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  • Oct 30, 2014
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PUBLISHED : Wednesday, 05 December, 2012, 1:04pm
UPDATED : Wednesday, 05 December, 2012, 1:04pm

ZTE gears up for government hand-outs

ZTE's new tie-up with China Development Bank will help it in the short-term, but will ultimately undermine its attempts to convince the world it is an independent commercial company.

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

Having been locked out of the US and worried about the potential for similar problems in Western Europe, struggling telecoms equipment maker ZTE (0763.HK; Shenzhen: 000063) is fighting back by doing what it knows best: taking free money from Beijing. I don't want to sound too negative here, but this latest deal between ZTE and China Development Bank is exactly what ZTE should NOT be doing, at least if it ever wants to convince the world that it's a serious commercial company. But perhaps the company simply doesn't care anymore what others think, and there's also the very real possibility that ZTE is simply fighting for its very survival at this point.

Let's take a look at ZTE's latest announcement, which has the company saying it has entered a "strategic cooperation agreement" with China Development Bank, a Beijing-based policy lender.  The tie-up looks quite attractive for ZTE, which will have access to US$20 billion in financing from CDB to help its customers finance their purchases.

This kind of support isn't really uncommon for companies in key strategic industries that the government wants to support, and we've even seen it in the west from time to time. Such funding can often convince a customer to purchase goods from the related supplier, since the funding often includes attractive interest rates that would be unavailable from a commercial bank.

Both ZTE and crosstown rival Huawei received this kind of support in the past, but later tried to wean themselves from such funding in an attempt to show they were true commercial companies that didn't need special support from Beijing to compete in the global marketplace. So a return to this kind of government support now seems to indicate that ZTE no longer cares what the rest of the world thinks, especially western governments and rivals that have accused it of receiving unfair support from Beijing.

This development shouldn't come as a huge surprise, since ZTE's position has become increasingly weak in the last few months. The company's profits and margins have shrunk rapidly over the last year, as it made an aggressive push into low-cost smartphones in a bid to quickly gain global market share and diversify its product portfolio beyond its traditional networking equipment. That campaign, combined with a broader global slowdown, pushed ZTE deeply into the red in its latest reporting quarter, and it's quite possible we could see more losses over the next year.

Adding to its woes, both ZTE and Huawei were locked out of the US telecoms equipment market in October when a government panel ruled both companies' products posed a risk to national security. Facing all of those problems, it's no huge surprise that ZTE is now turning to Beijing for help from China Development Bank, which will most likely provide attractive financing fro sales of ZTE equipment into developing markets.

But at the end of the day, this kind of move will also undermine ZTE's attempts to show the world it is a true commercial company, and will reinforce the view held by some that is really just an arm of Beijing. That could ultimately hurt its longer-term prospects to become a major global player.

Bottom line: ZTE's new tie-up with China Development Bank will help it in the short-term, but will ultimately undermine its attempts to convince the world it is an independent commercial company.

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