US and China reach ‘handshake deal’ to ease tension and save ZTE

US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He have reportedly laid the groundwork for a deal which would end escalating tensions between the two nations and save the fast falling ZTE.

According to Reuter’s sources, a deal could be reached between the two countries before US Commerce Secretary Wilbur Ross heads to China with his delegation to continue trade talks. Although there is no official confirmation from any of the parties as of yet, a deal would result in China increasing agricultural imports from the US, while the US would lift its ban on ZTE making use of US components. A shake up of the ZTE management team and Board of Directors is also like to be a condition in the exchange.

It has certainly been a rollercoaster couple of weeks for everyone involved. ZTE has been walking towards the bright light, only to be offered a lifeline with President Trump’s apparent change of heart. A ban would have destined too many people to the job centre, according to the President, kicking US ideals into action. And it certainly isn’t just ZTE employees who will be relieved by the news.

Following the announcement US companies would be banned from selling to ZTE, several companies plunged in the stock market. Oclaro, Inphi and Lumentum were three who felt the collateral damage, but Acacia Communications was hit the worst as share price plummeted 35%. Some of the mutilation has been reversed since, but prosperity will not be guaranteed until the ZTE ban has been officially lifted; during 2017, 30% of Acacia revenues were attributable to ZTE.

The whole saga has exposed how vulnerable the Chinese vendor actually is. When 10-15% of a company’s supply chain is compromised, the team would certainly be hitting the panic button, but ZTE’s dependence is rumoured to be much higher. Although exact figures are not known, chips are a good example, with it rumoured 70% of the ZTE smartphone chips are sourced from Qualcomm. Redeveloping a supply chain would take years, but doing it without any contribution from US companies might well be completely unfeasible. This was the impossible position ZTE found itself in.

China might be racing for a leadership position in the 5G competition, but this has been an embarrassing series of events. The US has shown how easily it can cripple a multi-national, multi-billion dollar corporation, seemingly as a reminder it is the dominant player in the technology world. ZTE has been involved in some very suspect activities over the last couple of years, and did deserve to be punished, but some cynics might simply put this exercise as a power play by the US. By kneecapping ZTE, the US is simply demonstrating why no-one should challenge the dominance of Silicon Valley on the technology world. The Silicon Valley protection money taxes could have encouraged the government to go smash a couple of windows and break a few fingers.

What this means for China’s ambitions to run the technology world remain to be seen. The ZTE ban didn’t seem to have much of an impact on the operations of many European operators, but if the US can kneecap ZTE in this manner, could it do the same to Huawei? Should the latter’s supply chain be thrown into disarray, this would cause chaos. Operators are unlikely to remove Huawei or other Chinese vendors from their supply chain completely as a result of this conflict, but there might be some more stringent due diligence and a bit more work to seek alternative suppliers.

While the apparent tactics of President Trump might be questionable, the outcome cannot be questioned. The ZTE ban was essentially the Commander-in-Chief throwing a monumental dirty bomb into the technology camp, with collateral damage being shared, and while some might suggest no-one has come out of this scenario better off, the US has reasserted itself at the top of the technology totem pole. US sanctions can potentially be viewed as an economic doomsday device, and this might well be an exercise to remind China (and the rest of the world) of this fact.

China might be home to some of the world’s economic heavyweights, but it does not have the breadth and depth of the US technology industry. It is still too reliant on US exports to go toe-to-toe with an impulsive and erratic Trump administration.