U.S. Disrupts China’s Technology Plans

The U.S. government has proved in the past decade that it can stop Chinese companies from buying American ones. It can also eviscerate a Chinese firm’s business by blocking access to American technology.

That is the significance of reports that the U.S. Commerce Department may restrict exports of American products to Chinese telecommunications equipment maker ZTE. The company, listed in Hong Kong and Shenzhen, may have violated U.S. export rules on Iran. The company suspended its stock Monday, citing the pending release of information related to the Commerce Department’s actions.

ZTE makes routers and switches for telecommunications operators, builds mobile phones, plus offers telecom software systems and services. Though details aren’t known, it is a fair bet that a chunk of these businesses rely on U.S. chipsets or software. Banning only ZTE’s access to U.S. hardware—not software—still affects the telecom-equipment and phone segments that generated 86% of revenue in 2014.

ZTE could replace American chipsets with those from other countries in low-end handsets, but that would only save a small portion of revenue, says Cynthia Meng at Jefferies. Even that may be not be so simple, though, since non-U.S. chips often use U.S. components in this integrated industry.

Such dependence on foreign hardware is precisely why China Inc. last year began attempting to buy stakes in U.S. and Taiwanese chip companies, so it could guarantee itself access. The prospect of requiring U.S. regulatory nods itself killed some of these deals. Seeing U.S. regulators now actually hobble ZTE, China is unlikely to give up on its ambition of technological self-sufficiency.

[“Source-wsj”]