ZTE, one of China’s leading technology companies, announced recently that it will end “major operating activities” after the U.S. government barred American firms from doing business with the telecom equipment maker.
The announcement by the fourth-largest Chinese smartphone maker comes amid an escalating trade battle between the United States and China.
Last month, the Commerce Department barred U.S. firms from exporting parts to the Chinese smartphone company for seven years, saying that ZTE had violated a settlement of criminal and civil charges for making illegal shipments to North Korea and Iran.
Starved of crucial American microchips, the company was left teetering. ZTE said in an announcement Wednesday that “the major operating activities of the company have ceased.” ZTE added that the company continues to communicate with the U.S. government with the goal of modifying or reversing the order. But investors were left without a definitive road map of the company’s future, according to the statement.
The suspension of ZTE’s operations follows several recent actions by the U.S. government that hindered the company’s business prospects. The Defense Department last month ordered military exchanges to end the sale of ZTE phones on U.S. bases. And the Federal Communications Commission has taken steps to ban federal funds from being spent on mobile equipment made by firms that pose a national security threat to U.S. communication networks. ZTE was mentioned in the FCC’s proposal in a section detailing the federal government’s concerns about foreign tech companies.
ZTE’s troubles with the U.S. government are also playing out amid broader fears of an ascendant Chinese tech industry. ZTE had plans to become one of the first vendors in the United States to offer a smartphone connected to the next-generation 5G wireless network. A host of big technology companies in China are racing to build out this network, sparking concerns from U.S. officials that a shifting reliance on technology developed outside the United States could empower Beijing to hack or spy on American businesses and other institutions.
Earlier this year, President Trump ordered Singapore-based Broadcom to abandon its $117 billion hostile bid for Qualcomm, citing “credible evidence” that the takeover threatened “to impair the national security of the United States.”
ZTE claims about 10 percent of the U.S. market share for smartphones, according to 2017 estimates. If the company continues to flounder, other budget-friendly manufacturers could step in to fill the void, analysts said. But American consumers in the low-end market for mobile devices may end up paying a little more money, because they will have fewer options.
AT&T sells several ZTE models and said in a statement Thursday, “We offer their devices primarily in our prepaid business and are evaluating the effects of the government’s order.” Verizon, which sells two ZTE phones, said in a statement that it will continue to offer them until inventory runs out. Sprint declined to comment, as did T-Mobile.
“Any company out there that can’t get their hands on chips made by a U.S. company, [then] that has huge negative implications on their business, which is why China is looking to grow its local manufacturing industry,” said Angelo Zino, an equity analyst with CFRA research, an investment research firm. As long as U.S. suppliers are banned from selling their wares to ZTE, the company’s reliance on American chips presents risks to the firm, he said. In its announcement, ZTE said it aims to “forge a positive outcome” in talks with U.S. officials.
Both techno-nationalists in Beijing and China-hard-liners in Washington can seize on ZTE’s shutdown to push their own political agendas, according to Adam Segal, director of the digital and cyberspace policy program at the Council on Foreign Relations. Chinese officials advocating a self-reliant, indigenous tech industry can point to ZTE’s downfall as a cautionary tale of depending too heavily on American innovation. Conversely, the Trump administration may use ZTE to underscore how seriously it is taking the perceived threat of China and foreign tech competition.
“In a normal situation, both sides would work to limit the spillover affects of U.S. sanctions on ZTE, but now both sides have reasons to use this for their own purposes,” Segal said. “Clearly, ZTE seems to be the most visible causality in what I think is a growing tech conflict.”