Market Insight

Trade sanction ordeal likely to spur ZTE’s internal mobile chipset efforts

April 19, 2016  | Subscribers Only


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Two weeks after the US Commerce Department placed trade sanctions on ZTE over allegedly skirting US export controls laws (see US trade restrictions could be disastrous for ZTE’s smartphone business), a 3-month temporary lift of the sanction was put in place after “active” and “constructive” talks with the US government.  The Chinese wireless network infrastructure and devices company was largely caught off guard by this turn of events and took the unusual step of postponing the release of its 2015 financial results “pending a thorough self-assessment on the potential impacts of the restriction measure on the business and operations.”  ZTE now anticipate holding their annual investor and industry analyst summit in June corresponding to the normal resumption of trade following this temporary 3-month stay of the US trade sanction. 

This tumultuous episode not only highlighted the risk in the global supply chain for ZTE but their overall dependence on US suppliers for their core products.  What will likely be an outcome of this trade crisis for ZTE will be a focus to mitigate these trade risks so that potential future disruptions like the US trade sanctions would not prove as disruptive as they have been in this past month.  One key aspect of such a mitigation plan would be to create hedges against these supply chain risk. On the mobile handset side of ZTE’s business, this would very likely mean a multi-sourcing strategy that takes into consideration ZTE’s own component technologies such as application processors and LTE modem chipset capabilities.

OEMs have long used a vertically integrated business model to develop differentiated smartphone offerings based on proprietary technology.  Just as Apple has created with their A-series application processors starting with the iPhone 4, every successive iPhone design since had the advantage of both hardware and software optimization based on the internally developed chipset technology.  Samsung and Huawei both tap their respective internal semiconductor R&D to create chipsets that produce unique chipsets that help their smartphones stand apart from the rest of the market.  In the case of Samsung and Huawei, both goes one step further than Apple by also producing their own LTE modem to address a complete computing and communications solution for smartphones.

OEM

AP

Modem

Integrated (AP+Modem)

Apple

A-series

n/a

n/a

Samsung

Exynos

Shannon

n/a

Huawei

HiSilicon Kirin

HiSilicon Balong

Kirin 930 & later

ZTE

“Fast Dragon” (not yet released)

LTE capable modem (not yet released)

n/a

LG

NUCLUN 2 (not yet released)

n/a

n/a

Table 1 – Vertically Integrated Chipset Solutions by Smartphone OEM

ZTE, just like Huawei and Samsung, have core intellectual property (IP) in 4G LTE technology as well as chipset expertise.  Their announced 2nd generation Fast Dragon is expected to be available later in 2016 for smartphones.  This announcement came in January before the US trade sanctions broke in March.  Therefore it is highly likely that ZTE may fast-track this development as their new strategic hedge against potential future disruptions to their supply chain.

In an ever more competitive and commoditized smartphone market, differentiation is key to an OEM’s market success.  Having an in-house chipset technology, OEMs with this capability are in a unique position to optimize and customize device performance relative to OEMs that are buying standard chipsets from major suppliers such as Qualcomm and Mediatek.  ZTE is likely more motivated now than ever to pursue or even accelerate this in-house chipset development effort as a means to control their smartphone design destiny.

Overall, this development, when materialized, will highlight a definitive trend among smartphone makers to vertically integrate chipset capabilities. Other OEMs that have also discussed using their own chipset technologies include LG and Xiaomi.  The strategy makes sense only when the smartphone OEM has achieve a level of manufacturing scale that can offset the sizable R&D effort and investment required.  Therefore, for smaller OEM brands, the most effective design path is still to use 3rd party chipset providers and differentiate in other design dimensions such as advanced imaging or industrial design.

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