Who's hurt by the ZTE ban? US consumers and businesses

China’s 10 best-selling smartphones

Paranoia will destroy us

Why Chinese tech isn’t spying on Americans

The notion that the Chinese government would spy on corporations and our agencies with electronic devices manufactured by Chinese companies is not only absurd but would be catastrophic to furthering their ambitions in world trade.

Read More In an unprecedented move, the US Commerce Department announced that ZTE — one of the largest manufacturers of smartphones and telecommunications devices in China and a primary supplier of mobile devices to US wireless carriers such as AT&T, Verizon, and T-Mobile — is banned for seven years from purchasing components from US manufacturers. Specifically, the order lists “Commodity, Software or Technology” that is now prohibited from sale and export out of the United States to the Chinese company.

That’s a very broad category of items which not only includes semiconductors (such as the Qualcomm SoCs used in the phones) but also the licensed components of the Android OS from Google, among other things which make up the common software and hardware stack used in their products. Why did this happen? In March of 2017, ZTE agreed to a combined civil and criminal penalty of £1.19 billion for the illegal (under international treaties) sale to North Korea and Iran of telecommunications equipment that used American technology.

Additionally, at the time the company agreed to a seven-year suspension of export restrictions which would be imposed in the event the agreement was not met, or if it was determined they had committed additional undisclosed violations. The US Commerce Department now maintains that during the settlement negotiations back in 2016, ZTE made additional false statements regarding violations as well as during their probationary period in 2017 regarding disciplinary actions made against senior executives responsible for the sales to North Korea and Iran.

It is now imposing that seven-year suspension. Effectively, the Commerce Department just destroyed ZTE’s mobile electronics and telecommunications business in the United States and potentially anywhere else in the world where their products that use these components are sold.

Conceivably ZTE could buy core components from other Chinese companies, such as MediaTek. Or possibly even Samsung, which makes its own Exynos SocC semiconductors in addition to designs from Qualcomm (which would be restricted). But would these firms be willing to sell to a pariah competing company and risk their own reputations in the process?

I don’t see Huawei’s HiSilicon division doing this, because they will want to remain in the Commerce Department’s good graces, assuming they aren’t next on their you-know-what list already. Like ZTE, Huawei is also under investigation for possible export control violations to North Korea and Iran, although they have not been fined or export restricted as of yet. That’s not outside the realm of possibility now.

Another serious problem for ZTE: No longer having access to the licensed pieces of Android. They certainly could run AOSP and their own App Store, much like Amazon does. Or they could run the Open Source Tizen OS.

Who's hurt by the ZTE ban? US consumers and businesses

Denying Chinese companies the ability to purchase components from US companies will result in significantly higher prices in consumer electronics and will create large artificial monopolies.

Neither is a very attractive prospect. I think that we can say definitively that in the United States, and possibly in a number of other global markets, ZTE’s Axon line of products is officially done. ZTE Axon M review: A unique dual screen phone optimized for multi-tasking

ZTE produced a really good phone and an excellent value in the Axon 7 and was doing some very interesting stuff with the dual-screen Axon M. It gave consumers additional choices and more ways for carriers as well as software developers to generate revenue within the Android ecosystem. And Qualcomm and other American firms did a decent business with them in the hardware and software components that went into these phones.

I hope this is not the beginning of a disturbing trend. ZTE is one of several Chinese smartphone companies that buy key components from US firms, which manufacture using fabs in mainland China. This includes but is not exclusive to Xiaomi, Oppo (sold in the US as OnePlus) and Lenovo (Motorola).

This also potentially includes targeting other Chinese firms such as Foxconn, Quanta and a number of others which not only have capabilities as ODMs and perform these services on behalf of many American companies like Apple, but also purchase components used in the manufacture of things like TV sets, set-top boxes, IoT devices, consumer and enterprise networking equipment and personal computers. Which is only just the tip of the iceberg. This is extremely disappointing.

Yes, ZTE should have to pay the £1.19 billion fine. Perhaps fine them even more if the Commerce Department’s allegations are true. But ultimately this draconian penalty hurts American customers as well as American firms that were reselling ZTE’s products and selling the company components for use in its products.

If we start wholesale denying Chinese companies the ability to purchase components from US companies, then it is going to result in significantly higher prices in consumer electronics and it will create large artificial monopolies. The only foreign companies that will be able to compete in the US market are those that have the ability to create their own intellectual property by having a vertically integrated supply chain. This is a very limited number of companies, which includes Samsung.

And the only Chinese company that I know of that is comparable to Samsung in terms of vertical integration — which can make its own semiconductors, displays, batteries, and memory — is Huawei. Mind you, Huawei makes excellent phones. I have a P20 Pro that I received on loan from the company which contains some truly impressive technology.

The 40MP triple camera system is outstanding, and the screen technology is also as good or even better than what Samsung has on the S9. The Kirin 970 chipset with built-in AI co-processing is state of the art. It is probably the best Android ultra-premium hero phone on the market today.

But if the Commerce Department and the Trump Administration has its way, we will never see this phone imported into the United States and sold by a US carrier. Do American consumers and American corporations want to live in a future where our options for purchasing electronics are much more limited and and expensive than the choices we enjoy today? I don’t think so.

But this appears to be exactly what the current administration under President Trump wants. The only way to stop it from happening is to take our collective message to the polls for the midterm elections on November 6, 2018 and to vote members of Congress sympathetic to this line of reasoning out of office. And to rinse and repeat during the presidential elections in 2020.

Is the US Commerce Department out of control? Are American citizens and businesses being denied choice through draconian export measures? Talk Back and Let Me Know.

Related and Previous Coverage

Citing risks but no evidence, US intel chiefs warn against using Huawei, ZTE phones There was speculation that US government concerns killed Huawei deals with AT&T and Verizon for the Mate 10 Pro.

Now, statements from US intelligence chiefs to Congress confirm those rumors. US outlines Chinese products set to be slapped with 25 percent tariff The Trump administration has unveiled 25 percent tariffs on some 1,300 Chinese products to force changes in Beijing’s intellectual property practices.

Nvidia responds to Trump’s looming trade war with calls for collaboration instead Jensen Huang responded to the looming trade war between the United States and China, saying it’s impossible for any product today to be created in just one country. ZTE returns to full-year profit normality after 2016 aberration

Without a set of fines to pay, the Chinese networking giant returned to posting more than 4 billion yuan of profit for the full year.

Broadcom-Qualcomm went from bad to worse to Trump: The whole sordid saga

Updated: ZDNet documents just how complicated this potential acquisition became and what happened once it reached President Trump’s ears.

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