Why US sanctions on ZTE might turn out to be the best thing for China’s microchip ambitions
Case study from 18 years ago may provide lessons for Chinese telecoms company that has been denied access to US technology
Eighteen years ago a small fire in a microchip factory in the US city of Albuquerque set off a chain of events that led to the demise of one mobile phone giant and market share gains for another.
The damage from water and smoke to millions of Philips-made radio frequency microchips disrupted the supply chain for Ericsson and Nokia – both major mobile phone makers at the time.
Ericsson bungled its response to the crisis and posted huge losses, eventually exiting the mobile phone business. Nokia responded adeptly, immediately seeking alternative sources, leading to increased profits and sales until missteps years later saw its phone business sold off to Microsoft.
The incident has since been widely used as a case study in crisis management.
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While it is likely that a compromise will be reached between the two governments, with China offering further trade concessions in return for a lifting of the ban on ZTE, the US move no doubt has Chinese officials wringing their hands over the country’s reliance on American technology.
The shock of possibly seeing one of its star state owned tech companies struggle for survival will push Beijing even harder in its efforts to reduce reliance on some US$200 billion of annual semiconductor imports, which it fears undermines national security and holds back its own technology sector.
China’s National Integrated Circuits Industry Investment Fund, a central government subsidy programme aimed at reducing the country’s reliance on foreign microchips, wants to raise as much as 200 billion yuan (US$32 billion) in its latest round of funding. The first round of about 140 billion yuan was allocated to more than 20 companies, including ZTE.
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There are Chinese chip makers focusing on these AI-specific products, but analysts say they are at least 10 years behind the west. These companies are also fabless operations that rely on outside wafer fabs to manufacture their chips, meaning they are vulnerable to supply chain shocks like the ones experienced by Nokia and now ZTE.
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China has the capital and the consumer market to support its own chip industry, but the road to get there won’t be easy. More often than not, a crisis is the best way to achieve a breakthrough – perhaps in a new technology that could make current manufacturing methods obsolete and vault the inventor to No 1 position.
Intel, the world’s No 2 chip maker, was so tested in the mid-1980s when a price war in memory chips saw it post huge losses, forcing staff lay-offs and factory closures. A decision made by then Intel president Andy Grove to walk away from the memory chip business and bet on a risky new product – microprocessors – paid off big time.
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Whether or not ZTE survives its current crisis, 18 years from now the company may be cited in the case studies on how China caught up with the west in microchips – or did not.
Craig Addison, a tech news editor at the South China Morning Post, has been covering Asia technology since 1992