[American
microchips power ZTE’s wireless stations. American optical components go into
its optical fiber networks. Google’s Android operating system runs its
smartphones. As the Trump administration threatens a trade war to stymie
China’s plans for promoting advanced industries, the firm’s travails are
proving an apt demonstration, for China’s leaders, of exactly why the country
needs to be more self-sufficient in technology.]
By Raymond Zhong
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ZTE’s
logo on a building in Shanghai. The firm said it had ceased “major operating
activities” after
the Trump administration banned it from using components made
in the United
States. CreditJohannes
Eisele/Agence France-Presse — Getty Images
|
SHENZHEN, China — Not Apple. Not Huawei. The
first casualty of the high-tech cold war between the United States and China
might be the biggest electronics maker you’ve never heard of.
The Chinese firm ZTE said on Wednesday it had
ceased “major operating activities” after the Trump administration banned the
company last month from using components made in the United States. With
manufacturing halted at the ZTE plant in Shenzhen, factory workers have been
getting called in for training sessions every other day or so — a snooze, they
say. The rest of the time, they loaf around in nearby dorms.
Trading in the company’s shares has been
suspended for weeks. Staff members have been instructed, in new guidelines
reviewed by The New York Times, to reassure anxious clients, while being sure
to avoid discussing with them the American technology from which the firm is
cut off for the next seven years.
One of China’s most internationally
successful technology suppliers, with about $17 billion in annual revenue, ZTE
is facing a death sentence. The Commerce Department has blocked its access to
American-made components until 2025, saying the company failed to punish
employees who violated trade controls against Iran and North Korea.
American microchips power ZTE’s wireless
stations. American optical components go into its optical fiber networks.
Google’s Android operating system runs its smartphones. As the Trump
administration threatens a trade war to stymie China’s plans for promoting
advanced industries, the firm’s travails are proving an apt demonstration, for
China’s leaders, of exactly why the country needs to be more self-sufficient in
technology.
President Xi Jinping recently issued a
rousing call to action, according to the state news agency Xinhua.
“By tightening our belts and gritting our
teeth, we built ‘two bombs and one satellite,’” Mr. Xi said, referring to a
Mao-era weapons development program. “This was because we made best use of the
socialist system — we concentrated our efforts to get great things done. The
next step is to do the same with science and technology. We must cast away
false hopes and rely on ourselves.”
ZTE’s moment of crisis, if it leads to the
company’s collapse, could also show how the tech cold war might ripple around
the world.
The company has 75,000 employees and does
business in more than 160 countries. It is the No. 4 smartphone vendor in the
United States. And its telecommunications gear supports the digital backbone of
a great swath of the developing world.
The wireless carrier MTN, which serves 220
million people in 22 nations in Africa and the Middle East, said last week that
it was assessing contingency plans, “given our exposure to ZTE in our
networks.” The chief executive of the Norwegian carrier Telenor, which has
large operations in Asia, said the company was “following the situation
closely.”
Several employees described the situation
inside ZTE on condition of anonymity, fearing reprisals from their employer. A
company spokeswoman declined to comment.
The United States has for years deemed ZTE
and Huawei, its much larger rival in network gear, to be national security
threats. Large American mobile carriers already shun the companies’ telecom
equipment. The White House is mulling an executive order that would make it
harder for government agencies to buy from them.
In response to the sanctions issued last
month, ZTE said it had worked to improve its compliance practices. It has
requested a stay on the export ban and has sent additional information to the Commerce
Department in support of its argument.
Zhongxing Telecommunications Equipment’s
corporate predecessor was established in 1985, as a joint venture between a
state-owned aerospace factory and two other firms. Within a few years, the
company was producing equipment for phone operators in the Chinese countryside,
before expanding into cities and then overseas.
“Zhongxing” means “China Prospers.” The
company’s controlling shareholder is Shenzhen Zhongxingxin Telecommunications
Equipment, which is nearly half-owned by two Chinese state entities. Several
members of the firm’s board also have leadership roles at Zhongxingxin. ZTE
says Zhongxingxin does not interfere in its business decisions. Unlike China’s
state-controlled enterprises, which are often run by Communist Party officials
who jump from company to company, most of the top executives at ZTE are
veterans with technical backgrounds.
The electronics maker released its first
smartphone for the American market in 2011. Within two years, it was a top-five
vendor in the United States, largely targeting people who wanted a phone but
not a long contract with a cell carrier. Even in China, the company has not had
great success selling smartphones.
“It’s extraordinarily impressive, what
they’ve done in the U.S.,” said Avi Greengart, a consumer tech analyst with the
research firm GlobalData. “So many Asian companies either said they would come
to the U.S. and then had to pull back — like Xiaomi, like Huawei. Or they
invested in the U.S. and weren’t able to make it work.”
ZTE’s secret, Mr. Greengart said, was a light
touch. The company’s American managers have had significant leeway in tailoring
their products to the local market. “That’s not the way many of its competitors
work,” he said.
The company was, for instance, quick to spot
that Americans were gravitating toward larger phones. It offered inexpensive
devices with big screens — if not those with the highest resolution — and
fingerprint readers at a time when such features were considered premium.
To build its brand, ZTE has sponsored several
National Basketball Association teams. In February, the company and the
Cleveland Cavaliers celebrated Chinese New Year at a game against the Brooklyn
Nets. The Quicken Loans Arena in Cleveland was decorated with Chinese lanterns.
An acrobat rode around the court on a unicycle at halftime.
In Africa, ZTE and Huawei have helped connect
many of the continent’s fast-growing economies, often with the help of generous
export financing from Chinese state banks. ZTE has laid thousands of miles of
fiber optic cable in Ethiopia and it recently signed an agreement with MTN of
South Africa to test fifth-generation wireless, or 5G.
Some of the company’s deals with
cash-stricken governments have attracted accusations of corruption and
overbilling. On the whole, though, ZTE is known in Africa for high quality and
good service, said Dobek Pater, a telecom expert at the research firm Africa
Analysis.
“The initial perception — of Chinese
companies coming in and being very secretive and not wanting to have much to do
with the locals — has changed over the past decade,” he said.
In Iran, it was secrecy of another kind that
got ZTE into trouble.
According to the United States government,
the company used an elaborate system to sell American-made goods there, and
then lied and deleted emails when the Commerce Department began to investigate.
It even made plans to resume shipments to Iran while the investigation was
ongoing, according to the Commerce Department.
“At home, they might have been doing some
things not according to standards, and then, when it came time to
internationalize, they might not have done so entirely properly,” said Gu
Wenjun, chief analyst at ICwise, a semiconductor market research firm in
Shanghai.
“For other companies thinking about how to
follow the rules and manage internal risks, I think this is going to serve as a
wakeup call,” Mr. Gu said.
At the very least, the sanctions against ZTE
appear to be supercharging Beijing’s determination to upgrade China’s microchip
makers, which have struggled to keep up with global industry leaders despite
state support.
Chris Lane, a telecom analyst in Hong Kong
with Sanford C. Bernstein, believes that China now has the resolve to whip its
semiconductor industry into world-leading shape, even if it takes a decade to
do so.
“They’re going to pour billions of dollars
into preventing this from ever happening again,” he said. “In the long run,
strategically, this might be worse for the U.S. than the current situation.”
Late last Friday, ZTE management sent an
email to staff members updating them on the company’s efforts to reconcile with
Washington.
“Even the longest road has an end,” the email
concluded. “Even the longest night ends in day. Let us stay resolute and
confident, and, full of hope, greet the coming dawn!”
Elsie Chen contributed research.
Follow Raymond Zhong on Twitter: @zhonggg.
