A U.S. ban imposed on China’s second-largest tele-communications equipment maker, lifted on July 13, has already pinched sales at Skyworks Solutions Inc. and is affecting several other Orange County technology companies with headquarters or major operations here.
The rare U.S. Commerce Department trade embargo, imposed in April on Zhongxing Telecommunications Equipment Corp., better known as ZTE, at the behest of President Donald Trump, led Skyworks (Nasdaq: SWKS) to trim $25 million to $30 million from its third-quarter sales forecast of $875 million to $900 million.
“They were a $100 million customer, approximately,” said Rick Schafer, managing director of semiconductor equity research at New York-based Oppenheimer & Co.
Skyworks, which is run from Irvine but designates headquarters in Woburn, Mass., makes communication chips used in smartphones, tablets, routers, PCs and notebook computers, among other devices.
Its diversification has helped overcome “the trade restrictions imposed by the U.S. government,” Chief Financial Officer Kris Sennesael said in a May analyst call following its second-quarter earnings report.
Last year, ZTE agreed to pay a then-record $661 million penalty to the commerce department’s Bureau of Industry and Security after engaging in a multiyear conspiracy to “supply, build, and operate telecommunications networks” in Iran and North Korea using equipment made in the U.S. ZTE was found in violation of a U.S. trade embargo against the Middle East country and hundreds of U.S. sanctions involving the shipment of telecom equipment to North Korea.
The agency said ZTE also made false statements and obstructed justice to prevent disclosures and mislead the government.
In addition to the monetary penalties and admission, ZTE agreed to a seven-year “suspended denial of export privileges” that would be activated if any part of the agreement wasn’t met.
In April the bureau activated the export ban after ZTE falsely told the government it would or had disciplined numerous employees responsible for the violations that led to the settlement agreement.
ZTE, the commerce department contended, actually rewarded the illegal activity by giving bonuses to 35 executives.
Skyworks declined to comment for this story in advance of its July 19 third-quarter earnings report.
“We are in our quiet period through our earnings conference call,” a spokesperson said.
The Business Journal reported in December that Skyworks was supplying ZTE with integrated chips that ZTE embedded in after-market consumer products, essentially turning unconnected vehicles into roaming hot spots.
Skyworks has supplied integrated chips and other components to the Chinese manufacturing giant since the chipmaker was established in 2002 after Alpha Industries Inc. in Woburn, Mass. merged with the wireless communications business of Newport Beach-based chipmaker Conexant Systems Inc. in Irvine.
The combined company was renamed Skyworks Solutions.
ZTE was a longtime customer of Alpha Industries and Conexant before the merger.
Skyworks is in line for a boost in the next quarter when Apple Inc. releases its latest iPhone models—rumored to be as many as four versions—and beyond as smartphones become more complex.
“We anticipate … content increases with customers including Apple as Skyworks expands integrated offerings for its customer base requiring more complex integrated solutions,” Canaccord Genuity Group Inc. said in a May investor note. “Skyworks is well positioned to gain share in future iPhones particularly with competitor Qorvo losing share.”
Irvine-based Paragon Software Group Inc. is in the third year of a five-year agreement with ZTE, which licensed its universal file system driver for new-generation Android devices. The deal, valued at several million dollars, also provided Paragon an entree into the booming smartphone market in the world’s most populous country, where it had planned to ship more than 5 million smartphones.
ZTE is one of China’s biggest Android product manufacturers.
Paragon’s driver was embedded in ZTE’s Vodafone Smart Ultra 6 and Warp 6 Android smartphones, allowing the devices to communicate with secure digital memory cards typically 64 gigabytes or more.
Memory cards higher than 32 gigs are formatted with a Microsoft standard called exFAT, which doesn’t sync with Android devices.
Paragon’s offering acts as a Rosetta Stone of sorts, linking separate and distinct file systems. The technology allows smartphones, smart TVs and monitors, tablets, media players, routers and other equipment to communicate with storage media, giving consumers the ability to streamline content through any device from any storage-media format or file system, regardless of chip configuration or operating system.
A Paragon spokesperson told the Business Journal that it “will not be able to comment on this story.”
Microchip Technology Inc., which acquired Aliso Viejo-based chipmaker Microsemi Corp. in May for $10.3 billion, shaved 1% off its China-revenue guidance to 16% of total sales in the June quarter.
“We’re facing a lot of one-time issues,” Chief Executive Steve Sanghi said in a May 8 analyst call. “There is a slight impact because of ZTE. We can’t ship to ZTE.”
Chandler, Ariz.-based Microchip (Nasdaq: MCHP) has a strong presence in the industrial, auto and home appliance segments. About 30% of its $3.9 billion in sales in its fiscal year ended March 31 was generated in China.
Microchip leases an office at 1 Spectrum Pointe Drive in Lake Forest where it employs 60 people, according to Business Journal research.
ZTE was also a Microsemi customer, getting technology and products for a wide range of communications applications, including fiber-optic connections, customer-premise equipment and wireless infrastructure. Microsemi was Orange County’s fourth-largest chipmaker before the merger, with 236 workers at its 110,000-sqaure-foot headquarters at 1 Enterprise in Aliso Viejo.
Rivals Broadcom Inc. and Qualcomm Inc., both with Irvine operations, have supplied ZTE with chips for years.
Broadcom (Nasdaq: AVGO) specializes in communications chips that power Wi-Fi, Bluetooth, GPS and other applications in mobile devices, as well as those used in data centers and set-top boxes.
Qualcomm (Nasdaq: QCOM) dominates the world market in high-margin baseband chips—the brains of smartphones—and its Snapdragon processors are among the most popular for gaming graphics.
In 2012, ZTE announced a $1 billion contract with Broadcom and a $4 billion contract with Qualcomm that extended through 2016.
Qualcomm was also the benefactor of a $2 billion memorandum of understanding announced in January to supply chips for the next three years to China’s largest wireless-equipment manufacturers: ZTE, Lenovo, Oppo, Vivo, Wingtech and Xiaomi.
11th-Hour Reprieve?
ZTE has mounted a second bid at amends with the Trump administration, which temporarily agreed to let it provide network maintenance on contracts it signed on or before the ban, which took effect on April 15. The authorization, which extends to Aug. 1, allows ZTE to work with U.S. companies to service and support its smartphones, including software updates.
Last month the Trump administration said ZTE could buy U.S. parts again if it paid an additional $1.4 billion in fines, retain special compliance coordinators selected by and reporting to the bureau for 10 years, and replace its entire board of directors and senior leadership.
“The purpose of this settlement is to modify ZTE’s behavior while setting a new precedent for monitoring to assure compliance with U.S. law,” the commerce department said in a statement.
ZTE has paid $1 billion of that fine and placed the rest in an escrow account.
The company replaced its board of directors and named Xu Ziyang chief executive in a string of new top executive appointments.
The concessions led Trump to lift the entire ban late last week, leaving many questions on ZTE’s U.S. operations in limbo as a bipartisan group of lawmakers wrestle with new potential sanctions and penalties against the company, including prohibiting it from buying U.S. parts, citing national security threats and links to the Chinese government.
