ZTE is now center stage in the US-China trade fight

ZTE is now center stage in the US-China trade fight

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The smartphone and telecom equipment maker announced Wednesday that it has halted its main operations after the US government last month banned American companies from selling it vital components.

The spiraling crisis at ZTE (ZTCOF) has thrust it into the heart of the escalating clash between the United States and China over trade and technology.

ZTE’s brief statement gave few details, but the implications were clear: a major Chinese company is warning it could go out of business because of the US government.

ZTE employs about 75,000 people, and its products are sold around the world. It is the fourth largest provider of smartphones in the United States.

Related: China’s ZTE says main operations have ceased after US ban

The US government said it imposed the export ban because ZTE breached a deal struck last year in which it agreed to pay a $1.2 billion fine for violating sanctions on Iran and North Korea.

ZTE is appealing the ban. Meanwhile, the Chinese government has linked the fate of the company to the trade dispute between the two countries, raising the issue with top US officials who traveled to Beijing last week for talks.

China’s efforts to boost its high-tech industries are a key source of tension between the two countries. And ZTE plays a role in Beijing’s tech ambitions.

It is one of several Chinese tech firms aggressively pursuing the development of 5G, the next generation in wireless network technology. The company boasts government and corporate clients in more than 160 countries and regions.

ZTE has repeatedly come under the scrutiny of regulators and officials in the United States, which is wary of its ties to the Chinese government. The company’s controlling shareholder is Shenzhen Zhongxingxin Telecommunications Equipment, a Chinese state-owned corporation.

In 2012, ZTE and Huawei, another huge Chinese tech company, were the subject of a US congressional report that focused on the equipment they make for telecommunications networks.

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The report said the companies “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.” Both companies strongly disputed the report’s findings.

US pressure has mounted this year. In February, US intelligence agencies warned Americans against buying ZTE and Huawei phones, saying the companies posed a security threat to American customers. And earlier this month, the Pentagon told stores on US military bases to stop selling phones made by Huawei and ZTE, citing security risks to the Department of Defense.

But the ban on buying parts and software from US companies has been the most damaging move for ZTE. It threatens the company’s survival and will hurt suppliers and customers, including in the United States.

ZTE halting operations “will hit every company in the value network across the globe,” said Charlie Dai, an analyst with research firm Forrester. He said the company relies heavily on foreign suppliers for many core components.

ZTE buys chips from Qualcomm (QCOM), Intel (INTC) and Broadcom (AVGO), and optical component parts from Maynard, Acacia (ABGLF), Oclaro (OCLR) and Lumentum (LITE), among others, according to Jefferies analyst Edison Lee.

The optical component makers are smaller companies and are therefore “more negatively affected by this,” Lee added.

Related: China’s ZTE to US: Let us buy American technology again

Acacia, based in Massachusetts, has been hit especially hard. The company sold about $116 million worth of chips and modules to ZTE last year, accounting for roughly 30% of its annual revenue.

In a recent earnings call, Acacia executives said the company had to write off $7.1 million in inventory that was slated for ZTE. Acacia shares are down more than 30% since the US government banned ZTE from buying.

If ZTE’s crisis worsens, it will start to affect wireless carriers in Africa, the Middle East and Europe.

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It would also handicap the development of 5G, slowing down the wireless technology’s evolution and adoption, especially in China, analysts say.

ZTE “plays a key role in China’s pursuit of owning more self-developed technologies and (building) the most advanced communications network,” Lee said.

Because the company is so important to Beijing’s tech ambitions, Lee believes the Chinese government will “do its best” to help ZTE resolve its dispute with the United States.

Whatever happens to ZTE, experts say the US crackdown on the company is likely to prompt Beijing to redouble its efforts to bolster homegrown technology — the same efforts that have fueled tensions with Washington.

“China will devote even more effort and resources to the quest for core technology,” Louis Kuijs, head of Asia Economics at research firm Oxford Economics, wrote in a recent note to clients.

“The doubling down will make China an even fiercer competitor sooner,” he warned.

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