Chips and software explain ZTE’s settlement of US sanction charges

ZTE Corp, the world’s fourth largest telecommunications equipment supplier by revenue, is estimated to import about US$2.6 billion of hardware and software from suppliers in the United States each year, accounting for up to 30 per cent of its total annual bill of materials.

Shenzhen-based ZTE's recent settlement with the US government over its violation of long-standing trade sanctions on Iran and North Korea reflects how vital the American supply chain means to the Chinese company. The importance extends to US companies like Qualcomm Technologies, which provides chips used in smartphones, as well as Xilinx and Intel subsidiary Altera Corp for their chips used in mobile base stations.

But ZTE is not the sole Chinese technology company that depends on integrated circuits from foreign suppliers.

Lenovo Group, Huawei Technologies and smartphone maker BBK Electronics are huge buyers of foreign technologies. These three companies were ranked among the world’s 10 largest customers of semiconductor products last year, spending a combined US$28.55 billion, up from US$23.65 billion in 2015, according to Gartner’s data.

The US sanctions case may have given ZTE an opportunity to step up its own research and development efforts, supporting the Chinese government’s aggressive push to accelerate the expansion of a home-grown chip industry.

The company’s goal is to provide itself with more key components to replace those that it buys from foreign suppliers, according to Jefferies equity analyst Edison Lee.

The firm’s strategy in designing chipsets used on smartphones, for example, is focused on technology leadership, Lee said.

“These chipsets, however, are lower-end products,” he said. “They will need more research and development to be able to design chipsets for high-end handsets.”

ZTE declined to comment for this article.

The company, through subsidiary ZTE Microelectronics Technology Co, designs chipsets deployed in base stations used by telecommunications network operators to support wireless access over multiple frequency bands.

It also develops semiconductor products used in smartphones and other mobile devices destined for the mainland as well as to Brazil, Indonesia and Russia. Contract chip manufacturers build these products for ZTE.

This ZTE business has more than 2,000 research and development staff on the mainland and the US. It’s currently developing chips with so-called 28-nanometre technology. A nanometre, equal to a billionth of a metre, is the unit of measurement for a specific chip fabrication process.

Jefferies’ Lee said efforts by ZTE and other mainland companies to advance their semiconductor capabilities are in line with the priorities of China’s 13th Five-Year Plan, which targets global leadership status for the country in chip design and manufacturing, software development and in building the core components of mobile broadband equipment.

In 2015, the National Integrated Circuit Industry Investment Fund invested 2.4 billion yuan (US$347 million) in ZTE’s semiconductor business in exchange for a 24 per cent equity stake. The fund was established in 2014 to help finance and push forward the central government’s policy to build an advanced domestic semiconductor industry.