US Cracking Down on China’s ZTE is Bad News for Silicon Valley’s China Relations

Earlier this week, we learned the US has placed major trade restrictions on China’s ZTE and made it difficult for them to buy components and software from US suppliers. According to multiple reports, ZTE broke US rules by selling US-made technology to Iran and had planned to use a series of shell companies to illegally re-export controlled items to Iran in violation of US expert control laws.

US companies are now prohibited from selling a long list of products to ZTE, including computers, software and telecom equipment, all of which strikes directly at the heart of ZTE’s business. ZTE makes mid to upper-end smartphones as well as telecom equipment and now they can’t get chips from Qualcomm, which are key to their smartphone program and processors from companies like Intel used in their telecom equipment.

I learned firsthand about this kind of trade restriction program in 1984 when I got a call from the Department of Defense asking for help on a related issue. At that time, Creative Strategies was owned by Business International, a major global econometric consulting firm. We were their high tech arm and the US Government was one of our major clients. The US had a hands off policy with most tech companies and actually had spent very little time with them outside of their cross relationships through DARPA.

During the call, I was asked to broker a meeting between them and Intel. They did not know who the right person was inside Intel to speak with to confidentially share some important trade restrictions with them. So I set them up with a group that managed Intel’s international relationships and, a few weeks later, two government officials met with Intel in Santa Clara.

It turns out they had become aware Intel was getting requests to ship their newest 80386 chips to Russia and China and under the current laws that would be illegal. The Dept of Defense had got wind of this and while this would normally have come under the State Department, it was the Department of Defense that took the lead and told Intel that under no circumstances could Intel ship any PC with 80386 chips in them to any “enemy” of America.

This was during the Cold War and, while our major conflict was with Russia at the time, the US was also very concerned about our highest levels of PC technology getting into the hands of the Chinese as well. Of course, we look back at this now and can’t imagine how a low level chip like the 80386 was considered too powerful for use in PCs but it was state of the art at the time and caused serious concern in Washington.

I ran across this again when IBM sold their PC business to Lenovo and the deal went through major government scrutiny regarding the fact that a Chinese company would not only own a major PC entity but also have access to the highest level of technology the US PC industry had in 2005. These types of technology restrictions are still active and always being monitored closely by US officials although these days are more about the technology not getting into countries on a major sanctions list like Iran and North Korea.

But given the changing world and the advanced economies of places like Russia and China, a restriction like the one put on ZTE now has major trade and relationship ramifications. Indeed, not long after this trade restriction was put on ZTE, the Chinese government condemned it and said point blank this would have a serious impact on US and China relations. They pointed out this will hurt Chinese companies and made a not-so-veiled threat about China imposing similar restrictions on US companies doing business in China.

Various US trade groups also pointed out the potential economic harm to US companies. While they agree limiting arms and arms-related technology to adversaries was understandable, they questioned blocking things like telecommunications products that are mainstream and could be counter-productive to US and China relations. They also pointed out that, if they don’t get them from the US, they will get them from someone else.

They also see these restrictions will give China other reasons to take actions to make the country less dependent on foreign suppliers. They fear China will only accelerate their ability to create chips equal to Intel, Qualcomm or other vendors in the US today and eventually only buy from suppliers inside China.

As a serious China watcher, this issue of China moving to create everything they need inside their country and become less dependent on their US suppliers is a serious one. We already know China, Russia and other countries have been getting closer to US companies and I know of various times industrial espionage has happened. In fact, this has been happening in Silicon Valley since the 1940s and US companies have to be more diligent than ever over this problem.

I don’t think the US will budge on these ZTE restrictions so this will need to be watched very closely by the US tech world. I sense China is looking for something to try and make their market more inclusive and this could be the case that pushes them further in this direction.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

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