RIP ZTE?

by Earl Lum, EJL Wireless Research

ZTE's wireless business is dead in the water if the company cannot convince the U.S. government to reconsider its export ban. The Chinese company's radio units, wireless base stations and smartphones all rely on U.S. components that ZTE will not be able to replace in time to meet shipment schedules and fulfill its commitments to customers.

 

When ZTE faced this ban temporarily back in 2016, we wrote a detailed report about the supply chain implications. We talked to chip suppliers who said they were being told not to even speak with ZTE. Then, ZTE settled with the U.S. government and it was business as usual.

 

A year after ZTE paid the U.S. government USD $890 million in fines relating to its admission of violating U.S. sanctions by shipping U.S.-made components and technology to Iran and North Korea, the company has been banned again by the U.S. Department of Commerce for seven (7) years. U.S. companies are now being instructed to not sell or export components to ZTE for the next seven years because the company failed to fully enforce the settlement terms with the U.S. government it agreed to in 2017. The export ban on U.S companies is in effect as of April 16, 2018.

 

The 2017 settlement terms required ZTE to fire/dismiss four senior employees and discipline 35 other employees through reprimanding them or reducing their bonuses. While ZTE did dismiss the four senior employees, it did not discipline the 35 other employees and admitted this to the U.S. Department of Commerce in March 2018.

 A deferred USD $300 million penalty that was not paid in 2017 may also now be made payable due to the violation of the settlement terms.

 

Initially, optical component suppliers have been hit hard. However, there are numerous semiconductor and other technology companies who ship their products to ZTE for wireless infrastructure equipment that the current news articles have not addressed. These component companies (EJL Wireless Research has compiled an extensive list) will also feel the impact if the global #2 RRU and TRx vendor is no longer a customer for the next quarter or longer.

 

There are two possible outcomes for ZTE:

1] ZTE convinces the U.S. Department of Commerce that it has/will immediately rectify the non-compliance of its actions and will pay the USD $300 million penalty immediately and probably an even larger fine and subject itself to frequent audits for compliance. It could potentially take most of Q2 2018 for ZTE to negotiate this miracle. While there is a slim chance for this to occur, it seems that the U.S. Department of Commerce is pretty pissed off about ZTE's behavior.

 

2] ZTE is dead (at least in wireless infrastructure and possibly in handsets). It would be impossible for the company to develop non-U.S.-based components and technologies within a year to replace the current designs for its BBUs and RRUs and other networking equipment. We would estimate that the company has possibly a 1-2 quarter supply of raw materials and components and would be able to continue to ship product for most of Q2 2018, depending on what inventory it has of key critical components.

 

So who benefits from ZTE's current demise?

Within China, Huawei Technologies and Datang Telecom Technology are the immediate beneficiaries. How much market share Nokia and Ericsson can pick up in China remains unknown and depends on how the Chinese mobile operators deal with the fall out regarding ZTE.

 

Outside of China, depending on the situation, Ericsson, Nokia, and Samsung stand to benefit in addition to Huawei. Stay tuned for more as this situation develops.