.S. firms from exporting any products to the Chinese company.
  • The decision – and possible Chinese countermeasures – could have major repercussions for a number of U.S. companies, highlighting the complex and highly interdependent nature of today’s telecommunications networks.

U.S. trade relations with China continue to sour, with the decision by the U.S. Department of Commerce to issue severe sanctions against ZTE representing the latest salvo. But in the complex, interdependent global supply, the ‘penalty’ sanctions imposed by the U.S. against ZTE could ultimately exact the greatest damage on U.S. vendors.

The U.S. Department of Commerce issued a severe penalty against Chinese telecommunication equipment vendor ZTE in April, banning it from purchasing U.S. hardware or software for the next seven years. The denial of export privileges follows a $1.19 billion fine paid in March 2017, and is based on the Department of Commerce’s assessment that ZTE failed to comply with something it had agreed to do – namely, to reprimand 35 employees involved in selling telecoms equipment to Iranian companies that had integrated U.S. components, a violation of U.S. trade regulations.

The unexpected announcement has had a major effect on ZTE’s ability to continue operations, particularly in its handset business. That’s because ZTE relies heavily on U.S. vendors to supply chipsets and operating software. In particular, ZTE uses Google’s licensed software to sell Android phones or enable access to Google apps in most markets outside of China.

However, the Department of Commerce action also has a severe impact on a number of U.S. companies. For example:

  • Qualcomm provides chipsets for approximately half of ZTE handsets.
  • Google supplies Android OS and access to the Google Play Store.
  • Massachusetts-based Acacia Communications, which provides optical interconnect technologies, generates 30% of its revenue from ZTE.
  • Silicon Valley-based Oclaro, which provides core optical technology, generates approximately 20% of its revenue from ZTE.

Beyond the immediate challenges faced by these companies, the draconian penalty on ZTE could invite corresponding sanctions from the Chinese government, especially in light of the recent escalation in tensions between the U.S. and China regarding the trade imbalance and the imposition of dueling tariffs. Apple relies on China heavily for a significant portion of its supply chain; meanwhile, Qualcomm generated 65% of its revenue last fiscal year in China, reflecting how vital that nation is to the handset supply chain.

Add to that possibility the likelihood that ZTE, its larger counterpart Huawei, and other Chinese vendors are now likely to embark on initiatives to diversify their supply chains to reduce reliance on U.S. suppliers of silicon, optical, and other telecoms gear, and this month’s penalties against ZTE could ultimately end up reducing U.S. vendors’ role in the complex telco value chain – which might hurt the U.S. tech industry for years to come.

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