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ZTE

ZTE

China’s ZTE steps up expansion drive, unfazed by US restrictions

The Shenzhen-based company is aiming to overtake Nokia to become the world’s third largest telecoms equipment supplier

PUBLISHED : Wednesday, 28 December, 2016, 8:00am
UPDATED : Thursday, 29 December, 2016, 1:15pm

While operating under the shadow of United States export restrictions for most of this year, ZTE Corp has managed to weather that crisis and push forward a business expansion strategy that could set it up for accelerated growth over the next few years.

Spokesman David Dai Shui said Shenzhen-based ZTE is firmly resolved to eventually become the world’s third-biggest telecommunications equipment supplier, following industry leader Huawei Technologies and Swiss powerhouse Ericsson.

“We’re now No 4 in the world [behind Nokia],” Dai said. “We’re very confident of becoming a top-three [telecommunications equipment] vendor in the next several years.”

That would be welcome news for investors in ZTE, who have seen the company’s share price decline 14.6 per cent in the 12 months to December 23.

Last month, the Bureau of Industry and Security of the US Department of Commerce granted ZTE a reprieve for the fourth time from export restrictions for violating Washington’s long-standing trade sanctions on Iran.

The bureau had slapped ZTE with export restrictions in early March, which would bar suppliers from shipping any US-made equipment and parts to the Chinese company.

Suppliers of goods subject to the US export curbs are required to apply for a license to ship those items to ZTE.

A “license review policy of presumption of denial shall apply” in this situation, ZTE said.

The US action stemmed from the Commerce Department’s probe of a 98.8 million contract between ZTE and the state-controlled Telecommunications Company of Iran for the supply of a powerful surveillance system.

That system, which was delivered to Iran in 2011, included hardware and software components from US technology firms such as Microsoft, Oracle, Cisco Systems, Dell and Symantec, according to a 2012 report on the product’s packing list.

ZTE is now the most aggressive vendor in the world in terms of pre-5G equipment deployments
David Dai Shui, ZTE spokesman

A Nomura report in March estimated that US-made components accounted for up to 15 per cent of ZTE’s total bill of materials last year. Major suppliers included Qualcomm, for smartphone chips, as well as Xilinx and Altera, for base station chips.

The US restrictions also covered subsidiaries Shenzhen ZTE Kangxun Telecommunications, ZTE Parsian and Beijing 8-Star International.

On March 24, the Bureau of Industry and Security amended its initial ruling by creating a temporary general license so that the export restrictions on ZTE and subsidiary Kangxun Telecommunications would not apply until June 30. This three-month reprieve was extended by the bureau on June 28 and on August 19.

The bureau last month extended ZTE’s temporary general license to February 27 next year.

Dai said the extensions “provide more time for both sides to try and resolve the issue”.

Unfazed by the pressure of keeping its US supply chain intact, ZTE has sharpened its focus on pre-5G mobile infrastructure deployments with telecommunications network operators.

“ZTE is now the most aggressive vendor in the world in terms of pre-5G equipment deployments,” Dai said.

The company and privately held Huawei were the suppliers in the world’s first commercial roll-out of Massive Mimo technology in September by SoftBank Corp, the domestic telecommunications subsidiary of Japanese conglomerate SoftBank Group Corp.

Massive Mimo, a large-scale antenna system for mobile base stations, represents one of the key technologies behind future 5G networks. Industry standards for 5G remain under development.

ZTE said it successfully completed earlier this month Spanish telecommunications giant Telefonica’s first European Massive Mimo trial in Madrid.

Also this month, ZTE agreed to take over Turkish company Netas Telekomünikasyon for up to US$101.28 million in a deal that would expand its operations across key markets covered by Beijing’s “One Belt, One Road” initiative.

The transaction will see ZTE acquire a 48.04 per cent share of Netas from Dutch investment firm OEP Turkey Tech and become its largest shareholder, according to its regulatory filing in Hong Kong.

Zhao Xianming, ZTE’s chairman and president, said Netas’ scope of business and corporate direction was consistent with ZTE’s own strategy around M-ICT, a shorthand for the so-called mobile interconnection of all things, which is expected to transform the mainland firm’s operations and expand its businesses over the next five years.

Last week, however, saw ZTE make a big bet outside of its traditional scope of business when its new unit, ZTE Smart Auto Corp, bought a 70 per cent interest in coach maker Granton Automobile in Zhuhai.

Academus Tian, the president at ZTE Smart Auto, said the acquisition cost “several hundred million yuan” and marked the company’s initial foray in building smart electric vehicles. That business is projected to generate annual revenue of 100 billion yuan for ZTE.

Dai pointed out that ZTE was keen to broaden its business ecosystem, which would help expand the application for its other products, such as chipsets.

Subsidiary ZTE Microelectronics Technologies currently supplies essential chipsets found in parent ZTE’s high-end routers, switches and mobile base stations. It also develops semiconductor technologies used in smartphones and other mobile devices shipped on the mainland as well as in Brazil, Indonesia and Russia.

ZTE Microelectronics received a 2.4 billion yuan investment in November last year from the National Integrated Circuit Industry Investment Fund Corp, which took a 24 per cent stake in the company.

In October, ZTE posted a 10.5 per cent year-on-year rise in net profit to 1.09 billion yuan (HK$1.2 billion) for the third quarter, driven by Chinese telecommunications network operators’ investments in 4G mobile and fixed-line broadband infrastructure. Its revenue advanced 5.23 per cent year-on-year to 23.8 billion yuan.