Chinese vendor's survival now looks at stake after US authorities banned it from buying US components last month.

Iain Morris, International Editor

May 9, 2018

5 Min Read
ZTE Ceases Business Operations After US Ban

Embattled Chinese equipment vendor ZTE says it has ceased major business operations as a result of the recent US decision to ban it from using components made by US companies.

The company, which sells network gear and services outside the US market, said in a filing that it was still working to reverse the ban, which it previously described as a threat to its very survival. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

"As a result of the denial order, the major operating activities of the company have ceased," said ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) in a filing published on its website. "The company and related parties are actively communicating with the relevant US government departments in order to facilitate the modification or reversal of the denial order by the US government and forge a positive outcome in the development of the matters."

ZTE has suspended its online stores as well as activities on Alibaba's e-commerce platform, according to a report from Reuters, while business trips for executives have also been halted.

US authorities last month banned US component firms from selling equipment to ZTE for seven years after accusing the Chinese vendor of failing to make amends for previous misdemeanors.

ZTE had returned to growth after paying a $900 million fine in March last year for violating sanctions against Iran. Having suffered a loss of 767.8 million Chinese yuan ($120.7 million) in 2016, it reported a net profit of more than RMB6.7 billion ($1.1 billion) last year, with sales up 7.5%, to RMB108.8 billion ($17.1 billion).

But the US Department of Commerce said in April that ZTE had issued misleading and false statements about making improvements to its business.

Market watchers believe the company is a victim of the ongoing trade dispute between the US and China, with President Donald Trump threatening tariffs on up to $60 billion of Chinese imports. (See Trade Warmonger Trump May Slap Tariffs on Chinese Tech – Reuters and Huawei, ZTE in the Eye of a Trade Storm.)

Major telecom operators have been warned off using equipment and services from ZTE and larger Chinese rival Huawei Technologies Co. Ltd. since 2012, when a US government report described both companies as a potential risk to national security.

Conditions have grown even tougher for the Chinese vendors this year. Under legislative proposals, Huawei and ZTE would be stopped from selling any products or services to government authorities or operators with government contracts.

Huawei is now reportedly under investigation for breaching sanctions against Iran, the same charge that landed ZTE in trouble, and the Pentagon has blocked sales of Huawei and ZTE handsets on all US military bases. (See US Ban on Huawei Would Trigger Turmoil in Telecom Industry.)

While the US government has long argued that Huawei and ZTE represent a possible security risk, some observers see the campaign against the Chinese companies as a response to perceived intellectual property violations by China.

Tension between the countries has grown amid signs that China could take a leading role in the development of technologies such as 5G, a next-generation mobile standard that could spur economic growth, and artificial intelligence, which is likely to underpin many products and services in future.

For all the latest news from the wireless networking and services sector, check out our dedicated Mobile content channel here on Light Reading.

In today's statement, ZTE said that it "maintains sufficient cash and strictly adheres to its commercial obligations subject to compliance with laws and regulations."

But there is a real possibility that ZTE may collapse without intervention. It relies on US components for between 80% and 90% of its products, according to a report from the Economist that cites research from UBS. In many cases there are no obvious alternatives to the US suppliers.

Its disappearance would be disastrous for smaller companies such as Acacia, an optical components supplier that derives about 30% of its revenues from ZTE, according to research from MKM Partners.

It would also have repercussions for much larger firms, including US chipmaker Qualcomm Inc. (Nasdaq: QCOM), which supplies semiconductors that are used in ZTE's range of devices.

ZTE's customers, which include some of the world's biggest service providers outside the US market, will also be unnerved by the latest developments.

"We use ZTE in Malaysia, Pakistan and Hungary and we are following the situation closely," said Sigve Brekke, the CEO of Norway's Telenor Group (Nasdaq: TELN), when asked about ZTE during a recent earnings call. "This is something we have been following for the last one and a half years since the first order came out. I cannot comment more than that." (See Telenor's Cost-Cutting Focus Rattles Investors.)

ZTE's rivals in the network equipment market may see an opportunity in the Chinese vendor's misfortune, however. Michael Genovese, an analyst with MKM Partners, says Finland's Nokia Corp. (NYSE: NOK) and optical equipment specialists Ciena Corp. (NYSE: CIEN) and Infinera Corp. (Nasdaq: INFN) could stand to gain at ZTE's expense.

"We think Nokia has a great opportunity to gain share from ZTE in China and outside of China," he wrote in a recent note. "Ciena and Infinera will also likely gain some share from ZTE outside of China."

Nokia CFO Kristian Pullola told Light Reading during a recent interview that Nokia had a good chance of succeeding in the current environment. "We will monitor the situation and try to use any opportunity that would present itself in radio, routing or optical," he said. (See Nokia Tumbles on Weak Results, Insists Good 5G Times Lie Ahead.)

— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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