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ZTE’s Operations Shutdown Stymies Major Phone Customers

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Customers of ZTE Corp. ZTCOY -15.37% are reassessing their ties with the hobbled Chinese telecommunications firm, concerned that supplies of phones and networking gear will fall short after assembly lines were shut down.

Telstra Corp. TLSYY -1.65% , Australia’s biggest telecom carrier, said Thursday it would no longer carry its own-branded smartphones manufactured by ZTE because it couldn’t guarantee supply. AT&T Inc., T 1.53% the major U.S. distributor of ZTE phones, and MTN Group Ltd., one of Africa’s biggest network operators, said they were assessing the impact of a U.S. ban on component sales to the Chinese company.

ZTE said Wednesday it had halted major operations, though employees at its headquarters in Shenzhen showed up to work as usual Thursday. As hundreds of workers streamed in and out of a nearby cafeteria during lunchtime, some said they had little to do since production was shut down in late April. Others said they were working as usual.

Concerns about ZTE’s ability to ship smartphones, routers and other telecoms gear have heightened after the company’s announcement, which didn’t specify which operations were most affected. The telecom firm had warned for weeks that it was battling to survive a Commerce Department order barring American companies from selling to ZTE as punishment for its violation of a 2017 settlement to resolve its breach of U.S. sanctions against Iran and North Korea.

A ZTE spokeswoman declined to comment Thursday.

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The Chinese company relies heavily on foreign-made components, particularly U.S. microchips for its smartphones. Qualcomm Inc. supplied chipsets for 84% of phones shipped by ZTE in the first quarter, according to Canalys, highlighting the vulnerability of the global supply chain as technology firms get caught up in the escalating trade fight between the U.S. and China.

Telstra said its move to break from ZTE was a “difficult but necessary step given ZTE’s decision to cease major operating activities.” ZTE was the eighth biggest smartphone vendor in Australia, well behind other suppliers, according to Canalys.

AT&T, one of ZTE’s biggest U.S. distributors, said it is still carrying ZTE phones but is “evaluating the effects of the government order.” Rob Shuter, chief executive of MTN, told investors this week that the African operator was considering contingency plans given its “exposure to ZTE in our networks.”

ZTE employs about 75,000 people around the world, including in factories in China and India, and has five research-and-development offices in the U.S. Its total sales last year were $17.13 billion. Though 60% of its revenue comes from China, it has struggled to sell smartphones in its home market.

It is a different story in the U.S, where ZTE is the only Chinese company to build a substantial smartphone business. Among its most recognizable phones in the market is the Axon M, an unusual dual-screen smartphone that folds in half. ZTE ranked No. 4 in the U.S. smartphone market in the first quarter, according to Canalys, with its sales there accounting for nearly three-fourths of its total smartphone shipments last year.

Beyond phones, an array of U.S. high-tech firms supply components for its base stations and other networking gear. They include Maynard, Mass.-based Acacia Communications , a manufacturer of parts known as optical components, used in networking equipment. The company’s chief executive told investors this week that it was no longer expecting any revenue from ZTE.

At ZTE’s sprawling headquarters in the high-tech Nanshan district of Shenzhen, employees said they were continuing to report to work and collect their salaries, though factory work had ceased last month.

A 21-year-old factory employee who said he worked on electrical components said his work had stopped around April 20, just days after the Commerce Department order. He now attends training sessions in the mornings and rests in a company dorm during his free time.

Another factory worker, who sat on a bench during his break in a nearby park, said he used to work on communications equipment before it dried up last month. He said he wasn’t upset at the U.S. because it would force China to innovate and develop its own technology.

Among top executives at the company, many were hopeful that a cool-down in trade tensions would lead to a reversal of the ban, a person familiar with the matter said. The company last weekend said it submitted an official request with the Commerce Department to suspend the ban and that it was under review.

ZTE said it “maintains sufficient cash” despite the business shutdown. The company said it had 23.67 billion yuan ($3.73 billion) in cash and cash equivalents as of March 31.

Write to Dan Strumpf at daniel.strumpf@wsj.com and Wayne Ma at wayne.ma@wsj.com

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