Embattled ZTE Is Back on Track, But Its Core Problem Remains

August 30, 2018, 9:30 PM UTC

Chinese smartphone maker ZTE is “back on track,” declared recently appointed chairman Li Zixue less than two months after the U.S. lifted sanctions that brought the Shenzhen telecom company’s production to a complete standstill. That sounds like good news, but it means ZTE is in the same precarious position now as it was before the sanctions kicked in.

Li Zixue delivered the news at a shareholder meeting on Tuesday. “As of today,” he said, “our operating business has resumed completely. The production mission for August has returned to normal and R&D is recovering rapidly.” ZTE expects it will resume normal growth by next year.

That’s a quick turnaround. ZTE’s operations shuddered to a halt in May after the U.S. discovered that the smartphone maker had been flouting sanctions against Iran. In retaliation, the U.S. government forbid American firms from conducting business with ZTE, cutting off a supply of semiconductors vital to the Chinese corporation’s products.

The embargo was lifted in July after ZTE paid a massive $1.4 billion fine and agreed to replace several members of its management team, which is how Li Zixue came to be the company’s new chairman. But the prohibition exposed a massive hole at the heart of China’s tech industry: a debilitating dependence on foreign components. That issue has yet to be resolved.

Beijing had noticed the country’s reliance on foreign computer chips already. In 2016 President Xi Jinping called for tech companies to ramp up the nation’s chip manufacturing and a group of 27 industry bigwigs banded together and formed the High-End Semiconductor Alliance to advance the cause. Two years later, the alliance evidently hasn’t done enough.

As U.S. sanctions put ZTE in the deepfreeze, Xi Jinping called again for Chinese tech companies to double down on developing “core technologies”—newspeak for semiconductors, or integrated circuits (ICs). These core technologies are vital for any advanced tech product and are also pivotal to Beijing’s Made in China 2025 plan, a national push to achieve global superiority in advanced manufacturing.

But when the U.S.-China trade war entered full swing, it became obvious that U.S. sanctions were targeting companies charged with implementing Made in China 2025. Party officials suddenly fell silent about China’s ambitions to sever its reliance on American circuit boards.

The silence doesn’t mean the plan has been cancelled, but it hasn’t been fulfilled yet either. Until it has, ZTE risks being derailed again at any time.

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