A Fire Starter for Chinese Chip Industry?

Where the U.S./China trade roller coaster will take the smartphone industry is impossible to know, but one thing is clear: Recent cross-country trade events will play a role in who supplies core processors to the mobile handset industry.

ZTE is a good, high-profile example. U.S. national security concerns and geopolitics put it in the center of a controversy that threatens the company’s ability to operate because of a U.S. ban on sales to ZTE. (There are intermittent signs that its fortunes may change.) Building smartphones with components from all over the world is a common practice.

Setting the geopolitics aside, it is the practical procurement of electronic and computing components that interests DTC. As noted in a previous DTC blog, “Given how tightly integrated global supply chains are, it’s difficult to imagine how the U.S. and China could completely disentangle and effectively nationalize their technology companies.” The components ban not only resulted in the second biggest Chinese telecom equipment-maker announcing it shut down major operations, but it could also be a major hit to U.S.-based Qualcomm, a leading supplier of chips for ZTE and many other phone brands.

Qualcomm, whose products account for the lion’s share of chips inside ZTE smartphones, is also the major chip supplier for other big Chinese handset-makers, such as Huawei, OPPO, Vivo and Xiaomi. These makers may also feel threatened after the ZTE event. To prevent heavy reliance of a core component from one foreign supplier, Chinese smartphone makers may be preparing to diversify their chip sources by using other suppliers such as Samsung and MediaTek. More importantly, they have been putting more money and effort into research and development toward producing their own chips. They realize the importance of not only making smartphones, but also of developing the key underlining technology.

This move is not going to be easy. Twenty years ago, China’s efforts to build a chip industry were mostly unsuccessful. The technology was far behind global giants such as Samsung. But things could be different this time, as the country not only serves up a massive market, but it now has strong domestic makers of smartphones.

Today, Chinese brands control roughly 50% of the global smartphone market. Chinese companies will have the advantage of a vast domestic market that can support more domestic chips. A few years ago, Huawei and Xiaomi developed their own smartphone chips for their branded smartphones.  Huawei began sourcing its chips into some of its devices in 2015, and Xiaomi also took greater control of product development through its Surge S1 processor. Much of that development comes from the Chinese government, which is providing funds to build more research and development facilities.

The recent events likely fuel the Chinese desire to influence its own—and the world’s—technology industries with greater domestic development and control. Will it be successful this time? Only time can tell.