Case 5:16-cv-00179-RWS Document 287-18 Filed 08/07/18 Page 1 of 4 PageID #: 16846
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`American Hustle: ZTE’s Surprise U.S. Success, Now Under Threat - WSJ
`7/31/2018
`Case 5:16-cv-00179-RWS Document 287-18 Filed 08/07/18 Page 2 of 4 PageID #: 16847
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`DOW JONES, A NEWS CORP COMPANY
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`https://www.wsj.com/articles/american-hustle-ztes-surprise-u-s-success-now-under-threat-1524216603
`
`TECHAmerican Hustle: ZTE’s Surprise U.S.
`Success, Now Under Threat
`
`The U.S. sales ban is forcing one of China’s leading telecom irms to reassess its position and future
`
`Chinese telecom giant ZTE has been steadily growing its U.S. smartphone business, almost doubling its market
`share last year to 11.2%. PHOTO: LLUIS GENEAGENCE FRANCEPRESSEGETTY IMAGES
`
`By Dan Strumpf and Newley Purnell
`Updated April 20, 2018 1057 p.m. ET
`
`was branded a national
`HONG KONG—In the five years since ZTE Corp.
`-1.76%
`ZTCOY
`
`▲
`security threat by U.S. lawmakers, the Chinese telecommunications giant has been
`quietly building its own American success story.
`
`While locked out of the market for networking technology, ZTE has expanded its
`smartphone business to where it is now the fourth-largest among U.S. consumers. Last
`year the Shenzhen-based company almost doubled its market share to 11.2%, selling 19
`million handsets and making the U.S. its biggest market, according to research firm
`Canalys.
`
`But now that success appears to be in jeopardy. In what ZTE executives deem a threat
`to the company’s very survival, the U.S. government moved on Monday to block sales of
`American products to ZTE, saying it violated terms of a deal last year settling
`allegations of sanctions-busting involving North Korea and Iran.
`
`The ban has forced the Chinese telecom titan to determine whether it must—or even
`can—find replacements for key elements of its smartphones and network equipment,
`such as semiconductors from Qualcomm Inc.
`and the Android mobile
`+3.77% ▲
`QCOM
`
`operating system, made by Alphabet Inc.’s
`Google.
`GOOGL
`
`+0.43% ▲
`
`
`ZTE shot back at the U.S. on Friday calling the Commerce Department order
`“unacceptable,” and saying it will “not only severely impact the survival and
`development of ZTE, but will also cause damages to all partners of ZTE including a
`large number of U.S. companies.”
`
`“This is a body blow to them,” said Duncan Clark, chairman of BDA China, a Beijing-
`based consulting firm that specializes in technology. “It’s sort of hitting at a
`homegrown hero.”
`
`Qualcomm and Google declined to comment.
`
`A senior Commerce Department official said late Friday that the agency had granted
`ZTE’s request to present additional evidence, although the company doesn’t have
`administrative appeal rights under agency rules. It wasn’t immediately clear what kind
`of information ZTE plans to provide.
`
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`American Hustle: ZTE’s Surprise U.S. Success, Now Under Threat - WSJ
`7/31/2018
`Case 5:16-cv-00179-RWS Document 287-18 Filed 08/07/18 Page 3 of 4 PageID #: 16848
`ZTE is the latest company to be caught in the crosshairs of an escalating trade dispute
`between China and the U.S. that is zeroing in on the technological race between the
`countries amid heightened national security concerns. The sales ban is likely to
`accelerate China’s efforts to develop its own technology supply chain and wean the
`country off imports from U.S. companies—a campaign viewed by some officials in
`Washington as a strategic threat to American interests.
`
`Washington’s announcement of a seven-year ban on sales of parts and software to ZTE
`renews U.S. scrutiny of Chinese telecom companies. ZTE and its bigger and better-
`known rival, Huawei Technologies Co., were the subject of a 2012 investigation by the
`U.S. House Intelligence Committee that recommended domestic telecommunications
`providers not use gear from the Chinese companies in building cellular networks due to
`national security risks. Both ZTE and Huawei have repeatedly denied that their
`products pose a security threat.
`
`Among other things, the House report delineated the ownership structures of the
`two companies. Huawei is privately held and owned by its employees. By contrast,
`ZTE, founded by five Chinese engineers in the 1980s, is publicly traded on stock
`exchanges in Shenzhen and Hong Kong and regularly discloses quarterly earnings.
`
`ZTE’s transparency earned the company softer treatment than Huawei. However, the
`House report still noted the state ties of ZTE’s largest investor, which currently holds
`30% of the company, according to public records. ZTE has said the state-owned
`investor isn’t involved direct or indirectly in any decision making at the company.
`
`The 2012 report prompted Huawei and ZTE to take different paths, with Huawei
`focusing on expanding outside the U.S., and ZTE nurturing its existing ties with U.S.
`mobile-phone operators to expand in the market. To deepen its U.S. roots, ZTE opened
`five research and development centers in the country, put more money into
`Washington lobbying, and became sponsors of NBA teams, including the Houston
`Rockets, the New York Knicks and the Golden State Warriors.
`
`As part of its eort to grow its U.S. business, ZTE has sponsored NBA teams. At the 2017 Consumer Electronic
`Show, it incorporated basketball players into its showcase. PHOTO: FREDERIC J. BROWNAGENCE FRANCE-
`PRESSEGETTY IMAGES
`
`Flash forward to the present, and Huawei now dominates global telecom-equipment
`sales virtually everywhere except the U.S., where its smartphones likewise are largely
`absent. For its part, ZTE commands a sizable share of the U.S. smartphone market,
`though it is an also-ran globally. Last year, ZTE unveiled a new flagship phone, a
`foldable handset called the Axon M that retails for $725 via AT&T Inc.
`+0.51% ▲
`T
`
`U.S.
`
`in the
`
`ZTE was set to release its first-quarter results on Thursday, but delayed the report to
`weigh the impact of the U.S. sales ban.
`
`One possible effect would be to boost the fortunes of its rivals, including Huawei,
`Finland’s Nokia Corp.
`and Sweden’s Ericsson AB.
`-1.64%
`NOK
`
`▲
`ZTE’s woes might not end up helping Ericsson or Nokia, which generally sell more
`expensive equipment, said Roger Entner of Recon Analytics. Instead, sales could shift
`to Huawei, which also sells lower-priced electronics. “If you’re shopping for a Kia,
`you’re not going to upgrade to a BMW , ” Mr. Entner said.
`
`In 2017, Huawei led the global telecom-equipment market with a 27% share, followed by
`Nokia at 17% and Ericsson at 13%, according to research firm Dell’Oro Group. ZTE was
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`American Hustle: ZTE’s Surprise U.S. Success, Now Under Threat - WSJ
`7/31/2018
`Case 5:16-cv-00179-RWS Document 287-18 Filed 08/07/18 Page 4 of 4 PageID #: 16849
`fourth with 10%. But in the U.S., Ericsson and Nokia each held a 48% market share,
`leaving little to Huawei and ZTE.
`
`Spokesmen for Ericsson and Nokia declined to comment.
`
`In its home market, ZTE is a small player in smartphones but has become a major
`supplier of networking equipment like cell towers and routers. Backed by the Chinese
`government as a tech national champion, it works alongside Huawei in the race to
`develop next-generation 5G wireless technology—an area in which Qualcomm is
`viewed by Washington as a crucial U.S. competitor. ZTE sent 11 representatives to an
`industry-sponsored meeting last month in India to discuss 5G specifications, according
`to conference records.
`
`MORE
`
`International trade
`experts called the ZTE
`sales ban wide-
`ranging, affecting not
`just items exported
`from the U.S., but also
`software and
`components marketed
`by American companies but manufactured in other parts of the world.
`
`In a U.S.-China Tech Battle, Companies Are Caught in the Middle (April 19)
`Heard on the Street: Qualcomm Is in the Eye of U.S.-China Storm Again (April 19)
`In U.S. Brawl With Huawei, Rural Cable Firms Are an Unlikely Loser (March 27)
`How Cellphone Chips Became a National-Security Concern (March 7)
`
`That would include a broad slate of hardware critical to ZTE, including Qualcomm
`semiconductors. It also potentially covers software like the Android operating system,
`which powers ZTE smartphones. The Chinese company is working to find ways to
`preserve its access to Android, according to a person familiar with the matter.
`
`“If they’re unable to use Google Android, I think that’s a big blow because there’s no
`real viable alternative at this point,” said Neil Shah, an analyst with research firm
`Counterpoint.
`
`Without access to parts from U.S. companies needed for its networking gear, ZTE will
`have a tough time selling its products and being competitive in the rollout of 5G
`equipment, said Edison Lee, a telecom analyst at Jefferies.
`
`“If this ban really continues and the U.S. really enforces it, I think ZTE is in big trouble,”
`he said.
`
`—John D. McKinnon in Washington contributed to this article.
`
`Write to Dan Strumpf at daniel.strumpf@wsj.com and Newley Purnell at
`newley.purnell @wsj.com
`
`Appeared in the April 21, 2018, print edition as 'China’s ZTE Fears for Its Survival After
`Ban.'
`
`Copyright ©2017 Dow Jones & Company, Inc. All Rights Reserved
`
`This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit
`http://www.djreprints.com.
`
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