EMAILED ON May 11, 2018 BY Conor Grant

US ban forces ZTE phone production to a halt — and re-energizes Chinese chipmakers

ZTE, the massive Chinese phone-maker — and the 4th-largest smartphone-seller in the US — announced earlier this week that it would “cease major operating activities.” 

The shutdown is the result of a ban issued by the US government last month prohibiting the company from using any American components in its phones.

After a hot streak in the US, ZTE made some people mad

ZTE became one of the top 5 phone sellers in less than 2 years after arriving in American markets in 2011. Then, ZTE scaled to $17B by expanding operations to 160 countries — including markets where the US had banned the sale of American goods. 

When Uncle Sam found out about ZTE’s illegal sales, he fined them $1.19B and made them pinky-promise to stop. But surprise, surprise, they kept selling ZTE products (built from San Diego-made Qualcomm chips and Massachusetts-built Acacia fiber) in Iran and North Korea.

Fool Uncle Sam once, shame on you… 

Fool him twice — and he’ll hit you with a 7-year embargo. The US discovered that ZTE had found under-the-table ways to sell American products — and then lied about it.

Since US-made Qualcomm chips powered 84% of ZTE’s phones, the ban severed the company’s supply chain.

The US may have accidentally kicked off a Chinese chip boom

ZTE has suspended operations, but claims it “maintains sufficient cash” ($3.73B) to weather a rainy day — and told investors it is “actively communicating with the US government to facilitate reversal.”

The Chinese government is taking this opportunity to reduce reliance on American chipmakers like Qualcomm (who they’ve fined for antitrust before) and build out domestic chip-making infrastructure using a $47.4B state-backed investment fund.

But dealing this blow to Chinese telecom — at least in part to get ahead in the race for 5G — has cost US chipmakers $1.5B in contracts, and smaller firms like Acacia (a fiber company that did 30% of its business with ZTE) lost 36% of its stock value instantly.

The US government can only keep its fingers crossed and hope that ZTE doesn’t rise from the dead.