Wall Street Journal: Chinese Smartphone and Made in America

THE WALL STREET JOURNAL: A peek inside ZTE Corp.’s flagship smartphone reveals how badly the Chinese telecom giant needs a deal to lift a U.S. ban on shipments of phone parts to the company. U.S. companies supply 60% of the electronic components in ZTE’s Axon M phone based on dollar value, according to ABI Research Inc., a market-forecasting firm.

San Diego-based chip maker Qualcomm Inc. provides at least eight of 25 key components on the device’s main circuit board, ABI said, making it the biggest supplier of those parts. They include the modem and the power-management unit, which directs the flow of electricity through the device.

Other key components come from SanDisk Inc., a flash-memory supplier based in Milpitas, Calif., and Skyworks Solutions Inc., a Woburn, Mass., chip maker, ABI said. The protective glass on the phone’s display is supplied by Corning Inc., the maker of Gorilla Glass, which is also used in Apple Inc. devices. Corning is based in New York State. These companies haven’t been able to ship parts to ZTE since the U.S. Commerce Department’s mid-April order barring sales of products to the Chinese company. The U.S. penalized ZTE for its violation of a 2017 settlement resolving a probe into its evasion of American sanctions on Iran.

ZTE, which is based in the southern Chinese tech hub of Shenzhen, has told the U.S. government that its failure to comply with the settlement was due to internal controls failures, according to a person familiar with the matter.

The export ban, which also affects ZTE’s network-equipment business, has been devastating for the company as it has been forced to shut down its major operations. The company is now a political pawn in the U.S.-China trade dispute and its fate could depend at least partly on the outcome of negotiations this week between the two sides in Washington. Earlier this week, President Donald Trump tweeted that he would try to get ZTE back in business, and Commerce Secretary Wilbur Ross said he was looking at alternative punishments.

A new roadblock for ZTE emerged in the U.S. Congress on Thursday, when the House Appropriations Committee, in a bill to fund the Commerce Department, passed an amendment opposing any rescue of ZTE. “ZTE needs to try everything to reach a settlement with the U.S. government,” said Mo Jia, an analyst at Canalys, a mobile-device research firm. “If it fails, it would be extremely hard for ZTE to carry on its smartphone business.” A ZTE spokeswoman didn’t respond to a request for comment. Qualcomm didn’t respond to a request for comment.

Even if exports to ZTE resume, the damage to its business is likely to endure, as both suppliers and customers have been re-evaluating their ties with the company. Telstra Corp., Australia’s largest telecom operator, stopped selling ZTE handsets due to concerns about supply, as did MTN Group Ltd., Africa’s biggest operator. Like many global tech firms, ZTE relies on an international web of suppliers to build its devices. U.S. companies like Qualcomm, for example, dominate the market for smartphone chips and other high-end parts. In the first quarter, 84% of the phones shipped by ZTE contained Qualcomm chipsets, according to Canalys.

ZTE phones also use Google’s Android operating system. The Commerce Department ban means Google has stopped providing software updates and other services to ZTE, according to a person familiar with the matter. In recent weeks, many users of ZTE phones say their devices have become glitchy and unreliable. At the same time, the U.S. market is crucial to ZTE, which badly trails domestic rivals in China. In the U.S., it is the fourth-largest vendor of mobile phones, after Apple, Samsung Electronics Co. and LG Electronics Inc., Canalys says.

Nearly 75% of ZTE’s first-quarter smartphone shipments were in the U.S., where it is a big player in the budget and mid-tier phone segments, Canalys said.

Joe Parkinson contributed to this article.