The U.S. Department of Commerce banned the country’s enterprises from selling components to ZTE (000063.SZ) within seven years on Monday because it violated an agreement reached with the U.S. government after it was found to have illegally sold goods to Iran.
Qualcomm (QCOM.O) is in dire straits. The company’s products account for the largest share of ZTE’s smartphone chips. According to IHS Markit, ZTE’s handset shipments were estimated at 46.4 million last year.
'Zhongxing sells about 45 million smartphones worldwide each year, nearly half of them use Qualcomm chips,' said Neil Shah, research director at Counterpoint Research.
'If it's calculated at an average of $25 per chip, this is almost equal to $500 million in revenue.'
Canadys, a technology consulting firm, has a higher estimate and believes that 65% of ZTE's mobile phones use Qualcomm chips.
For Qualcomm, the loss of business may be just the beginning of the problem. At the time when China and the United States threatened each other with tariffs and trade barriers, Qualcomm, with $22 billion in revenue last year, had become an easy target for revenge.
Technology is the key issue of Sino-US trade friction.
China hopes to nurture Huawei’s leading domestic technology industry, and Huawei will also produce chips. Concerned that Chinese forces are increasingly sitting large, the United States has repeatedly blocked China’s overseas M&A deals in the field of science and technology on grounds of national security concerns.
This makes China's revenue account for its large number of Qualcomm situations.
'There is a sense of competition in China: For companies like Huawei, Qualcomm is an enemy,' said Andrew Gilholm, director of China and Northern Asia analysis at Control Risks, a risk consulting company. 'But for many smaller Chinese mobile phone companies, They actually rely heavily on Qualcomm.'
**Snapdragon Chips**
Qualcomm owns government and defense contracts in the United States and has close ties with the U.S. government. At the same time, it is striving for China's regulatory approval of its acquisition of NXP Semiconductors (NXPI.O) for US$44 billion.
Ironically, because of the issue of ZTE, Qualcomm will have more impact in the United States than in China.
According to Canalys, ZTE is the second largest telecommunications equipment manufacturer in China. However, according to smart phone revenue calculations, it has fallen by the top 10 in recent years. Sales of Huawei, OPPO, Vivo and Xiaomi have increased significantly.
However, in the United States, ZTE is the fourth-largest supplier of smart phones, ranking behind Apple (AAPL.O), Samsung Electronics (005930.KS) and LG Electronics (066570.KS).
According to the consulting agency Canalys data, ZTE’s market share in the United States last year was 11.2%.
According to the company's product announcement on the US website of ZTE Corporation, its mobile phones sold in the US use Qualcomm chipsets and processors, and all 'flagship' phones use Qualcomm chipsets such as Xiaolong 820 and Xiaolong 617.
'Most telecommunication operators use the Qualcomm chipset in the United States, so basically they are in trouble. 'Shah means ZTE. He estimates that the US market accounts for nearly a quarter of ZTE's mobile phone business. 'They may One of the biggest markets will be lost.'
Qualcomm cannot be immediately contacted for comment.
**Three threats**
The problems of ZTE may bring triple threats to Qualcomm: The loss of an important customer, the competitor's strength to fill vacancies will increase, and China's pursuit of retaliation against the United States may bring about a potential blow.
China’s Ministry of Commerce said on Tuesday that it will pay close attention to the progress of the ZTE case and stand ready to take necessary measures to safeguard the legitimate rights and interests of Chinese companies.
The impact of the trade war has already emerged. Sources told Reuters that Qualcomm withdrew and planned to resubmit the anti-monopoly application for the NXP Semiconductors acquisition transaction on Saturday according to the requirements of the Chinese Ministry of Commerce.
Qualcomm’s share price fell by 1.7% on Monday. ZTE's smaller US optical components such as Acacia Communications (ACIA.O) declined even more.
Counterpoint’s Shah said that ZTE can now purchase replacement chips from Samsung Electronics, Taiwan's MediaTek (2454.TW) or China Spreadtrum Communications. Huawei reiterated its long-term policy on Tuesday saying it would not sell kylin chips.
However, Shah added that ZTE's handsets may require high-cost redesign, and other chips will not achieve the same performance: 'Either way, ZTE will face high costs.'