ZTE’s Dilemma In The U.S: One Company Can’t Challenge The Entire Industrial Chain

摘要: The U.S’s full embargo on ZTE is no longer an economic matter or a publicity stunt of the presidential election, but a strategic attempt, as well as a competition between the two countries.

(Chinese Version)

ZTE is using all of its business mind to handle this current dilemma it faces since one company can hardly challenge a whole industrial chain.

This whole thing was triggered by ZTE’s alleged violation of US sanctions on Iran, which might cause the United States Department of Commerce to punish the Chinese telecom equipment giant. The Department of Commerce has put ZTE on the Entity List for the company’s alleged violations of the export control act, restricting suppliers in the U.S from exporting products to ZTE.

The alleged violation here is actually a very old case. In 2012, ZTE was said to be involved with a telecom equipment trade of over a million dollars with an Iranian telecom operator. The U.S later launched investigations over the matter and found that ZTE didn’t ship the products to Iran and complete the deal. However, four years later comes the harsh punishment of the U.S, which will bring devastating consequences for ZTE.

Giant as it is, ZTE is still just a telecom equipment provider and smart phone maker. The loss for American side is split into a couple hundred of suppliers, but ZTE has to face the 100% loss. No Chinese company can challenge a whole industrial chain in the U.S alone, let alone the American government. If the embargo punishment lasts long enough, ZTE’s cash flow would crumble and lose many clients. Worse still, ZTE might face the danger of going bankrupt as well. It’s the cold reality that ZTE must face.

How did ZTE become the American government’s target? In some sense, this is the result of America’s goal to suppress China’s high-tech industry. But in a bigger scale, it’s a matter of political and economic competition.

Why is the American government  so harsh on ZTE?

The problem here is that this time the punishment from the American government is so sudden and so harsh considered it’s an old case that took place four years ago. People naturally start to wonder if the American has some other intentions or not.

ZTE Corporation is a Chinese multinational telecommunications equipment and smart phone company headquartered in Shenzhen. ZTE has thousands of business partners ranging from the downstream to the upstream of the industry, among which hundreds of upstream partners are from the U.S. These partners even include big companies like Microsoft, Qualcomm, TI, Intel, and Oracle. More importantly, some essential products are owned by America exclusively, which means the punishment is devastating blow for ZTE and will directly influence the normal operation of the company. Under these circumstances, whether it’s China, ZTE, Huawei, or other downstream companies, they will all have to face the consequences this incident brings.

As a matter of fact, companies that have violated such regulations and sanctions are plenty. For instance, in 2012 Ericsson forged documents and sent broken devices from Cuba to the U.S for repairmen. And after that the company transferred the shipment back to Cuba through Panama, violating America’s export and import restrictions on Cuba. In the end Ericsson was fined at USD 1.75 million.

One of the main reasons for the harsh punishment is the fierce competition between the IT industries of the two countries. The Chinese government now is trying to get rid of IOE, which inevitably generates more conflicts. Furthermore, currently the U.S is having its new round of presidential election, and the relationship between China and the U.S is always a major vote getter. Unfortunately, ZTE happened to be the target that’s in the crossfire between the two countries.

And of course, ZTE doesn’t have the capacity to handle such loss. ZTE and Huawei have been making technological breakthroughs in recent time and ZTE alone has made it into the global top five in terms of the number of PCT patent in process, showing that ZTE and Huawei no longer lag behind international heavyweights in patent. However, when faced with such situations and interfered by the American government, it pretty much means a company will have to face the industrial chain itself. What’s more, America has dominating advantages in this field.

Without a doubt, companies like ZTE can’t handle such loss. To be specific, the Chinese industrial chain can’t handle this loss as well.

The restrictions not only blocks ZTE from the country, but also American businesses as well

The punishment on ZTE, as a matter of fact, also brings losses to ZTE’s partners in the America.

Recent reports show that ZTE’s American suppliers are also having financial problems due to the restrictions, among which Intel and Qualcomm take the worst hit as Qualcomm alone loses nearly USD 40 million. Oclaro, one of ZTE’s partners, had a 15% plunge in share price, the biggest slump in the past two years. Besides the share price, Oclaro’s revenue also decreased as a result. Acacia, an emerging Silicon Valley based company, is also under great influence of this incident. ZTE contributed 25% of Acacia’s sales and therefore losing ZTE as a client would even affect the company’s IPO. The restriction will also influence ZTE’s semiconductor suppliers. AppliedMicro was once awarded the title Supplier of the Year in 2013 by ZTE for its OTN and highly-efficient PHY chip. PMC-Sierra, acquired by Microsemi, was once a supplier of OTN semiconductors for ZTE.

From this we can tell that America’s punishment on ZTE will not only affect ZTE. In the article ZTE Plays Contrite As U.S. Sanctions Loom written by Chinese economist Yang Ge, the author pointed out that ZTE has been cooperative with the American government and is actively seeking feasible solutions with America while the American government is being overly harsh on ZTE. Yang also stated that America should recognize Chinese companies’ efforts in internationalization and abide international law and standard.

On March 17th, Wallstreet Journal’s new issue featured a letter from one of ZTE’s suppliers’ CEO, which commented directly that the American government’s punishment on ZTE is actually a death sentence for them, showing great his great disapproval towards the government’s decision. American suppliers’ loss is also something that the American government should consider about.

There are more obstacles needed to be tackle in the enterprise-nation game

Without a doubt, the biggest victim of the restriction is ZTE itself, other American partners are just collateral damage. ZTE faces 100% blockade from the upstream of the industrial chain.

Therefore, the relationship between the enterprise and the nation is a very important topic to be talked about. Besides ZTE, other enterprises that have participated in the global business competition must learn from this incident.

Recently, Apple is under investigation by FBI while Google and Facebook are being investigated by European governments for monopoly and tax evasion. Compared with ZTE, they are more seasoned in dealing with the local governments.

For instance, Apple is familiar with the political power in the U.S and has its own lobbyist group. Aside from that, Apple also has the whole Silicon Valley as supporter. So even though the company is currently being investigated, it’s not hard for the company to strike back. As for Google, before the company faces investigation in Europe, it has already made incredible tax evasion and used many media and government relationship PRs to avoid risks, and therefore many times the investigations just wouldn’t go anywhere. Even companies like IBM and Qualcomm that had received severe punishment in China, the disputes were quickly resolved after the interference of the American government.

The thing is, ZTE has become an international enterprise for many years, and has won many battles in anti-dumping investigations and patent wars. The company has defeated InterDigital and Vringo for multiple times and has reached a reasonable agreement with them.

However, this time it’s not just a matter of patent war, or a matter economic conflicts, but it’s a matter of one single company combating with an industrial chain and a government. It’s a battle that requires wisdom, endurance and compromises to win. If the restriction continues to last, the potential loss would be immeasurable. This would be the bad outcome for ZTE and its clients. And it’s not up to enterprises to decide whether American government’s action is right or not. Even international organizations like the UN can’t solve such issues. The reality is that even in China there are also cut-throat competitions brew by the lack of cooperation within the industrial chain.

Companies like ZTE must learn from this incident. In some way, ZTE is paying for a very expensive lesson for not only itself, but also other Chinese companies that about to go global.

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[The article is published and edited with authorization from the author @Zhang Si, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.




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