May 15, 2018 - Despite President Donald Trump’s recent promise to make it possible for ZTE, the Chinese telecommunications equipment manufacturer, to import U.S. components and technology again, the fracas was a giant red alert to ZTE’s industry peers: If their supply chains include U.S. firms, they aren’t safe from adverse surprises. Trump shouldn’t be surprised if these firms begin taking defensive action that hurts American commercial interests. Of course, they won’t find it easy to do that.
It would be hard for Chinese manufacturers not to be alarmed. The U.S. doesn’t just pursue foreign companies for alleged violations of its sanctions against Iran and North Korea; in ZTE’s case, it demanded punishment for specific culpable employees, and failing to mete it out was one of the stated reasons for the seven-year ban on sourcing anything from U.S. firms. Even aside from Trump’s obvious use of the order to renegotiate trade terms with China, this is a level of meddling few companies are willing to allow. The Chinese government isn’t happy to live with this kind of vulnerability, either; in March, even before the ZTE ban was announced, it publicized a plan to raise $31.6 billion to invest in local chip companies so it could phase out some $200 billion in annual semiconductor imports.
That won’t help in the short term, especially in network equipment production, the line of business that provides 59 percent of ZTE’s revenue. There, U.S. suppliers like Acacia Communications, Analog Devices and Xilinx, all of which have worked with ZTE, aren’t easy to replace. ZTE’s plight creates an opportunity for European competitors making network equipment, such as Nokia and Ericsson, as well as for bigger Chinese peer Huawei — unless it, too, gets slapped with sanctions as a result of the ongoing U.S. criminal investigation against it.
In mobile phone production, however, Huawei is much better prepared for such an eventuality than ZTE was. ZTE used chipsets from U.S. manufacturer Qualcomm in all the phones it sold in the U.S. (where mobile operators sold the handsets under their own brands as well as the Chinese firm’s) and half of the rest. Qualcomm has a massive headstart over competitors. But then, ZTE, with $16 billion in 2017 revenue, cannot afford to spend as much on the development of phones — its secondary line of business, providing less than a third of revenue — as Huawei, which sold $27 billion worth of consumer devices last year.
Huawei uses in-house Kirin processors even in expensive flagship models that compete with products from Apple and Samsung. Disassembling the Huawei P20 Pro flagship reveals that it uses in-house audio, transceiver and power management components, too. They are made by HiSilicon, Huawei’s fully owned subsidiary.
Huawei does source some parts for the P20 Pro from U.S. companies — a battery charger controller from Texas Instruments, memory from Micron Technology, a Skyworks Solutions LTE module and a Cypress Semiconductor WiFi and Bluetooth module. Alternatives to all of these are made outside the U.S. Samsung’s flagship, the Galaxy S9, uses practically all these components from Asian manufacturers, including its own semiconductor unit and the Japanese companies Toshiba and Murata. This means components of comparable, flagship-worthy quality are obtainable outside the U.S. — the only worry is that some of them may use bits of U.S. technology, which would make them ineligible.
Of course, a U.S. export ban could make it difficult even for third-party producers to supply a sanctioned company. For example, Taiwan has required its component manufacturers to ask permission from the government before selling anything to ZTE. Who knows how the U.S. might react? The Trump administration could just be looking for an excuse to hit out at Korean semiconductor manufacturers, who compete successfully with U.S. ones.
Mobile phone components are by now sufficiently commoditized, however, to turn emergency sourcing from a hellish process into a merely difficult one. Inevitably, even the core parts of a handset — such as processors — will turn into more of a commodity. Huawei isn’t the only Chinese company to use an in-house processor today: Xiaomi launched its Surge S1 chipset last year. It’s not a flagship-level one, but it’s decent for mid-range phones.
The biggest problem U.S. export bans could pose for phone makers has to do with software: Android, though open source, comes from a U.S. company. Tizen, Samsung’s open source operating system, is far inferior to Android, and Huawei is reportedly working on a system of its own — just in case.
In the last 10 quarters, according to IDC, which collects and analyzes smartphone sales data, the biggest Chinese manufacturers —Huawei, Transsion, Xiaomi and BBK Electronics with its Oppo and Vivo brands — have increased their share of global unit sales from 17 percent to almost 31 percent. I understand why: For the last few years, I’ve been using smartphones from Chinese manufacturers. They are the only ones that come at fair prices, and any difference in performance with U.S.- or Korean-based producers’ handsets has been erased — at least from an ordinary user’s perspective.
Consumers care little about Trump’s trade wars or even U.S. sanctions policy. They just want well-made, reasonably priced phones. That’s a good reason for them to root for the Chinese manufacturers as they work on their contingency plans which, given the U.S. government’s unpredictability, must bypass the very U.S. companies whose bottom lines and workforces Trump has vowed to protect.
As Bloomberg Opinion’s Tim Culpan wrote in April, U.S. chip-makers are not losing sleep yet over China’s diversification agenda. Asian nations may not quite be there yet in terms of providing viable alternatives to U.S. products and technologies. But then the first Kirin processors only became available in 2012; the evolution to the current, highly competitive generation has only taken five years. At this rate, Trump may be the last U.S. president able to exploit the country’s technological advantage in trade wars.