Mobile/Wireless Components

ZTE Racks Up Losses of $3B After US Ban – Report

Chinese equipment vendor ZTE reckons the current ban on its purchase of US components will result in losses of about $3 billion, according to a Bloomberg report.

The Bloomberg report cited people familiar with the matter as the source of its information, but did not indicate over what period the Chinese company would record those losses.

Now banned from buying US components after being charged with violating sanctions against Iran, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) had previously reported a net profit of nearly 1.7 billion Chinese yuan ($270 million) for the first three months of the year, up 40% on the year-earlier figure. First-quarter revenues were up 12%, to RMB28.9 billion ($4.5 billion).

The company, which competes against Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. and Nokia Corp. (NYSE: NOK) in the market for network equipment and services, had to cease business operations earlier this month due to the US components ban. Older reports, citing research from UBS, had indicated that up to 80% of ZTE's products used components made by US companies in 2016. (See ZTE Ceases Business Operations After US Ban.)

In a bizarre turn of events, US President Donald Trump, whose administration is obviously behind the ban, tweeted on May 13 that he was in talks with China's President Xi Jinping about getting ZTE "back into business."

On Wednesday, Trump told reporters there is still no rescue deal for the Chinese company, which employs about 75,000 people. (See Trump Denies ZTE Deal, Faces Senate Backlash.)

US lawmakers are said to be angry that Trump is considering whether to lift the ban and instead impose a $1.3 billion fine on ZTE. That financial penalty would come after ZTE paid a fine of almost $900 million last year to settle the original charges.

The Chinese company may have ended up as a bargaining chip in the ongoing trade dispute between the US and China, with Trump's administration complaining about unfair Chinese competition and arguing that Chinese equipment vendors pose a threat to security. (See Trade Warmonger Trump May Slap Tariffs on Chinese Tech – Reuters and Huawei, ZTE in the Eye of a Trade Storm.)

US authorities are clearly worried that a Chinese lead in technology areas like 5G and artificial intelligence could translate into a major economic advantage in future.

Hit by mounting expenses while employees remain largely inactive, ZTE has also seen major clients pull out of deals, according to Bloomberg's report. It puts daily expenses for the company at between RMB80 million ($10.7 million) and RMB100 million ($13.4 million).

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The update comes after Norway's Telenor, which uses ZTE equipment in several markets, said it had been monitoring developments ever since the Chinese vendor was first accused of violating sanctions. "We use ZTE in Malaysia, Pakistan and Hungary and we are following the situation closely," said CEO Sigve Brekke, during an earnings call with analysts earlier this month. (See Telenor's Cost-Cutting Focus Rattles Investors.)

There is also industry concern that Huawei, ZTE's bigger Chinese rival, could be hit with a similar ban. It was recently reported to be under investigation by the US Department of Justice for breaching sanctions against Iran. (See US Ban on Huawei Would Trigger Turmoil in Telecom Industry.)

That is causing jitters at service providers that are heavily reliant on Huawei for network equipment and services. "It causes us to be a bit hesitant but at the same time I am not sure their solutions are replicable," said Ibrahim Gedeon, the chief technology officer of Canada's Telus, in a discussion with Light Reading last week. "They are labor intensive and they work and they are cheap."

Even so, Gedeon said Telus might be forced to consider alternatives if there is no improvement in US-China relations. "It makes me a bit more apprehensive," he said when asked if the current dispute was scary for a service provider like Telus. "If China and the US don't sort out their stuff over the next year we will probably have to start looking."

— Iain Morris, International Editor, Light Reading

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