Video: ZTE ceases main operations after US ban
ZTE, the fourth-largest smartphone company operating in the US, has declared it will "cease major operating activities," effectively leaving its partners no choice but to pull their products from their shelves and to seek alternatives.
All this comes in the wake of a decision by the US Commerce Department to impose a 7-year export ban on the company from being able to do any kind of business with American firms in which the transfer of intellectual property, electronics, or software is involved.
That includes American-designed semiconductors and licensed software, such as the Qualcomm Snapdragon and support chipsets, and the Android operating system. Without access to these components, ZTE, a multi-billion dollar Chinese telecommunications company with thousands of employees, had to close overnight.
Why is this even possible in this day and age?
Although the global mobile electronics industry is quite large, the reality is the supply chain of intellectual property that actually goes into the design of these devices is not as big as we think.
Yes, there is a tremendous volume in the manufacturing of such items, and many companies are involved in their manufacture, but the rights to license the core technologies that go into the design of these components belong to a rather small, elite group of firms.
At the top of the food chain for smartphones is ARM Holdings, which is a UK-based firm that is now owned by SoftBank Group, a Japanese company that has a majority interest in Sprint, which, barring any government obstruction, is destined in its merger with T-Mobile to become the second-largest mobile telecommunications provider in the US.
ARM does not actually manufacture semiconductors; it produces fundamental architectural blueprints for the different generations of microprocessor cores that companies such as Apple, Samsung, and Qualcomm license to make their own chip designs.
In terms of what impacts the smartphone industry, two of them are American-owned and operated -- Apple, and Qualcomm.
South Korea-based Samsung is considered to be the largest licensee next to Apple, and with its Exynos chips it can build semiconductors for any other smartphone manufacturer.
But, like Apple, it reserves its semiconductor designs for its own global products, which, for various reasons, are not in wide use in the US.
Samsung, like Taiwan-based TSMC, also has the ability to fabricate semiconductors on Qualcomm's behalf. However, it uses primarily Qualcomm-based semiconductors in models of its own Galaxy smartphones sold in the United States.
The US version of the Galaxy S9, for example, uses the Qualcomm Snapdragon 845.
Only Qualcomm has the reach to work with the broadest amount of vendors -- because of its overall IP portfolio, which includes not just its Snapdragon chips but also its RF and Wi-Fi components.
ZTE was heavily dependent on the entire portfolio of IP from Qualcomm. Without access to those components, it would have been forced to redesign every single one of its products for all its business units, which includes carrier equipment, as it was also a major consumer of Qualcomm's CDMA technology.
Now that ZTE is off the map, who is next?
Huawei, which is a much larger firm, like ZTE before it, is currently under criminal investigation, and it is very likely it will undergo huge fines and potentially the same export restrictions as ZTE.
However, Huawei owns much more of the intellectual property that goes into its products. Like Apple, Samsung, and Qualcomm, it is an ARM architecture licensee. So, it has its own semiconductors, and it competes heavily with Qualcomm in the carrier business. It is even partnering with AT&T to create a global 5G standard, so it has its own components.
Should Huawei undergo the same restrictions as ZTE, it would be much better prepared to deal with an existential threat. It would lose access to the commercial version of Android, which certainly is not ideal.
But it is apparently developing its own operating system, which would allow its own domestic market to continue to consume its products and potentially continue to serve large export markets such as the EU and the UK.
Of course, this is all barring the possibility that ARM Holdings itself, under international pressure by the US, UK, and Japanese governments, does not revoke Huawei's architecture license.
So far, there hasn't been any real talk of that, but I would not put it outside the realm of possibility that increasing tensions between the US and China may result in such actions.
But not everyone is as prepared as Huawei. Two other large Chinese smartphone vendors are also highly dependent on Qualcomm components: OnePlus and Xiaomi.
OnePlus, which is part of the BBK family of companies that includes Oppo, the most popular smartphone brand in China, is poised to take ZTE's place in the US as No. 4. It does not currently have carrier relationships; it does business directly with end-users, at least for now.
If it can manage to stay under the radar, OnePlus is likely to become Qualcomm's export showcase phone manufacturer in China. Its OnePlus 6 phone, launching on May 16, uses Qualcomm's powerful Snapdragon 845, and it's been highly anticipated by the technology press and smartphone enthusiasts alike.
Xiaomi has not launched with a carrier in the US yet, and now, it's probably wary about any further investment under the current anti-Sino atmosphere here.
What is the likely result of this shake-up?
This ZTE lesson is going to weigh hard on Chinese corporations and is almost certainly going to force them to develop not only domestic semiconductor fabrication (to compete with the likes of TSMC and Samsung) but also their own native chip designs and potentially chip architectures that are not tied to intellectual property owned by foreign corporations.
Companies like Huawei, with its Kirin series of chips and MediaTek, will be doing gangbusters business domestically and with other Chinese partners seeking semiconductor alternatives to their American counterparts.
There is already serious discussion about a $47 billion fund that the Chinese government is close to finalizing, which would potentially spur native Chinese semiconductor designs, possibly even native architectures.
Open-source architectures such as RISC-V may see considerable interest from companies such as Huawei and MediaTek.
In the long term, this technological independence is good for China and Chinese firms, but it isolates American corporations from perhaps the largest market in the entire world.
Hopefully, ZTE was the lone example the Commerce Department wanted to make, and we won't see any further fallout. But if not, prepare to see a considerable culling of Chinese mobile electronics products and manufacturers from the American and other large export markets.
Is ZTE just the beginning of a large culling of Chinese-manufactured goods from the American market? Talk Back and Let Me Know.
Previous and related coverage
It's hard to get things done when the government stops you from getting parts from US companies for seven years.
The Chinese smartphone maker was earlier this week hit with seven-year-long export restrictions by the US.
The UK National Cyber Security Centre has reportedly sent a letter to telcos warning of the risks of using ZTE equipment.