China's ZTE boosts chip capabilities amid Huawei's crackdown woes

TAIPEI -- China's No. 2 telecommunications equipment maker ZTE has been quietly boosting its chip design capabilities as a U.S. crackdown continues to hobble its bigger domestic rival, Huawei Technologies.

ZTE has been developing its own base station processors and tapping Taiwan Semiconductor Manufacturing Co.'s advanced technologies for chip manufacturing and packaging, sources familiar with the matter told Nikkei Asia.

The Hong Kong-listed company has been ramping up efforts to improve its tech capabilities for the past three to four years, ever since trade and tech tensions broke out between the U.S. and China, the sources said.

Its moves are part of a trend across China's tech industry as companies attempt to seize market share from Huawei, which Washington has placed on a trade blacklist due to its alleged ties to the Chinese military. Beefing up in-house tech muscle is also seen as a way of shielding themselves from geopolitical tensions going forward.

ZTE is focusing on processors, the brains that power every electronic device, from smartphones to servers.

The company has been utilizing some of TSMC's most advanced chip production technology -- the so-called 7-nm tech -- to build processors for its 5G base stations. Sources said it also uses the Taiwanese chipmaker's advanced chip packaging technology, which uses stacking technology to arrange chips with different functions into one package.

For comparison, AMD and Nvidia both use TSMC's 7-nm chip technology for their flagship CPUs and GPUs, while AMD, Nvidia, Xilinx and Broadcom all have adopted its advanced chip packaging technology. ZTE is also considering using chip manufacturing technology that is even more advanced than the 7-nm version, sources told Nikkei Asia.

"ZTE has turned quite aggressive in pursuing its chip capability in the past few years. Although the volume is still small, it is showing impressive progress," said one of the people familiar with ZTE's situation.

ZTE has told suppliers it is aiming for double-digit growth in domestic server shipments to expand its market share in China this year, especially for servers used in base stations, Nikkei Asia has learned. This aggressive goal poses a direct challenge to Huawei, which is still facing hurdles in accessing key components.

ZTE said in its annual report that it gained market share in China last year for servers, core networks and storage solutions -- the three areas where Huawei is a key player. ZTE does not yet have a significant presence in the global server market like domestic peers Inspur, Huawei and Lenovo, but said its revenue for server and storage solutions doubled in the first three quarters of 2021 from a year earlier. The company specifically highlighted that its servers had the highest market share in China Mobile -- the country's top mobile carrier -- for three consecutive years, which it says is a sign that its server business has become a reliable player domestically.

Manoj Sukumaran, principal analyst for data center IT at Omdia, pointed out that Huawei's server revenue dropped 44% on the year in the July-to-September quarter last year as it faced backlash from the U.S. trade sanctions.

"The decline in Huawei's business in China is a boon for its local competitors -- Inspur, Lenovo, H3C and ZTE. All of them reported an uptick in China revenues for the third quarter of 2021," Sukumaran told Nikkei Asia.

Like its domestic peers Xiaomi and Oppo, ZTE also geared up its efforts to rebuild its smartphone business and grab market share from Huawei in this area too. Its global smartphone shipments came to 6.4 million units in the first three quarters of 2021, already exceeding the full-year 2020 total of 5.9 million units, data from IDC showed. Its global market share has increased from 0.5% in 2020 to about 0.7%, according to the data.

Huawei, meanwhile, is unable to work with TSMC, once a vital supplier, due to the U.S. clampdown. Washington tightened export control rules against Huawei in late 2020, cutting off its access to, among other things, the Taiwanese chip manufacturing giant and its cutting-edge production technology.

Huawei suffered a nearly 29% drop in revenue in 2021, the first full-year fall it has ever reported.

Both Huawei and ZTE have been banned from participating in 5G network infrastructure in a number of countries, mostly in the West. As a result they have concentrated more attention on their home market.

China has led the world in 5G rollout and is by far the largest market for its deployment, with 1.3 million 5G base stations installed as of 2021, according to preliminary data from China's Ministry of Industry and Information Technology.

Stephane Teral, chief analyst with LightCounting, a market research agency that focuses on the communications industry, said Huawei remains the largest telecom equipment builder in China, but ZTE's domestic market share climbed from 30% in 2020 to an estimated 35% last year.

"ZTE has been staying the course and executing its strategy carefully to gradually gain shares in its home market," Teral told Nikkei Asia. "Abroad, Huawei and ZTE have been able to sustain some level of activity in markets where governments have not banned them: Africa, Europe, Southeast Asia and South America."

Overseas, they have also been able to sustain their businesses of upgrading 4G networks because the bans generally apply only to 5G, the veteran telecom analyst added.

Washington imposed an export ban on ZTE in April 2018 that prohibited American companies from dealing with the Chinese telecom gear maker, which it accused of selling and shipping products to Iran and North Korea. The ban was lifted later that year after ZTE paid an additional fine of $1.4 billion, shuffled its management team and agreed to accept legal compliance monitoring measures. The U.S. Federal Communications Commission has banned U.S. telecom carriers from using Huawei or ZTE's gear over national security concerns.