ZTE, Huawei scale back investments
A couple of months after suffering a major setback in the US, hobbled telecoms equipment giants Huawei and ZTE (0763.HK; Shenzhen: 000063) are trying hard to convince the world that they are still committed to expansion in the west with 2 new investment announcements. But neither announcement looks very exciting in terms of size, and both look like feeble efforts to try to prove that neither company is ready to admit a slowdown in its global expansion. Both cases involve investment in new product development, with ZTE announcing a plan to invest in the US and Huawei focusing on Europe.
Let's take a look at ZTE first, as this particular commitment looks quite meagre to me, involving a commitment to invest US$30 million "to demonstrate its long-term commitment to the US market," according to the company's announcement. The announcement is rather vague about what the funds will be used for, though it implies spending will go to product development.
Meantime, Huawei's own new announcement will see it set up a product development centre in the Finnish capital of Helsinki, which, as many people know, just happens to be the hometown of former cellphone superstar Nokia (Helsinki: NOK1V). Huawei's investment is slightly larger than ZTE's, worth about US$90 million over the next few years, but still looks quite small for a company of its size.
The new R&D centre clearly looks set to draw many of its employees from Nokia, which has announced wave after wave of layoffs in the last 2 years as it struggles to turn around its fading cellphone business. Huawei said the new R&D centre will initially hire a relatively modest 30 workers, with the number expected to rise to around 70 over the next few years.
If anyone reading this posting is yawning after reading about these 2 new investments, it certainly wouldn't surprise me. After all, these are the same 2 companies that just 10 months ago announced major overseas spending commitments, with Huawei and ZTE committing to buy US$6 billion and US$5 billion, respectively, worth of component in the US over the next 3-4 years.
Of course, much has changed since the companies made those headline-grabbing announcements in February. Most notably, Washington decided in October that telecoms equipment from both Huawei and ZTE posed a national security risk due to the potential for each company to include back doors in their products to allow spying by Beijing. Following that decision, signals emerged that other major western markets could soon follow the US lead, though none has made any formal announcements yet.
Meantime, both Huawei and ZTE have seen their growth slow sharply this year due to weakening demand both at home and abroad. Such a slowdown was almost inevitable due to their previous high growth rates, and is also hitting their major western rivals. ZTE's problems have been compounded by a number of other factors, including the abrupt ending of its relationship with US networking equipment giant Cisco (Nasdaq: CSCO).
These modest new commitments from both Huawei and ZTE probably reflect a new reality for both companies that will see them become more conservative spenders until their situations improve. Of course there's no reason to believe such improvement will come anytime soon, meaning we're unlikely to see any major new expansions from either of these 2 fading superstars in the next couple of years.
Bottom line: Modest new investments from Huawei and ZTE are likely to become the norm for the next 2 years, as each looks to conserve cash in the current uncertain business climate.