A U.S. plan to ban exports to China's ZTE is likely to backfire.
Because the Chinese handset and equipment maker allegedly broke U.S. rules on sales to Iran, the Commerce Department has retaliated by forcing American companies to apply for export licenses if they want to sell to ZTE, Reuters reported, citing documents and a department official whom it didn't name.
Those restrictions, to be enforced this week, generally will result in such applications being denied, the news service reported. ZTE received a notice from the Commerce Department and is evaluating any possible impact, the company said in a statement to the Shenzhen Stock Exchange March 7.
Qualcomm, Broadcom and Intel are among the top U.S. exporters to ZTE, according to Bloomberg supply chain analytics.
This is not good news for ZTE, which relies on the U.S. for 34 percent of the inputs for handsets and networking equipment made in China.
Yet the ban plays into the hands of President Xi Jinping, just as China holds its annual congress and after he urged his comrades in business to make the country more technologically independent. It also pokes at a raw nerve Beijing has for anyone being seen to meddle in Chinese policies.
ZTE is neither the largest smartphone or equipment maker, nor the largest client for any of its suppliers. Globally, it's No. 7 in smartphones, while it also trails in the market for networking equipment.
Still, the company is the source of more than $344 million in quarterly revenue for a U.S. technology industry that's desperate to tap into new growth markets amid competition and slowing expansion in the developed world. ZTE's sales grew fourfold in the past decade, and that trajectory is likely to continue after the company pushed hard into new markets, including Iran.
That makes it the perfect test case for China to push back against what it might see as U.S. imperialism, without worrying that the fight will bring the nation's own technology industry to its knees.
While the U.S. remains far superior in technological development, especially in semiconductors, China is not without alternatives.
Qualcomm, for example, found itself in the uncomfortable position over the past few years of having to go toe-to-toe with Taiwan's Mediatek in the market for smartphone chips. Even then, Mediatek has found growing competition from Chinese names like Spreadtrum.
Elsewhere, the Chinese started making their own servers, with Inspur becoming the first domestic name to take first place there, while work continues -- with limited success so far -- on developing a Chinese operating system.
In some cases, there remains no alternative. Intel blankets the field in both PC and server chips, and its nearest rival, AMD, is also U.S.-based. Despite fanfare to the contrary, China has no credible contender.
With necessity being the mother of invention, a ban on one of China's most famous names could spur the country into increasing investment in technology: The leadership has long used fear of foreign dominance as a spur for industry.
If anything keeps Xi up at night, it's probably the immediate and precarious balancing act he needs to perform between growth, stability and security. The fate of a single Chinese company is not likely to be his chief concern. Yet the president may be quietly satisfied with any U.S. action against ZTE, because in the Chinese grand plan, what's bad for the company today will surely help the country tomorrow.
And companies like Qualcomm, Broadcom and Intel that are caught up in U.S. foreign policy may be set to lose.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects ranking of ZTE suppliers starting in fourth paragraph of article published March 7, based on revised Bloomberg supply chain analytics.)
To contact the author of this story:
Tim Culpan in Taipei at firstname.lastname@example.org
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Paul Sillitoe at email@example.com