Why US strike on ZTE another blow for Qualcomm

A Chinese national flag and two flags bearing the name of ZTE fly outside the ZTE R&D building in Shenzhen China

A Chinese national flag and two flags bearing the name of ZTE fly outside the ZTE R&D building in Shenzhen China. Image Reuters

The US government's assault in Chinese electronics makers continued today with news that the US had slapped ZTE with a 7-year ban for violating an agreement between the two.

The US Department of Commerce has implemented a ban on American companies selling components to ZTE.

ZTE officials did not immediately respond to requests for comment. While it is not related to links between the ZTE and the Chinese government, it is actually because of shipping the USA hardware to the United States sanctioned countries. ZTE may have to either buy from a competitor or get chips from a Taiwanese company whose products generally lag those of its US rival's in performance.

Viavi Solutions (VIAV) is one company that has business with ZTE, though only a small amount, according to William Blair analyst Dmitry Netis.

As for ZTE, past year it paid a whopping $1.19 billion fine to the USA government for selling goods and services to Iran and North Korea.

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Caught in the crossfire is Qualcomm, whose products account for the lion's share of chips inside ZTE smartphones.

According to Reuters, US manufacturers are estimated to provide up to a third of the components in ZTE's network equipment and smartphones, so the US action could have a disastrous impact on the Chinese business.

With the ban now in place, it's unclear how ZTE can keep competing properly in the smartphone market.

ZTE paid $890 million in fines and penalties and agreed to take other steps but has not followed through, the commerce department said.

On Monday, Britain's main cyber security agency said it had written to organizations in the telecommunications sector warning about using services or equipment from ZTE.

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ZTE has sold handset devices to USA mobile carriers AT&T Inc, T-Mobile US Inc and Sprint Corp.

Regarding the United Kingdom, officials there said they were specifically concerned about new Chinese laws they said gave China "wide-ranging powers of compulsion", according to an official familiar with the matter.

The company was supposed to take disciplinary action against multiple individuals at ZTE.

On Monday, the Commerce Department announced that it would begin denying export privileges to ZTE for repeatedly misleading its Bureau of Industry and Security.

Now, the USA government is dropping the hammer. USA versions of ZTE phones were found to have a backdoor in 2012.

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The move is the latest crackdown on telecom equipment suppliers by governments around the world who are showing increasing concern about using telecoms networks supplied by Chinese companies.

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