ZTE’s incident being a wake-up call for China

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The Trump administration has lifted the procurement ban on Chinese telecommunications company ZTE on the condition of a fine and board changes. (source: vimeo)
The Trump administration has lifted the procurement ban on Chinese telecommunications company ZTE on the condition of a fine and board changes. (source: vimeo)

The Trump administration has lifted the procurement ban on Chinese telecommunications company ZTE on the condition of a fine and board changes. Last Friday, Trump confirmed the news on twitter.


Trump: Xi Jinping calls for negotiation

According to Fox News, Xi Jinping had recently contacted Trump via a phone call asking the U.S. president to lift the ban on ZTE. Xi’s reasoning being that many people would lose their jobs if the U.S refuses to sell parts to ZTE. In addition, many of these jobs are in Xi’s hometown.

According to Trump, they settled on a $1.3 billion fine, security controls, board changes and an agreement that the company would source a large percentage of its parts from U.S. companies.

Xi Jinping had recently contacted Trump via a phone call asking the U.S. president to lift the ban on ZTE. (source: Wiki Images/Jette Carr and Flikr/Foreign and commonwealth office)
Xi Jinping had recently contacted Trump via a phone call asking the U.S. president to lift the ban on ZTE. (source: Wiki Images/Jette Carr and Flikr/Foreign and commonwealth office)

 

Whether or not ZTE can survive the blow is not entirely up to Trump. Earlier last week, senators from both Republican and Democratic parties signed on a letter to Trump warning against China’s development of “aggressive military modernisation” which undermines “long-term US national security interests.”

Last year, ZTE was investigated for shipping telecommunications equipment to Iran and North Korea which violated U.S. sanctions. As a result, the company agreed to pay a $1.2 billion fine last year. However, the company paid “full bonuses to employees that had engaged in illegal conduct” instead of punishing those involved, according to a statement from the U.S. department of commerce.

As a result, ZTE received a seven-year ban which cut off all supplies of parts and services from the U.S.

ZTE relies on the US for business and component supplies

Take a look at the components of ZTE’s flagship smart phone and you will see its dependence on the U.S. as a source of parts.

The Wall Street Journal has reported that “U.S. companies supply 60% of the electronic components in ZTE’s Axon M phone based on dollar value.” Qualcomm, SanDisk, and Skyworks Solutions are included as suppliers.

According to ABI, Qualcomm, based in San Diego, is the largest supplier of these components, providing at least 8 of the 25 key components on the device’s main circuit board. Other major components come from SanDisk based in California and Skyworks Solution Inc. in Massachusetts. The protective glass on the phone’s display is provided by Corning Inc. in New York State.

Being the dominant supplier of chips and high-end components, Qualcomm accounts for the chipsets in 84% of mobile phones shipped by ZTE, according to Canalys.

ZTE phones also utilise google’s android operating system. The Wall Street Journal reports that many ZTE mobile users have reported faults after the ban in April, after Google had stopped updating softwares on ZTE devices.

On top of being the primary source of parts, the US market is crucial for the demand of ZTE products. While the company is a relatively small player on China’s technological community, it is the fourth largest supplier in the U.S, after Apple, Samsung Electronics and LG.

Other Chinese brands also relying on the U.S.

On April 22, an article published by Forbes pointed out China’s heavy dependence upon U.S. technology. That includes large Chinese firms as well as the Chinese government.

Related: Analysis: ZTE’s Collapse Reveals China’s Huge Dependence On U.S. Technologies

According to the article, ZTE and Huawei rely on technology in the United States. Baidu, Alibaba, Tencent and Xiaomi also rely on US technology. To some extent, they all rely on the technology, parts, software, and intellectual properties belonging to U.S. companies.

Ma Huateng: The ZTE Incident is a wake up call for China.

Last month, Tencent Holdings CEO Ma Huateng attended the first Digital China Summit in Fuzhou. In a speech, he said that the ZTE incident was a wake-up call” to China’s chip designers.

“It is the compelling obligation for big companies to compete in core technology,” said Ma. “A real company is not determined by its market value or market share, but how much responsibility it takes and whether it has mastered core and key technologies.”

“When we look into the fundamental research of these chip technologies, China still has a very weak base,” said Ma. “However advanced smartphone applications are, without chips or an operating system, they’re merely shaky houses built on sand that can collapse with a push.”

Although China seems to be at the forefront in mobile payment applications, the high speed railway, online shopping platforms and bicycle rental services, its technological foundation is certainly reliant on international suppliers.

An outlook of the “Made by China 2025” plan 

According to the RFI, China imports chips valued at $23 billion (USD) annually. These include chips requested by consumers and those that cannot be produced in China.

The ZTE incident has revealed the instability of China’s science and technology industry. Although the Chinese Communist Party has advocated plans like the “Made By China 2025” with the goal of expanding its share on the global technological market, one can simply cut off its supply chain remove it from the global market.

So why has ZTE taken such great risks?

Some have wondered why ZTE has taken such great risks to violate U.S. sanctions in order to export products to Iran. With close affiliations to the Chinese Communist party, ZTE is bound to support its agenda by supporting Iran’s dictatorship government.

Secondly, if ZTE is able to change the board, why had the company offered bonuses rather than taking bonus deductions for employees who had violated the U.S. sanctions; and consequently violated the sanction again as a result? Because ZTE has such close ties with the Chinese Communist Party (CCP), the company’s senior employees have ties or are family members of CCP executives. While penalizing management staff may not be difficult, penalizing individual employees with state connections certainly can be difficult under the communist regime.

ZTE’s affiliation with the CCP suggests that the fine to the U.S. is likely to be coming out of the CCP’s pocket which is essentially taxpayer’s money. The payment of fines with such public funds is a totally different matter to the deduction of individual bonuses which would affect ZTE employees personally.

Some analysts also believe that China’s funds are invested in real estate, not technology. It is difficult for people to invest in the technological sector in China as returns do not come about in a short time frame. Furthermore, personnel training and capital investment are long term factors which does not attract the vast majority. A guaranteed success and short term benefits are slogans that the Chinese government uses to attract its citizens into investing in state-supported companies. Few enterprises in China have gained the trust of their consumers as brand image is often a low priority. Thus investors have opted to invest abroad or have transferred their savings overseas.

(Compilation from Chinese Eaglevistimes.nz)

The views expressed above belongs to that of the author and does not necessarily reflect the stance of Eagle Vision Times.

 

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