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ZTE Battles For Survival After US Ban Jolt

Sep 4, 2018 by A. Alfaro
ZTE Battles For Survival After US Ban Jolt

Chinese telecommunications company ZTE is struggling to recover from the effects of a US government sanction on the company in April this year.

On August 30, the fifth largest telecommunications player in the world reported a loss of USD 1.1 billion during H1 2018.

The company declared that it had generated an income of USD 5.7 billion during the period which is 26.9% lower than that earned during the corresponding period last year.

ZTE, which has operations in 160 countries, had reported profits of USD 335 million a year ago.

Angered by the company doing business in North Korea and Iran, the US government had banned other companies from providing goods and services to ZTE. This forced the company to shut down operations in the country for two months.

Although it resumed services after paying a penalty, the curse of the ban is clearly dogging the company even now.

Addressing shareholders at a meeting in Shenzhen on August 28, ZTE CEO Xu Ziyang tried to allay fears claiming that the company had returned to normalcy.

However, industry insiders claim that the company’s situation continues to remain grim.

ZTE is reportedly planning a massive retrenchment in the smartphone division of the company, the Chinese tech portal Shenwang quoted insiders as having said. Quoting the sources, the portal reported that many of the 10,000 employees at ZTE’s Nanjing-based research and development centre had already faced the axe. The job cuts could spread to other centres, the report added.

Media reports even claim that ZTE could completely shut down its phone business. However, the company has not confirmed it yet. At the shareholders’ meet, CEO Xu insisted that the company is concentrating resources on the development of 5G networks and was relocating resources away from its smartphone department.

The ban has also come as bad news for the employees of ZTE Ultimate, a subsidiary that the company started in March 2018 and hoped to nurture it into an independent entity.

But after the ban, ZTE has been forced to abandon those ambitions, leaving its employees in the lurch.

ZTE has stopped allocating resources to the US and European smartphone markets. Its employees in Russia have begun to return. However, following the launch of Axon 9 Pro in Berlin last week, the company said that it would continue to manufacture devices in non-US regions.

CEO Xu now has all his hopes pinned on the 5G technology. ZTE expects that 5G development would put its internet services back in growth mode.

By 2020, ZTE hopes to start taking advantage of the business opportunities brought by 5G and hopes to witness rapid growth.

However, ZTE will also have to tide over the shortage of capital faced by companies in China. Besides, there are other challenges too that the limping company has to face.

In August, rivals Ericsson acquired the largest Italian mobile operator, Wind Tre for USD 700 million. Wind Tre was one of ZTE’s strategic partners in Europe, along with Spanish Telefonica, German T-Mobile and Belgian Telenet.

The company is having some luck on the domestic front. ZTE won bids to supply telecommunication equipment worth USD 73 million to China Mobile, China Unicom and China Telecom, the three largest telecom companies in the country.

Despite this, the company’s financial situation is fragile. According to the company’s annual financial report, ZTE had generated USD 15.9 billion as revenue in 2017, its operation cost was USD 11 billion and the net cash flow from operating activities was USD 1.5 billion. The performance report for H1 2018 shows that the net cash flow from operating activities fell by 19.96%.

ZTE pays out USD 586 million per month as salaries. The company had a USD 4 billion credit line from Bank of China and another USD 6 billion from the Shenzhen Branch of the State Development Bank. But now the banks are not confident that ZTE can completely resume normal production and are wary of giving out credit.

The company has announced that it would apply for new credit lines from various financial institutions in the second half of 2018. Clearly, the smartphone manufacturer and network service provider will need some time to be back in the pink of its health again.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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