ZTE Back in the Game, Seeking Trust & 5G Deals

But the road ahead looks steep, despite domestic support and opportunities.

Robert Clark, Contributing Editor, Special to Light Reading

August 28, 2018

5 Min Read
ZTE Back in the Game, Seeking Trust & 5G Deals

ZTE is back in the game, but is now confronting the cost of its forced hiatus.

It has lost its position as the world's number four mobile network infrastructure vendor to Samsung Electronics Co. Ltd. (Korea: SEC), according to Dell'Oro and its stock is trading at HK$14.60, about 40% below the HK$25.60 price it commanded in April when a US ban effectively stopped it trading. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

Under a settlement with the Department of Commerce, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) paid a $1 billion fine and sacked its board and most of its top management. (See ZTE nearly back in business after inking US 'escrow' deal.)

But with 5G deals now being struck, it's playing catch-up with its global rivals.

Some see positives for the state-owned firm, which resumed operations last month after the Trump Administration lifted a three-month prohibition on component exports. (See Acacia Spies Return of ZTE Revenues.)

For example, Chinese securities house CICC has maintained its 'recommended’ outlook for ZTE's stock: According to a report by the Finet website, CICC noted that while the vendor's earnings will take a hit in the next reporting periods, the stock is under-priced and will bounce back next year.

One prime reason is the support from the Chinese government and the state-owned operators. Within a week of resuming operations, ZTE had picked up contracts from the Chinese telcos totalling more than 500 million yuan (US$73 million) -- not large, but symbolic: There will be plenty more where that came from now that its production lines are up and running again.

And in a move that will have caught the eye of its competitors, ZTE has applied for credit lines worth US$10.4 billion from two state banks.

Based on past experience, these applications are almost certain to be granted. (The company did not respond to queries from Light Reading.)

Past experience also suggests these huge lines of cash will likely support vendor financing deals that help support its sales -- a signal that it will attack the market on price.

Join Light Reading in investigating the transport and networking requirements of 5G as US operators move towards commercial launch. Register today for 5G Transport & Networking Strategies in New York on Oct. 9. Register now for this exclusive opportunity to learn from and network with industry experts – communications service providers get in free!

On the downside, ZTE is dealing with the reputational impacts of the export bans and penalties, unprecedented in the telecom industry. Carrier customers, especially those in Western Europe, have reason to question ZTE's reliability as a supplier and its ability to stay on the right side of US law.

"Outside of China... there is some irreversible damage -- ZTE can recover but it will take time to regain the trust," said Stefan Pongratz, senior director at Dell'Oro. The ban will "likely impact ZTE's 5G momentum," he said. "Prior to the ban, ZTE was hopeful that its position in China, coupled with its sub-6GHz strengths, would enable the vendor to capture a larger mobile infrastructure position globally in the 4G to 5G transition -- these aspirations will now need to be revised."

ZTE was scooped by Ericsson in Italy last month when the Swedish firm carried off a RAN contract from Wind Tre, which had been trialing ZTE's 5G gear. (See ZTE ban and Iliad entry blow Wind Tre of course.)

It was one of a number of "strategic partnerships" ZTE has forged with operators in Europe and Asia, including deals with Telefonica, T-Mobile, Telenet, Veon, Telecom Malaysia and KT. They might feel reassured if ZTE were able to explain how, after being caught breaching sanctions, it was unable to fulfill the terms of the legal settlement.

It has apologized to shareholders but has not given a public account of the events.

Under terms agreed early last year, ZTE had promised to remove senior staff and to introduce governance reforms. (See ZTE to Pay $892M Fine to Settle US Trade Dispute.)

Its alleged failure to do so is what prompted the revised penalty handed down by the Department of Commerce in April.

Now, in the final piece of the settlement, the department has just appointed a compliance lawyer who will monitor ZTE for the next ten years.

But against the fevered backdrop of the US-China trade relationship, it is not going to get easier for ZTE. US government agencies are now barred from using any ZTE or Huawei equipment and Australia is now out of bounds for 5G deals. (See US Government Agencies Barred From Buying Huawei, ZTE Tech and Australia Excludes Huawei, ZTE From 5G Rollouts.)

There are even rumors that doing business in Japan might get tough. (See Could Japan Also Bar Huawei, ZTE?)

And early this month the Commerce Department slapped export controls on a ZTE affiliate, the China Aerospace Science and Industry Corporation Second Academy, on security grounds. The company is a unit of one of ZTE's controlling shareholders, CASIC, an aerospace and weapons conglomerate with military links.

A recent article in Foreign Policy described ZTE's sanctions-breaking behavior as "a small part of something much larger: a pattern of breaking sanctions and illicit deals by firms with strong ties to the Chinese military-industrial complex." It adds: "Beijing has a long history of supporting Iran and North Korea in a variety of ways."

Put together, and that all adds up to a steep mountain that ZTE now has to climb.

— Robert Clark, contributing editor, special to Light Reading

Read more about:


About the Author(s)

Robert Clark

Contributing Editor, Special to Light Reading

Robert Clark is an independent technology editor and researcher based in Hong Kong. In addition to contributing to Light Reading, he also has his own blog,  Electric Speech (http://www.electricspeech.com). 

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like