Qualcomm to face the heat as U.S. blocks supplies to ZTE

ZTE Axon7d smartphoneChipset major Qualcomm will face the music due to America’s decision to ban its local firms from selling components to the China-based ZTE, Reuters reported.

The U.S. Department of Commerce slapped a seven-year ban on sales to ZTE on Monday for breaking terms of an agreement reached last year after it was caught illegally shipping goods to Iran.

Qualcomm supplies major share of chips inside ZTE smartphones. The Chinese phone company shipped an estimated 46.4 million phones last year, according to IHS Markit.

Major suppliers to ZTE include chipmakers such as U.S.-based Qualcomm, South Korea’s Samsung Electronics, Taiwan’s Mediatek, as well as optical component firms such as Acacia Communications, Lumentum Holdings, Finisar and Oclaro.

ZTE, in its annual report, said it bought goods worth 3.17 billion yuan from its largest supplier, which accounted for 5.5 percent of its supplies.

Purchases made from ZTE’s five largest suppliers amounted to 10.61 billion yuan, or 18.3 percent of its total supplies.

“If you look at ZTE it sells around 45 million smartphones per year globally, and almost half of them have Qualcomm chips,” said Neil Shah, research director at Counterpoint Research.

“So if you look at an average of 25 dollars per chip set that’s close to half a billion dollars in revenue.”

Canalys, a technology consultancy, estimate that a higher 65 percent of ZTE phones contain Qualcomm chips.

Loss of business could be just the start for the U.S.-based Qualcomm, which had sales of $22 billion last year. Qualcomm is already in the hit list of Apple, the leading smartphone maker, due to patent related battle.

China wants to boost business for domestic companies such as Huawei, which also makes chips for phone manufacturing companies. The United States, concerned about China’s growing might, has shot down Chinese technology deals overseas, citing national security concerns. Huawei, the number 3 phone maker, cannot supply phones to telecom operator AT&T and some retail chains there.

Qualcomm is also grappling with regulator approval in China for a $44 billion takeover of NXP Semiconductors. Qualcomm may get hit by the ZTE issues more in the United States than in China.

ZTE, while China’s second-largest telecommunication equipment maker, has dropped out of the top ten in terms of domestic smartphone sales in recent years, according to Canalys, as rivals such as Huawei, OPPO, Vivo and Xiaomi have surged.

ZTE is the fourth largest smartphone vendor in the United States — after iPhone maker Apple and Samsung Electronics and LG Electronics of South Korea.

ZTE held 11.2 percent of the U.S. market last year, according to data from the consultancy Canalys.

Its phones in the United States use chip sets and processors from Qualcomm, according to company specifications on its U.S. website, which showed all its “signature” phones using Qualcomm chip sets such as Snapdragon 820 and Snapdragon 617.

The ZTE issue could create a triple threat for Qualcomm: the loss of an important customer, rivals bolstered as they step in to fill the vacuum, and a potential hit as China looks to retaliate against the United States.

ZTE could now look to rivals like Samsung, Taiwan’s MediaTek or China’s Spreadtrum for alternative chips. Huawei on Tuesday repeated a long-held policy of not selling its Kirin chips to outside parties.

Qualcomm is currently negotiating its terms with Huawei, the rival of ZTE in China and global markets, for supplying chipsets.