US ups the ante on Chinese industrial espionage claims

State-owned Chinese company Fujian Jinhua Integrated Circuit Company (FJICC) and Taiwan’s United Microelectronics have been formally charged with intellectual property theft, targeting a US firm.

FJICC, which is owned by the People’s Republic of China (PRC) and part of the ‘Made in China 2025’ technology development programme, has already had it US supply chain components severed after intervention from the US Department of Commerce earlier this week, though the formality of a lawsuit escalates the conflict between the US and China further. United Microelectronics has already stated it has cut ties with FJICC, seemingly in an effort to avoid similar sanction from the US.

The lawsuit takes FJICC, United Microelectronics and three individuals into the courtroom, accused of using stolen trade secrets in the production of FJICC and United Microelectronics products. According to the lawsuit, the PRC did not possess DRAM technology prior to the events described in the indictment, though it was a segment which was identified as an economic priority. The three accused individuals previously worked at a subsidiary of US firm Micron, before transferring to United Microelectronics and subsequently setting up the relationship between the company and FJICC. At this point, the trade secrets were allegedly transferred to Chinese control.

If convicted, each company faces forfeiture, though how this will be imposed we are not sure, and a maximum fine of more than $20 billion.

“I am announcing that a grand jury in San Francisco has returned a multi-defendant indictment alleging economic espionage on the part of a state-owned Chinese company, a Taiwanese company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi-conductor company,” said Attorney General Jeff Sessions.

“Micron is worth an estimated $100 billion and has a 20 to 25 percent share of the dynamic random access memory industry—a technology not possessed by the Chinese until very recently.  As this and other recent cases have shown, Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly.  I am here to say that enough is enough. With integrity and professionalism, the Department of Justice will aggressively prosecute such illegal activity.”

Intellectual property theft is one of the cornerstones of President Trump’s assault on China, though taking the company to court is escalating the conflict further. After allegations of corporate espionage early this week, cutting out US components from the company’s supply chain was a logical step, though the lawsuit further compounds the battle.

The ban from the Department of Commerce is similar to the economic dirty-bomb the US dropped on ZTE earlier this year, though that only lasted a couple of weeks. The consequences of that action were clear, ZTE was also sent to keep the dodo company, though there was certainly collateral damage for US firms. Acacia Communications was one company who dependence on ZTE as a customer saw share price decline by more than 30% as a result of the ZTE export ban, though whether there are firms who are similarly dependent on FJICC remains to be seen.

The lawsuit itself represents the greater conflict between the US and China, both of which has ambitions to control the 5G ecosystem and subsequently lead the technology industry of tomorrow. Intellectual property theft is rhetoric which we have consistently heard from President Trump, though should the US prove successful in this case, it would not be surprising to see more investigations. Considering the leading positions Huawei and, less so, ZTE have crafted in the telco industry, these firms might find themselves in the crosshairs before too long.

One thing is certain, this will not be the last aggressive move towards China from this administration. If anything, this is justification for every intervention made by President Trump, think back to the Executive Order blocking Broadcom’s acquisition of Qualcomm and also the dreaded tariffs, as well as validation to accelerate towards further conflict.

“No country presents a broader, more severe threat to our ideas, our innovation, and our economic security than China,” said FBI Director Christopher Wray. “The Chinese government is determined to acquire American technology, and they’re willing use a variety of means to do that – from foreign investments, corporate acquisitions, and cyber intrusions to obtaining the services of current or former company employees to get inside information.

“We are committed to continuing to work closely with our federal, state, local, and private sector partners to counter this threat from China.”

Trump takes next step in Chinese trade war

The United States Trade Representative will place a second round of tariffs on roughly $200 billion of imports from China, effective September 24, though it looks like Apple is passing through unscathed for the moment.

The 10% tariffs will be introduced on September 24, rising to 25% on January 1. Should China take retaliatory action, President Trump has promised to move onto phase three of the strategy, placing tariffs on an additional $267 billion of imports. While these tariffs are thought to spread to consumer goods, it seems some tech companies will escape any financial burdens, at least for the moment.

“After a thorough study, the USTR concluded that China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts,” said Trump. “These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.”

While the White House has attempted to shield the consumer from the negative impacts of the tariff strategy, it was only going to be a matter of time. Not only would the domino effect of the initial tariffs eventually spread through various ecosystems, the US only imports so much from China. Two rounds of tariffs worth $250 billion was bound to hit the consumer pocket before too long. That said, certain products feature on the 300-list of exempt products.

You can see the full list of products on the tariff list here. It is of course incredibly wide ranging, it’s 192 pages long, though the consumer’s back pocket will almost certainly be hit. Seafood features heavily to start, and fans of frogs legs will also suffer. Vegetables are there, as is vinegar. Suitcases, golf bags, baseball mitts, bible paper, carpets, hats and car seats will also be included.

Looking at the technology industry, smart watches, wireless headphones and smart speakers are believed to be on an exempt list, though this is only from the US side. US heavyweights such as Apple might be largely free of collateral damage for the moment, though China will hit back before too long.

Trump might be looking to protect industries and consumers which will largely be in his support camp, though this is not to say Beijing won’t look to inflict damage here. In response to the tariffs imposed in June, China hit back against the farmers, and while iLifers might have been protected thus far it would certainly be a big scalp to claim. Considering the reliance Apple has on China, this would certainly be an effective move.

So far the consumer may not be that concerned about the escalating trade war, as the short-term benefits are a PR win for Trump. Presidential speeches can focus on driving more jobs back onto US shores and the bank accounts are bulging thanks to the tariffs. But this round of tariffs will certainly make life more expensive day to day.

In excluding certain products from tariffs, the Trump administration has simply pointed towards products which it believes could cause political damage. With such an open goal, we imagine the Chinese government will take an incredibly long run up at the consumer technology industry. Look out Apple, Beijing might be eying you up.

Paranoid US politicians urge Google to break ties with Huawei

An open letter signed by a US Senator and three members of Congress to Google CEO Sundar Pichai suggests the internet giant should end its relationship with Huawei on the grounds of national security.

Signed by Senator Marco Rubio of Florida, Congressman Mike Conway of Texas, Congresswoman Liz Cheney of Wyoming, and Congressman Dutch Ruppersberger of Maryland, the letter expresses ‘concern’ about the relationship, and the knock-on effect on national security due to the assumed ties between Huawei and the Chinese Government. Anti-China sentiment is hardly a new development in the US, though the threat to Huawei’s ability to operate is starting to become more dangerous.

“We write to express our concerns about Google’s ‘strategic partnership’ with Huawei Technologies,” the letter states. “Chinese telecommunications companies, such as Huawei, have extensive ties with the Chinese Communist Party. As a result, this partnership between Google and Huawei could pose a serious risk to US national security and American consumers.”

Six US intelligence agencies have already warned American citizens not to use Huawei products or services, FBI Director Christopher Wray has testified expressing concern over Huawei’s influence and the influences on Huawei and recent reports over espionage have also began to emerge. It would appear the US is starting to build a case to take Huawei down the same road as ZTE.

ZTE is one company which has already felt the consequences of getting on the wrong side of the US government. A ban on using US technology or services crippled the companies supply chain, effectively rendering the business useless, and while Huawei is not as dependent on the US as ZTE, any actions which would be deemed even remotely similar would be a very negative turn of events for the vendor.

“We urge you to reconsider Google’s partnership with Huawei, particularly since your company recently refused to renew a key research partnership, Project Maven, with the Department of Defence,” the letter states. “This project uses artificial intelligence to improve the accuracy of US military targeting, not least to reduce civilian casualties. While we regret that Google did not want to continue a long and fruitful tradition of collaboration between the military and technology companies, we are even more disappointed that Google apparently is more willing to support the Chinese Communist Party than the US military.”

The politicians seem to be playing on the patriotic values of Pichai, though we feel this is not the most effective route for the budding public servants to head down. Unlike the Senator and members of Congress, Google is a global company with ambitions to work collaboratively with the international community. They are not pro-isolationist, like many of US politicians seem to be positioning themselves, and are keen to make money. Ending the relationship with Huawei on the grounds of paranoia would not be an effective commercial decision for one of the world’s heavy economic powers. There will need to be a more effective argument, and, above everything else, more evidence.

Such developments however should be quite a worry for Huawei. Aside from ending a relationship with one of the world’s most innovative companies, it would also mean no more access to Google’s products. Some could be replaced, however not being able to access the Android operating system would be crippling for the consumer division. Huawei has been working on an in-house alternative for the worst case scenario, though we worry about the effectiveness of such an alternative.

A couple of weeks ago we ran a poll with the Telecoms.com readers asking whether a Huawei ban on US technology impact your decision to buy a Huawei Smartphone or wearable device. It is not exactly the right question for developments here, though it does provide some insight into the communities thoughts on a Huawei operating system. 27% said they would continue to buy Huawei devices, while 21% said it would depend on how good the OS actually is, but 27% said Android was what made the devices any good and 24% would be worried about influence of Chinese government. Clearly ending the relationship with Google would not be a good move.

The threat of Huawei heading down the same route of ZTE is not imminent, but it is certainly more than a distinct possibility. Politicians seems to be building the case, and considering the current Murica-first rhetoric which seems to be flooding the country, it is certainly something the Huawei executives should be concerned about.

Senate puts stoppers on Trump’s plan to save ZTE

The US Senate has voted 85 to 10 in favour to reinstate penalties on ZTE, despite President Trump’s attempts to ease pressure on the business and effectively save it from extinction.

The move from Trump could be viewed as an olive branch to ease growing tensions between the US and China, some of which can be attributed back to the President itself, though this bipartisan vote effectively side-roads any recovery efforts. The Bill will have to be reconciled with another bill already passed by the House, though it does look like Trump’s grand plan to ease international tension between the US and China starting to unravel.

The measure was included in a wide-ranging Bill focused on national security, known as the National Defence Authorisation Act, was backed by Senators from both sides of the aisle, with Republican Senators Tom Cotton of Arkansas and Marco Rubio of Florida teaming up with Democrats such as Minority Leader Chuck Schumer of New York and Elizabeth Warren of Massachusetts. With the provision being heavily backed by both sides, the Senate faces a showdown with the White House at an uneasy time for international relations.

This news should hardly come as a huge surprise though. When Trump suggested he was keen to save ZTE, and also when the Commerce Department tabled the deal, politicians from both parties were keen to object. A question was asked of the President; how can a company which is a suspected threat to national security be let off the hook so easily? Little seems to have been done to ease concerns, and it would now seem Trump will be powerless to save the struggling vendor.

ZTE found itself in hot water after violating US trade sanctions on Iran and North Korea, before then being caught out lying to US officials. The original seven year ban on using US products, services and IP brought the vendor to the edge of extinction, forcing it to cease operations, though Trump’s call-to-action seemingly brought ZTE back onto the straight and narrow.

For those who feared the escalating trade war between the US and China, this could be considered one of the worst possible developments. Some might have viewed the move to save ZTE as a pragmatic decision to get on friendly terms with China, though the actions of the Senate may well throw the relationship back into disarray. With tariffs set to come into play on July 6, and an the imminent retaliation from China, the situation could be about to get a lot worse.

Trump’s ZTE moves ease tensions, but $50bn tariffs still on

The last couple of weeks have seen President Trump try to get back on the good side of Chinese authorities by saving ZTE, but confirmation of trade tariffs on Chinese goods is another contradictory twist in the on-going saga.

The tariffs were promised back in March, and since then Trump has proved to be the aggressor, as well as the saviour of the almost-doomed ZTE, before having authority to ease sanctions eased stripped away by Senators. The determination to save ZTE has been reiterated over Twitter, with some outsiders possibly assuming this a move to ease tensions with the Chinese government, only for the tariffs to be reconfirmed.

The whole seesaw exchange has been a baffling one to follow, purely because there hasn’t been much consistency to the swerves, swipes or strokes. Perhaps this is the ‘deal maker’ strategy from Trump; lure opponents into a false sense of security, before upping the ante and then presenting a less aggressive, more palatable response. Emotionally stress the opponent with erratic behaviour and manipulate them into accepting a deal due to the fear of it disappearing after a bad night’s sleep in the West Wing.

In terms of the tariffs, the total has dropped from $60 billion to $50 billion, but the Trump administration is maintaining a tough stance of trade equality. The final list of tariffed items will be released by June 15, but in the meantime the US will be working to restrict the amount of investment which can be made by Chinese entities or individuals into ‘industrially significant’ US companies or technologies, as well as removing trade barriers into the Chinese market.

“…the United States will request that China remove all of its many trade barriers, including non-monetary trade barriers, which make it both difficult and unfair to do business there,” the statement reads. “The United States will request that tariffs and taxes between the two countries be reciprocal in nature and value.”

The Trump administration seems to want to play hardball with the Chinese government, but for the moment, it is difficult to judge who is gaining the upper hand. In a globalised economy, the imposition of tariffs leans towards isolation, which will never benefit anyone in the long-run. That said, we have not seen any significant reaction from the Chinese government just yet. There has been a bit of posturing, but nothing meaningful.

The US has shown the world what it can do. With a single signature, US sanctions brought a multi-billion organization to the edge of extinction. It was not only a message to China, but perhaps a hint to the rest of the world as well; you might want to develop Plastic Pavements or Silicon Roundabouts, but we are still the bosses of the technology world. Unfortunately we do not know what the repercussions of Chinese aggression could be.

Perhaps the Chinese government is willing to let the Trump administration flap around, erratically and emotionally throwing threats and compromises across the Pacific for the meantime. Eventually doing an awkward impression of a testosterone-fuelled teenager will grow tiresome, and a sensible, diplomatic solution will presented. Maybe this is when China will start to produce meaningful observations and actions.

Rowdy Senators snap Trump’s ZTE olive branch

Senators are planning to derail President Trump’s plans to ease pressure on ZTE, potentially removing the ban on US exports, pointing out the law cannot be bent and ignored to satisfy political objectives.

The emergence of this resistance comes in the form of a letter from 26 Senators, representing both sides of the aisle, seemingly in reaction to comments made by Trump. The edge of menace and aggression has been drained out of the government in recent days, as the administration has eased its foot off ZTE’s neck. Trump has suggested a $1.3 billion fine, as well as management change at ZTE would be enough of a punishment, though the Senators disagree.

The letter states:

“We urge you not to compromise lawful US enforcement actions against serial and pre-meditated violators of U.S. law, such as ZTE. This is particularly critical when the violators are state-owned and -influenced, part and parcel of China’s policies and practices designed to strengthen its own national security innovation base, and essential tools of efforts to spread China’s influence in other countries that pose national security threats to the United States. Export control and sanctions laws should not be negotiable, because fidelity to the rule of law is a key part of what distinguishes the US from a country like China that is ruled by a Communist dictatorship.”

It seems the Senators are going to hold Trump accountable to his and his administrations hostility towards China. Fingers have been pointed at the Chinese for breaking the law, and the Senators are reminding the President that he cannot ignore these infringements, bend the rules or forget about enforcement now China seems to be favourable to the idea of buying more US goods.

Those who are in favour of globalisation and borderless trade would have let out a sigh of relief as tensions seemed to calm, but should Senators block any deal Trump puts forward, the potential for a trade-war could well return. This could well turn into a bit of a disaster for the Trump administration.

The purpose of the ZTE denial order could simply have been to demonstrate the might of the US government and the power of US sanctions. It certainly worked, bringing ZTE to its knees, but might well have just been a negotiating tactic to weaken the position of China. Demonstrate how reliant the Chinese economy is on US suppliers and technology, before easing back and finding a more palatable solution for the US government.

Trump might have over-estimated his control over the situation and his ability to reign back in sanctions, as it seems Senators have picked up the scent and are determined to make an example of ZTE. The whole exercise might have been a play out of ‘The Art of the Deal’, but the Senators clearly haven’t read it.

Alongside the letter, the Senate Banking Committee has also approved an amendment to a bill that would give regulators more authority to block foreign investment in the US, effectively blocking Trump’s ability to ease sanctions on ZTE. The bipartisan committee voted 23-2 in favour of the amendment, which was proposed by the Democrat Senator of Maryland, Chris Van Hollen.

“If the president and his team won’t follow through on tough sanctions against ZTE, it’s up to Congress to ensure that it happens,” said Minority Leader Senator Charles Schumer.

For sanctions to be eased on ZTE, the firm will still have to prove to Congress that it is not breaking the law. You have to wonder whether the President actually cares whether ZTE is breaking the law or not; as long as the Chinese trade deficit is brought down, it doesn’t really matter. At least that is what it looks like watching from the UK.

The Trump administration did a fantastic job of shaking the cage and awakening the paranoid patriot inside each of the Senators with stories of spies and bugs in telco equipment, but now the President is struggling to keep a lid on the situation. The problem with democracy is that people don’t have to think the same way as you just because you are in charge. Trump is seemingly finding this out very quickly.

US and China reach ‘handshake deal’ to ease tension and save ZTE

US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He have reportedly laid the groundwork for a deal which would end escalating tensions between the two nations and save the fast falling ZTE.

According to Reuter’s sources, a deal could be reached between the two countries before US Commerce Secretary Wilbur Ross heads to China with his delegation to continue trade talks. Although there is no official confirmation from any of the parties as of yet, a deal would result in China increasing agricultural imports from the US, while the US would lift its ban on ZTE making use of US components. A shake up of the ZTE management team and Board of Directors is also like to be a condition in the exchange.

It has certainly been a rollercoaster couple of weeks for everyone involved. ZTE has been walking towards the bright light, only to be offered a lifeline with President Trump’s apparent change of heart. A ban would have destined too many people to the job centre, according to the President, kicking US ideals into action. And it certainly isn’t just ZTE employees who will be relieved by the news.

Following the announcement US companies would be banned from selling to ZTE, several companies plunged in the stock market. Oclaro, Inphi and Lumentum were three who felt the collateral damage, but Acacia Communications was hit the worst as share price plummeted 35%. Some of the mutilation has been reversed since, but prosperity will not be guaranteed until the ZTE ban has been officially lifted; during 2017, 30% of Acacia revenues were attributable to ZTE.

The whole saga has exposed how vulnerable the Chinese vendor actually is. When 10-15% of a company’s supply chain is compromised, the team would certainly be hitting the panic button, but ZTE’s dependence is rumoured to be much higher. Although exact figures are not known, chips are a good example, with it rumoured 70% of the ZTE smartphone chips are sourced from Qualcomm. Redeveloping a supply chain would take years, but doing it without any contribution from US companies might well be completely unfeasible. This was the impossible position ZTE found itself in.

China might be racing for a leadership position in the 5G competition, but this has been an embarrassing series of events. The US has shown how easily it can cripple a multi-national, multi-billion dollar corporation, seemingly as a reminder it is the dominant player in the technology world. ZTE has been involved in some very suspect activities over the last couple of years, and did deserve to be punished, but some cynics might simply put this exercise as a power play by the US. By kneecapping ZTE, the US is simply demonstrating why no-one should challenge the dominance of Silicon Valley on the technology world. The Silicon Valley protection money taxes could have encouraged the government to go smash a couple of windows and break a few fingers.

What this means for China’s ambitions to run the technology world remain to be seen. The ZTE ban didn’t seem to have much of an impact on the operations of many European operators, but if the US can kneecap ZTE in this manner, could it do the same to Huawei? Should the latter’s supply chain be thrown into disarray, this would cause chaos. Operators are unlikely to remove Huawei or other Chinese vendors from their supply chain completely as a result of this conflict, but there might be some more stringent due diligence and a bit more work to seek alternative suppliers.

While the apparent tactics of President Trump might be questionable, the outcome cannot be questioned. The ZTE ban was essentially the Commander-in-Chief throwing a monumental dirty bomb into the technology camp, with collateral damage being shared, and while some might suggest no-one has come out of this scenario better off, the US has reasserted itself at the top of the technology totem pole. US sanctions can potentially be viewed as an economic doomsday device, and this might well be an exercise to remind China (and the rest of the world) of this fact.

China might be home to some of the world’s economic heavyweights, but it does not have the breadth and depth of the US technology industry. It is still too reliant on US exports to go toe-to-toe with an impulsive and erratic Trump administration.

Cagey statement hits pause button on US-China trade-war

A joint-statement released by the US and Chinese government has calmed the stormy waters but vague promises, imprecise objectives and notable omissions have opened the door for criticism.

The statement which you can see below (courtesy of The Washington Post) is what you would expect from two governments which are trying to calm tensions, but seemingly haven’t made any progress whatsoever. There is a vague commitment from the Chinese government to increase the flow of American goods and services into the country, but the absence of any details is perhaps more notable than anything else.

What the statement seems to be missing is details on how much more China would purchase, whether there are any timescales or milestones, if the US would back down on the tariffs, remove the penalties imposed on steel and aluminium, or if there have been any developments to save the endangered ZTE business.

Statement

The overall objective here is to address the trade deficit the US faces. While there have been vague promises, but nothing put down on paper as of yet, to increase Chinese consumption of US goods and services by $200 billion, there is still some way to go in reversing the $335 billion deficit if President Trump is to stay true to his word.

Unfortunately the telecoms and technology industry has seemingly become a pawn in the political game of chess which is beginning to unfold. Some sceptics might have come to the conclusion the Chinese regulator was blocking the Qualcomm acquisition of NXP as a power play as the two nations jostle for control of the digital economy, while other might assume the ZTE disaster was a retaliation from the US. The absence of any comments regarding the ZTE saga perhaps indicates the US government is keeping this trump card in its deck for the moment. Trump might have urged the Department of Commerce to find a solution to keep ZTE in business, but the omission is a worrying sign.

While this might look like a frustrating outcome, at least it creates a brief moment to breathe. The prospect of trade war between the two nations seemed to be inevitable, though hitting the pause button is a good sign, allowing the opportunity for external influences to make a mark on the saga. Tariffs and trade wars results in positive outcomes for very few people, at least now there is the opportunity for level-headed parties to express their opinions.

For the moment the world might have to wait and see. Commerce Secretary Wilbur Ross will be leading a team of representatives for meetings in China next over the course of the next week, which could prove to be a timely factor. The public consultation for US tariffs on the import of Chinese goods is set to end this week, meaning a brand new chapter in the rising tensions tale. There has been little comment regarding the current state-of-play here, placing increased emphasis on Ross’ meetings.

Both sides are seemingly calm at the moment, but this might not last long. Douglas Irwin, a trade economist at Dartmouth College, commented on twitter he has seen little evidence of a Trump trade strategy as of yet. What happens next in this saga is anyone’s guess.

ZTE seems to be doomed. Who’s next?

ZTE employs 75,000 people and sold $17 billion of gear last year, but seems to have been wiped out with one stroke of a US regulatory pen. That’s scary.

We were among the apparent majority of the telecoms industry that perhaps didn’t fully acknowledge the implications of the US slapping an export ban on ZTE. Of course it was bad, and who could help but be moved by ZTE’s existential angst and pleas for mercy, but these things usually sort themselves out in the end don’t they?

Not this time, apparently. Earlier this week ZTE took the extraordinary step of announcing it had ceased is major operating activities thanks to not being able to score any US components, upon which both its networking and smartphone businesses are heavily dependent. This is an incredibly dramatic development for such a large and established company and it has sent shockwaves through the industry.

To get a more of a sense of the implications we spoke to CEO of telecoms consultancy Northstream, Bengt Nordstrom. “This week’s news confirmed what many people already suspected, that if the ban isn’t lifted then it’s game over,” he said. “The most likely scenario for me is still that the ban will be modified after negotiations, but ZTE is still very vulnerable.”

This seems hard to argue with. All ZTE commercial partners are currently frenziedly reviewing their options and looking for alternative suppliers. All operators we have spoken to have been quick to either stress they don’t use ZTE kit or have more than one supplier.

“ZTE is just one of a number of suppliers that Orange works with, including Huawei, Ericsson, Nokia and Cisco, amongst others,” an Orange spokesperson told us. “Today, Orange uses ZTE equipment mainly in its service platforms in Africa and for our FTTH deployment in Spain. We are in the process of assessing the US ban decision with regards to ZTE. The Group has always maintained a strategy of partnering with a number of providers so that we have alternative suppliers at all times. We do not envisage any impact on equipment parts currently.”

Nordstrom thinks one of the effects this will have on the broader telecoms industry is that any operators who only use a single supplier, regardless of who it is, will give that strategy some pretty urgent review. “All operators need to consider at least a dual operator strategy,” he said.

The elephant in the room here, at least as far as we’re concerned, is Huawei. The Chinese giant is not currently subject to anything like the punitive measure ZTE is, although the US continues to ban it as a public sector supplier there and it’s severely curtailed in the US devices market too. Furthermore the US has reportedly started looking into the same kind of sanction-flouting activity that eventually landed ZTE in its current predicament.

We’re not aware of any evidence that Huawei has done anything that could draw the ire of US agencies, but we have to wonder whether the broader industry might be a bit spooked by what has happened to ZTE and whether Huawei might get swept up in the escalating trade aggro between the US and China. At the very least if some operators that are wholly dependent on Huawei decide to hedge their bets with another kit vendor that would surely be a negative for Huawei.

Even if ZTE somehow wins an appeal against this ban, or if US/China horse-trading results in a significant downgrade of the measures, the damage appears to have been done. Commercial partners currently looking for alternative aren’t going to suddenly stop and who would want to take the risk of things suddenly changing for the worse once more anyway?

The US government under President Trump (who, let’s not forget, placed the economic threat posed by China at the forefront of his election campaign) has demonstrated that it’s willing to wreck even the largest companies if it’s not happy with them. If it can happen to ZTE then, surely, it could happen to any company. That must be an unsettling thought for anyone in the telecoms industry contemplating major deals right now.

Share price plunges indicate who has the upper hand in US/China trade war

If ZTE has acted in violation of US trading regulations there is no question it should be punished, but investor reaction to the ZTE ban perhaps shows US companies depend more on China than vice-versa.

Yesterday the US Department of Commerce’s Bureau of Industry and Security (BIS) has imposed a denial of export privileges order against ZTE, meaning US companies cannot do business with ZTE for seven years. The result of this order will be felt by ZTE, which has been working itself into a useful position in the US for devices, but it could spell disaster for some US firms.

At the time of writing, the impact was quite notable for these firms:

  • Acacia Communications down 35.97%
  • Oclaro down 15.18%
  • Inphi down 5.96%
  • Lumentum Holdings down 9.06%
  • Finisar down 4.05%
  • NeoPhotonics down 3.98%
  • Qualcomm down 1.72%

All of the above firms are somewhat reliant on being a ZTE supplier, and as you can see from the numbers above, the impact is quite varied. Qualcomm counts ZTE as a customer, but the same could be said for pretty much every other mainstream smartphone manufacturer. Acacia Communications, which manufactures components for fibre optic networks, has a considerable amount of exposure, with 30% of its business attributable to ZTE over the course of 2017.

This is perhaps one of the most worrying aspects of President Trump’s trade war with the Chinese; we suspect US companies need the Chinese economy and its companies more for growth than the other way around. This is just one example, however if (or perhaps when) Chinese authorities react to US, restricting their ability to do business in the country, what impact will that have on the spreadsheets? We don’t think it will be a very positive one.

US technology companies are the powerhouses of the global economy. In pretty much every sub-sector, a US company will be at the top, or pretty close, of the rankings. The rapid growth and digitalisation of the US economy was the one of foundation blocks of this incredible rise in power, however the US is now a mature market. For future profits, these powerhouses have to look to the international markets, and when you look internationally, it usually means China.

Years ago we used to talk about the BRICs (Brazil, Russia, India and China) nations as the ones fuelling global economy, but owing to the rapid acceleration of China, and more recently India, the scope of ambition has been refined. China has a monumental population which is just awakening to the digital economy, while businesses are undergoing the digital transformation process experienced in the Western economies years ago. Some might point to the Chinese companies which are incredibly advanced, the likes of Alibaba or Huawei, but considering the sheer size of the country, there is still a huge amount of profit to be made.

ZTE is only one company, but the dip in share price above shows how dependent some companies have become on Chinese customers and the nation’s economy on the whole. If, or when, the Chinese government retaliates to Trumps tariffs on a much wider scale, making it harder for US companies to do business, we dread to think of the consequences spread throughout the US technology industry.