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China tech

ZTE roars back to 5G race as Huawei reels under sanctions

Without in-house technology, Chinese company's recovery at mercy of US policy

ZTE released China's first 5G-compatible smartphone Aug 5. (Photo by Takashi Kawakami)

GUANGZHOU -- China's ZTE is staging a swift comeback after the lifting of U.S. sanctions that nearly drove the company out of business, launching the nation's first smartphone for fifth-generation networks and racking up overseas orders for communications equipment.

ZTE released China's first 5G-compatible smartphone Monday equipped with semiconductors from U.S. chipmaker Qualcomm, a launch that became possible after the lifting of U.S. sanctions. It has also formed tie-ups in 5G with over 60 global telecommunications providers.

As compatriot Huawei struggles under the weight of U.S. sanctions, ZTE is raising its profile in the global race to build 5G networks. But a quick comeback again risks coming under Washington's scrutiny as the U.S. is determined to ensure its supremacy in next-generation communications networks.

As ZTE's Axon 10 Pro, priced at 4,999 yuan ($720), hit the market on Monday, a store in Guangdong was urging shoppers to try out the phone's speedy network functions in a campaign that began more than a month ago.

The phone can download videos about 30 times as fast as those on current 4G networks. "Once the network infrastructure is ready, it'll get even faster," a clerk said.

Although ZTE cannot yet make its own chips, it can now procure core parts from U.S. suppliers. Huawei, which remains under an American export ban, aims to launch Aug. 16 its own 5G handset featuring chips developed in-house.

ZTE is also rapidly gaining orders for 5G network equipment, another core business. In 2018, it was the world's fourth-biggest shipper of base stations in value terms, claiming a 13% worldwide market share, though it still lagged behind Huawei's commanding 31%.

But in 2023, ZTE could surge to second place with 24%, with Huawei's lead narrowing to just 3 points at 27%, Chinese research firm Guanyan Tianxia predicts.

ZTE's 5G tie-ups with more than 60 telecommunications companies have led to 25 formal commercial contracts, a count rapidly nearing Huawei's roughly 50. European, Middle Eastern and Asian companies are on the list of ZTE partners, including French provider Orange and Spain's Telefonica, as well as Indonesian leader Telkomse.

ZTE's strength is price. Its 5G infrastructure costs about 30% less than the competition's, according to a Hong Kong-based analyst familiar with the communications industry.

In 2018, ZTE faced U.S. sanctions over allegations that it had been supplying communications equipment to Iran and North Korea for years. Unable to source parts like semiconductors for its smartphones and network equipment from American companies, the company's operations came to a screeching halt.

Unlike Huawei, ZTE lacks the technology to develop semiconductors in-house and thus had no choice but to surrender to Washington's demands. In July 2018, about three months after the sanctions were imposed, it paid a $1 billion fine, reshuffled its leadership and brought on an American legal compliance watchdog.

In June, ZTE President Xu Ziyang told Chinese media that while the sanctions were in place, even while cutting spending on sales promotions, the company spent at least 10 billion yuan on 5G research and development, exceeding initial plans.

"One year ago, I had nothing to do," a 30-something ZTE employee involved in the company's 5G efforts said. "Now I'm so busy I hardly get time off to spend with my family."

The market has been upbeat on the resurgent company, with its shares lately hovering around 20 Hong Kong dollars ($2.55) -- up about 90% from a year earlier.

Nevertheless, many industry players expect Washington to take a harsher tack on ZTE again as it tries to secure an edge over China in 5G networks. Under the National Defense Authorization Act for fiscal 2019, ZTE, Huawei and three other Chinese peers will be banned from supplying U.S. government agencies from Aug. 13.

ZTE remains heavily reliant on tech from Qualcomm and its compatriots. Perhaps the U.S. has not dialed up pressure on ZTE as much as it has on Huawei because its survival is at the mercy of Washington's policy. Thus the prospects for its continuous recovery remain uncertain.

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