GOOGL Alphabet Inc

By Dan Strumpf 

A peek inside ZTE Corp.'s flagship smartphone reveals how heavily the Chinese telecom giant depends on U.S. technology suppliers -- and stresses the urgency of ZTE's efforts to strike a deal with U.S. commerce chiefs that would lift the ban on U.S. exports.

U.S. companies supply 60% of the electronic components in ZTE's Axon M smartphone, according to ABI Research Inc., a market-forecasting firm.

San Diego-based chip maker Qualcomm Inc. is the biggest supplier, with at least eight of 25 key components on the device's main circuit board originating with it, according to ABI. Those parts include the modem, which connects the phone to the internet, and the power management unit, which directs the flow of power through the device.

Other components come from SanDisk Inc., a flash-memory supplier based in Milpitas, Calif., and Skyworks Solutions Inc., a Woburn, Mass., chip maker, ABI found. The protective glass on the phone's display is supplied by Corning Inc., the Corning, N.Y.-based maker of Gorilla Glass, which is also used in Apple Inc. devices.

None of these companies has been able to export parts to ZTE since the Commerce Department's mid-April order barring U.S. sales of products to ZTE. The U.S. imposed the penalty on ZTE for its violation of a 2017 settlement resolving a probe into its evasion of U.S. sanctions on Iran.

ZTE, based in the southern Chinese tech hub of Shenzhen, has told the U.S. government that its failure to comply with the settlement was due to failures in internal controls, according to a person familiar with the matter.

The export ban has been devastating for ZTE, which has shut down its major business operations. The company is now a political pawn in the U.S.-China trade dispute, and its fate likely hinges on the outcome of trade negotiations this week between the two sides in Washington, D.C. President Donald Trump early this week tweeted that he would try to get ZTE back in business; Commerce Secretary Wilbur Ross said he was looking at alternative punishments.

Even if other measures were to happen swiftly and exports resumed, the damage to ZTE's business is likely to endure. ZTE suppliers and customers have been re-evaluating their business ties. Telstra Corp., Australia's largest telecom operator, stopped selling ZTE handsets over concerns about supply, while MTN Group Ltd., Africa's biggest operator, has also stopped carrying ZTE phones.

"ZTE needs to try everything to reach a settlement with the U.S. government," said Mo Jia, an analyst at Canalys, a mobile-device research firm. "if it fails, it would be extremely hard for ZTE to carry on its smartphone business."

A ZTE spokeswoman didn't immediately respond to a request for comment.

Like many global tech firms, ZTE relies on an interconnected web of suppliers to build its devices. U.S. companies like Qualcomm dominate the market for smartphone chips and other high-end phone parts. In the first quarter, 84% of the phones shipped by ZTE contained Qualcomm chipsets, according to Canalys.

ZTE phones run on the Android operating system, provided by Alphabet Inc.'s Google. The Commerce Department ban means Google has stopped providing software updates and other services to ZTE, according to a person familiar with the matter. Many ZTE phone users say their devices have become glitchy and unreliable in recent weeks.

At the same time, the U.S. market is crucial to ZTE. Its phones are also-rans in China, where ZTE has lost out to domestic rivals. In the U.S., it is the fourth-largest vendor of mobile phones, after Apple Inc., Samsung Electronics Co. and LG Electronics Inc., according to Canalys.

Almost three-fourths of all ZTE's first-quarter smartphone shipments were in the U.S., where it is a big player in the budget and midtier phone segments, the research company said.

--Joe Parkinson contributed to this article.

Write to Dan Strumpf at daniel.strumpf@wsj.com

(END) Dow Jones Newswires

May 18, 2018 05:44 ET (09:44 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.