ZTE is about to dump its senior leadership as part of the settlement with the Department of Commerce over its breach of US sanctions on Iran. That's a win for the US, but would be an even bigger win if China would cop to its failings.
Entries in ZTE (15)
Corporate rebranding is an easy target for snark, and ZTE isn’t helping by declaring ‘cool, green and open’ are its new corporate values. But with its nearest rivals said to be contemplating a merger, it's worth asking whether a minnow like ZTE has a future at all.
China’s hefty 4G rollout has come to the rescue of ZTE’s interim result, propelling it to a healthy 1.28b yuan ($180m) profit despite a drop in handset sales.
Total revenue for the six months to June 30 was flat at 37.697b yuan ($6.14b), but carrier gear sales were up nearly 15% to 21.8b yuan.
The China 4G sales also hoisted the margin in the carrier unit by 3.9 points to 39%. In China, the margin increased nearly eight points.
ZTE said in a statement that the “substantial increment” in gross margin and profit was attributable to improved management of contract profitability and the greater sales of 4G kit in China.
By contrast, mobile phone revenue was off 16% year-on-year, which the company said was a result of lower 3G device sales in the China market.
ZTE also predicted earnings for the first nine months would be between 1.7b-1.9b in the first nine months, up 208.2% to 244.5% from a year ago.
After awarding a no-bid contract to ZTE, Ethiopian telecom officials are now complaining about the high financing cost.
The news doubtless set off the schadenfreude meter at Ericsson, but bigger issue explored in this Wall Street Journal piece is the problematic role of Chinese state financing of offshore telecom contracts.
The billions of dollars in credit extended by China Development Bank (CDB) and the China Ex-Im Bank are the not-so-secret weapon behind the offshore success of Huawei and ZTE.
That’s not just my opinion. A People’s Daily editorial in March 2010 (reproduced here in Chinese on the CDB’s own website), proudly declares that “the contribution of CDB’s financial support to the international expansion of Huawei and ZTE cannot be ignored.”
According to the Journal, ZTE won the network contract ahead of western vendors in 2006 by offering $1.5 billion in low-interest financing through the state-run banks.
A World Bank investigation last year found that in awarding the contract to ZTE the Ethiopian government, which enjoys close ties with Beijing, appeared to ignore its own procurement rules that require competitive bidding. The WB report also criticized the government for giving such a big project to a single company.
Last year when Ethiopia Telecom issued network extension contracts it split them between ZTE and Huawei, putting itself another $1.6 billion in hock to Chinese banks. Yet even prior to that officials had been complaining that ZTE had charged too much for the original network.
Jia Chen, the head of ZTE Ethiopia, said ZTE had to charge more in Ethiopia because of the project loans' large size and the long repayment period.
Western firms also can get funding to help customers buy their equipment but, unlike their Chinese counterparts, western banks have signed an agreement to limit such lending, especially to countries with a history of debt problems.
Chinese officials routinely dismiss these arrangements as foreign ‘interference’ and insist their financial aid comes with no strings attached.
Huawei and ZTE are just as disingenuous. Eric Xu, now one of Huawei’s three rotating CEOs, told me in an interview in 2010 that the tens of billions of dollars available on credit had nothing to do with Huawei. It was merely something that banks announced for publicity purposes.
Yet it’s the vendors who are liable for repayment of the loans, as firms like Nortel and Lucent discovered after the telecom bubble burst in 2001.
Such massive amounts of easy money offer the temptation for feather-bedding, as Ethiopian officials obviously believe.
In another case, also involving ZTE, the Kenya government last year cancelled a police radio system contract. A review found ZTE had tendered its gear at double normal market prices.
China provided $50 billion in financing in Africa from 1995 to 2012, at least three or four times that provided by the US or Germany over the same period, according to Johns Hopkins University estimates.
Despite the blowback, there’s no chance that this torrent of cash will dry up. But let’s see if Chinese banks and vendors can learn the obvious first lesson and become introduce some transparency in the way they deploy these funds. A little straight talking wouldn't go astray, either.
In a New Year reorganisation, ZTE has sidelined He Shiyou, the long-serving head of its handset group, and replaced him with Zeng Xuezhong, currently China handset sales chief.
He, 47, has headed the devices business since 2004.
ZTE says the move is aimed at bringing new blood into senior management ranks, although Zeng is just seven years younger than He.
The move follows a decline in terminal sales over the last 18 months. Device revenue shrank 12.5% in the first half of 2013 and 4% during 2012.
ZTE also said it would spin the devices group off as a standalone unit. The division, which accounts for a third of total revenue, won't be a separate company, but will be responsible for its own procurement, R&D, sales and other functions.
ZTE, China’s second-largest telecom vendor, last year posted a 2.84 billion yuan ($470m) loss. It has forecast a full-year profit for 2013.
A company source told Sina Tech that Zeng had replaced He because of the financial results, his age and greater grasp of the internet. Traditional handset vendors like ZTE are being challenged by new brands like Xiaomi, which skilfully use online channels, and e-commerce platforms like JD.com.
“Here the fast fish eats the slow fish,” CEO Shi Lirong is reported to have said. "The highly efficient will destroy the inefficient... we must carry out strategic change, organisation change and cultural change."
As well as shifting He Shiyou, who keeps his role as executive director, ZTE said it would also step up its efforts in urban public IT, new energy tech and mobile internet.
In other appointments, it has tapped EVP Zhao Xianming as CTO and appointed senior VP Pang Shengqing as head of the enterprise group.