ZTE – light in a tunnel

The event: On March 7th, 2016 the US Commerce Department charged ZTE with a, “planned and organized scheme to establish, control and use a series of ‘detached’ companies to illicitly re-export controlled items to Iran in violation of US export control laws.” ZTE is also accused of selling to other embargoed countries including Sudan, North Korea, Syria, and Cuba.

The charges are serious because it means that ZTE will have to obtain a special license to buy any technology from US companies including Qualcomm, a major chip supplier for the company. Over 10% of ZTE’s smartphone components are sourced from US technology firms. So, an embargo on its devices would be sizeable setback as the company would have to redesign virtually all of its handset portfolio.

ZTE has been quick to address the charges, “ZTE is highly concerned about media reports relating to a US Dept of Commerce investigation…and maintains constant communications with associated departments and is committed to fully address and resolve any concerns.”

On March 20th, the US government’s embargo on ZTE was softened. US government officials stated that there was a temporary stay on the embargo of ZTE products. Quoted in the Wall Street Journal, US government officials stated ZTE was being “active” and “constructive” in talks. In the past two weeks, there has been little mention of any embargo at all and only that the discussion hinged around the size of fines being levied.

What does this mean for ZTE, US carriers, and competitor handset OEMs?

The charges are serious for ZTE, a major handset provider in the US. Last year, the company sold-in over  14m devices in the US – close on 8% share, and has hovered between the #4 and #5 largest mobile handset provider in the market overall. ZTE is a major force within the US prepaid

channels including MetroPCS, Cricket, Virgin, Boost, and WalMart. ZTE has a sizable line-up of actively selling devices: Avid Plus, Obsidian, Sonata 2, Grand X series, Warp Sync, Max, Prestige, Paragon, Whirl 2 and Merit.

Operators: To date, no US carrier selling ZTE products has dropped the brand from its portfolio. Devices continue to sell in MetroPCS, Cricket, Boost, and WalMart. Certainly, carriers have made contingency plans in the event the situation changes. The prepaid market turns a lot of devices because of churn and high upgrade rates. A carrier cannot be caught with a shortage at any point in the year.

OEMs: This development could have represented a rare opportunity for other OEMs to grab some of ZTE’s 14m+ device sales and 8% market share. Winning share among OEMs who supply the low-end and prepaid markets—such as Alcatel, LG, Samsung or Coolpad — is extremely challenging. Having one of the key players side-swiped by this action would potentially create a vacuum that other players would be only too willing to take advantage of, presupposing they could up their supply lines in time to capitalize on the opportunity. However, for now, ZTE looks to be on safer ground.

Speculation continues and further charges and fines may be en route. But, to date, there has been very limited disruption in ZTE volumes or other OEMs potentially wedging into ZTE’s sales. ZTE managers can breath a little easier, while its competitors will have to work much harder.