US strike on ZTE an­other blow for Qual­comm

Chip­maker caught in the cross­fire


SHANG­HAI/BEI­JING: A move by the United States to ban Amer­i­can firms sell­ing com­po­nents to the Chi­nese tele­com equip­ment maker ZTE Corp will also hit a tar­get closer to home: Qual­comm Inc, a US com­pany that is a ma­jor sup­plier of chips for ZTE’s phones.

The US Depart­ment of Com­merce slapped a seven-year ban on sales to ZTE on Mon­day for break­ing terms of an agree­ment reached last year af­ter it was caught il­le­gally ship­ping goods to Iran.

Caught in the cross­fire is Qual­comm, whose prod­ucts ac­count for the lion’s share of chips in­side ZTE smart­phones. The Chi­nese com­pany shipped an es­ti­mated 46.4 mil­lion phones last year, ac­cord­ing to IHS Markit.

“If you look at ZTE it sells around 45 mil­lion smart­phones per year glob­ally, and al­most half of them have Qual­comm chips,” said Neil Shah, re­search di­rec­tor at Coun­ter­point Re­search.

“So if you look at an av­er­age of 25 dol­lars per chip set that’s close to half a bil­lion dol­lars in rev­enue.”

Canalys, a tech­nol­ogy con­sul­tancy, es­ti­mate that a higher 65% of ZTE phones con­tain Qual­comm chips.

Loss of busi­ness could be just the start for the US com­pany, which had sales of $22 bil­lion last year. As Wash­ing­ton and Bei­jing square off with threats of tar­iffs and trade bar­ri­ers, Qual­comm is a clear tar­get for re­tal­i­a­tion.

Tech­nol­ogy is the crux of the tensions. China wants to boost do­mes­tic cham­pi­ons like Huawei Tech­nolo­gies Co Ltd, which also makes chips. The United States, mean­while, con­cerned about China’s grow­ing might, has shot down Chi­nese tech­nol­ogy deals over­seas, cit­ing na­tional se­cu­rity con­cerns.

That puts Qual­comm, which makes the bulk of its sales in China, in an awk­ward po­si­tion.

“Do­mes­ti­cally there are com­pet­ing at­ti­tudes: for some­one like Huawei, Qual­comm is the en­emy,” said An­drew Gil­holm, di­rec­tor of anal­y­sis for China and North Asia at Con­trol Risks.

“But for many smaller Chi­nese phone mak­ers they are ac­tu­ally very de­pen­dent on Qual­comm.”

Qual­comm, which has gov­ern­ment and de­fence con­tracts at home, is closely tied to the US gov­ern­ment; it is also grap­pling with reg­u­la­tor ap­proval in China for a $44 bil­lion takeover of NXP Semi­con­duc­tors NV.

It may, iron­i­cally, get hit by the ZTE is­sues more in the US than in China.

ZTE, while China’s sec­ond-largest telecom­mu­ni­ca­tion equip­ment maker, has dropped out of the top ten in terms of do­mes­tic smart­phone sales in re­cent years, ac­cord­ing to Canalys, as ri­vals such as Huawei, Oppo, Vivo and Xiaomi have surged.

But in the US it is the fourth largest smart­phone ven­dor af­ter iPhone maker Ap­ple Inc and Sam­sung Elec­tron­ics Co Ltd and LG Elec­tron­ics of South Korea.

ZTE held 11.2% of the US mar­ket last year, ac­cord­ing to data from the con­sul­tancy Canalys.

Its phones in the US use chip sets and pro­ces­sors from Qual­comm, ac­cord­ing to com­pany spec­i­fi­ca­tions on its US web­site, which showed all its “sig­na­ture” phones us­ing Qual­comm chip sets such as Snap­dragon 820 and Snap­dragon 617.

“Most car­ri­ers want Qual­comm chip sets in the United States, so ba­si­cally they are in deep trou­ble,” said Shah, re­fer­ring to ZTE.

He es­ti­mated the US at close to one fourth of the com­pany’s hand­set busi­ness. “They’d be los­ing one of their big­gest mar­kets.”

Qual­comm was not im­me­di­ately avail­able for com­ment.

The ZTE is­sue could cre­ate a triple threat for Qual­comm: the loss of an im­por­tant cus­tomer, ri­vals bol­stered as they step in to fill the vacuum, and a po­ten­tial hit as China looks to re­tal­i­ate against the US.

China’s Com­merce Min­istry said yes­ter­day that it would closely mon­i­tor the ZTE case and be pre­pared to take ac­tion to pro­tect the in­ter­ests of Chi­nese firms.

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