US chip export ban has Beijing calling for home alternatives

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Visitors pass in front of the ZTE stand at the Mobile World Congress. Photo: AFP

The ban by the Donald Trump administration on exports of chips for use in electronic hardware has come as a wake-up call to Chinese policymakers and gadget makers that, under the facade of the nation’s progress in telecom technologies and manufacturing, giants such as ZTE have a weak underbelly.

These Chinese firms still rely on chips and integrated circuits made elsewhere, despite their stranglehold on such products as soft switches, servers and network protocol systems.

The US Commerce Department on Monday banned American companies from selling key components, including chips, to the Shenzhen-based ZTE Corporation.

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Like many Chinese telecom device and phone makers, ZTE assembles its own smartphones, but relies on imported components like flash memories and microprocessor units. Photo: ZTE

The ban augurs ill for the networking and telecom behemoth, as ZTE may have nowhere else to go to procure chips and processors for its servers, base stations and multimedia subsystems.

“At present, the company is assessing the full range of potential implications that this event has on the company and is communicating with relevant parties proactively in order to respond accordingly,” ZTE  said in a brief statement.

The ban is an escalation of penalties meted out by Washington since 2016 for a raft of alleged breaches by ZTE, including shipping sanctioned telecommunications equipment to Iran and North Korea.

Beijing has called the move a “curt” step in the tit-for-tat trade row with the Trump administration, and vowed to spur development of indigenous chips and other semiconductor technologies.

“The key issue is that while globalization offers a more convenient and cheaper solution, it has also bred ‘laziness,’” Global Times said in an op-ed. “If importing chips is easier and more cost-effective than sourcing domestically made alternatives, the market will opt for overseas products, and that’s how we’ve become so reliant on foreign technologies.”

So exactly how dependent are these Chinese information-technology companies on imported components?

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An employee holds an interface card in a Huawei FusionCube storage system. Photo: Bloomberg

A 2017 annual report on China’s integrated circuits revealed that in output of microprocessor units for servers, personal computers and smartphones, display drivers for high/ultra-definition displays, dynamic random-access memories, NAND flash memories, field-programmable gate arrays, erasable programmable logic devices, and digital signal processors among others, the share of Chinese products stood at zero that year.

The share of made-in-China microcontroller units, display processors, image processors and NOR flash memories ranged from 2-5%, most of which were of course low-end chips sold at a fraction of the prices of imports.

China spends a whopping US$200 billion a year importing chips according to data from the Chinese Ministry of Commerce, and for sure the domestic semiconductor and chip industry would accrue huge potential if that money could be spent on research and development for home-made products.

Washington has started to reckon on means to counter China’s rise, and restraints on high-tech exports give the Trump administration a ready-to-hand method.

Meanwhile, the Chinese Ministry of Industry and Information Technology has insisted that as the world’s largest telecommunications market, “it makes sense for the country to offer up a slice of our market in exchange for technology.”

Beijing has long requested foreign chip makers to set up fabrication plants and joint ventures with domestic firms. But technology transfer is held back now that Washington has put up more barriers and red tape that has led to a total chip embargo targeting a leading Chinese company.

Observers say the United States’ use of its chips as sticks to browbeat ZTE and other Chinese firms means the market-for-technology approach is now a dead end.

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