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The US Commerce department just dropped a bomb on ZTE, requiring all US companies to obtain an export license if they wish to do business with the company. Article updated continuously as more information filters in.

Overall, this is a negative event for the component industry, as Chinese demand is likely to fall not just due to a lack of ZTE demand, but a pullback in new contracts from Chinese carriers until this issue is resolved. Long term this will further catalyze the development of Chinese suppliers.

From Reuters:

Under the measures, U.S. manufacturers will be banned from selling components to ZTE, a major global supplier of telecom-networking equipment and smartphones. In addition, foreign manufacturers will be prohibited from selling products containing a significant amount of U.S.-made parts to the Chinese company.

Specifically for the optical networking business this could mean several things:

  • Huawei and Fibrehome – Have the appearance of being huge beneficiaries as they now have one less competitor shipping 100G in Chinese markets. The risk is that Chinese carriers put the brakes on 100G bidding as a result of losing a competitive supplier. It isn’t clear if this will happen and demands further study.
  • Acacia – ZTE was Acacia’s largest customer, accounting for 25% of revenue. While ZTE was rotating away from modules to DSP purchases this will inject a level of uncertainty into Acacia’s IPO plans that certainly cannot be positive. Acacia was ramping some business with another Chinese vendor however…
  • ZTE – They were very smart and pursued a dual source strategy after Acacia was unable to ship modules a few years ago for other reasons. ZTE has designs that use the NEL DSP and unless Japan duplicates the US actions, will still have access to coherent DSP technology in the absence of Acacia. Unfortunately, some part of this design is probably derived from USA components such as laser sources, modulators, ICR’s, etc, gearbox – so they are probably line down for at least 3-6 months. Without knowing the bill of materials of the alternate design, it is impossible to know but odds are there is American content there.
  • Japan– Component suppliers here should benefit unless the government duplicates the actions of the US. We’re looking into this. There are still some key components that must be sourced from the US but virtually everything else can be bought out of Japan/China.
  • Western Vendors – Not a lot of impact, positive for vendors such as Nokia and ECI who compete against ZTE in developing markets. Huawei is the prime beneficiary.

Update 9:30 – Oclaro has issued a statement regarding imapct to their business. ZTE was to be a 10% customer for the March Q. They did not previously name customers so it is unclear if they were 10% last Q. Guidance now at lower range, around $97M. Most of Oclaro’s growth is coming from other customers so this appears to be a tactical, not a strategic issue.

Update March 16th – The US Department of Commerce issued a statement that discussions with ZTE were ongoing and “These discussions have been constructive, and we will continue to seek a resolution.” Other Chinese equipment vendors indicate that they really don’t have a good idea of what this means for near term 100G spending by service providers. General consensus of people we speak with is that this is a one quarter event, and that ZTE will reform.

Update March 25th – The US Department of Commerce has issued temporary relief to ZTE (though not some of the subsidiaries suspected of exporting to Iran). This license is in effect until June 30th, though it is renewable provided ZTE abides by restrictions and coorperates with the ongoing investigation. The CEO of Oclaro indicated that they expected to be shipping product to ZTE as of March 28th.