China’s ZTE gets operation back on track while global backlash mounts

ZTE Corp has said it expects to post a profit in the third quarter after reporting its worst-ever first-half loss on Thursday, in what is the Chinese telecommunications equipment supplier's first step towards normality in the wake of a US ban that had shut down its operations for months.

The Shenzhen-based company, which is the second largest telecoms equipment maker in China, said it expected to record a net profit of between 24.2 million yuan (US$3.54 million) and 1 billion yuan for the three months ending September 30, compared to 1.61 billion yuan in the same period of 2017, according to a release on its website.

Its newly-elected executives told shareholders on Tuesday that production had returned to normal. But Chinese telecoms equipment suppliers such as ZTE and Huawei Technologies, are likely up against a global backlash as governments around the world take action to contain their businesses.

Watch: ZTE ban lifted as China ponders next trade war move

The critical role ZTE and Huawei are playing in the development of the next-generation 5G telecoms networks has caused concerns among governments about the possible direct ties the companies may have with Beijing.

Although it has lifted a ban that stopped ZTE from buying US components, Washington has prohibited government entities from using ZTE and Huawei network gear, and Australia and Japan have also said in recent weeks that they would stop the firms from providing 5G equipment in their countries.

Despite the expectation of a net profit in the third quarter, ZTE still recorded a net loss of 6.8-7.8 billion yuan for the first nine months this year.

ZTE leaves trade war woes behind as stock makes a strong comeback

The substantial decrease in results for the period was mainly because of the US$1 billion penalty placed upon ZTE this year by Washington, as well as the loss in revenue due to the ban, the company said in its release.

ZTE was first fined in early 2017 for selling millions of dollars’ worth of hardware and software from US technology companies to Iran’s largest telecommunications carrier, and was later said to have sold products to North Korea.

As well as paying that initial US$1 billion fine, ZTE agreed to punish the workers involved. In April, the Commerce Department said the company had failed to make good on its promises and reimposed the ban for seven years.

The inability to buy components from US suppliers, including chip maker Qualcomm, was crippling and led to ZTE’s closing major operations within weeks.

The question mark over ZTE’s survival became a source of friction in trade talks between Washington and Beijing. Trump, in what he called a favour to China’s president, Xi Jinping, directed the Commerce Department to come up with alternative penalties.

The result was US$1.4 billion in fines and escrowed accounts, a new board of managers and the installation of US-chosen compliance oversight management. It was able to resume normal operations and retain 75,000 workers.

US Commerce Secretary Wilbur Ross last Friday appointed former federal prosecutor Roscoe Howard, a former US Attorney in Washington, to lead the compliance team.

ZTE shares staged a recent comeback, rising 13 per cent since June. The company lost 40 per cent in market value since the ban took effect in April.