ZTE's U.S. Folly Will Kick China Chip Plan into Overdrive

(Bloomberg Gadfly) -- A year ago I wrote how ZTE Corp. would be forgiven for skirting a U.S. embargo on selling equipment to Iran.

"ZTE's execution of a text-book study in contrition, reflection and reform has helped it build goodwill in America," I said then.

Except that didn't happen, according to the U.S. Secretary of Commerce.

ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.

Stupid. Foolish. Idiotic. Arrogant. Pick your adjective.

The Commerce Department imposed a seven-year ban on the company's purchases of key U.S. technology. ZTE halted trading of its shares Tuesday as it prepares to explain itself to anyone who'll listen.

Losing orders to U.S. companies is no big deal to China's second-largest telecom equipment maker. Getting cut off from American supplies is what will hurt.

The U.S. dominates the essential technologies that go into building communications networks, with Broadcom Corp., Qualcomm Inc. and Intel Corp. all probably selling chips to ZTE. None of them will be losing sleep over the sales they'll sacrifice in the name of national service.

But all should be worried about Chinese President Xi Jinping's aggressive plan to make his country technology independent. Beijing has earmarked billions of dollars to develop semiconductors to avoid the exact scenario playing out in Washington this week.

China's Ministry of Commerce responded swiftly Tuesday morning with the announcement that it will take necessary measures to protect the interests of local companies. ZTE helped create tens of thousands of jobs in the U.S., it said, as if explaining the firm's egregious behavior.

That public defense might well be balanced by a private dressing-down. Even the most patriotic of Chinese regulators should be incensed by the utter stupidity of ZTE in breaching the terms of its U.S. sanctions settlement. 

While China is confident it will one day develop leading-edge technology on its own, it's not there yet. So any move that puts its companies on the U.S. radar is bad for Chinese industry.

China is set to lead development of the coming 5G mobile telecommunications roll-out, which draws heavily on chips and technology supplied by American companies. This embargo could jeopardize that advancement.

Thankfully for China, it still has Huawei Technologies Co., with a management team that one imagines isn't so foolhardy. It's possible that the Chinese government, and investors, will forgive ZTE. The company may even be thrown a few extra contracts to help make up for lost revenue.

But as the government works even harder to avoid a repeat, it won't be in a hurry to forget.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With Business News News On BloombergQuint