ZTE Corp.—one of two Chinese entities singled out by the U.S. government in a security warning against Chinese telecom equipment vendors this month—reported sharply lower profits for the first half of this year despite strong revenue growth, according to an IHS iSuppli China Research topical report from information and analytics provider IHS.
ZTE posted a decline of $136.4 million for the first six months of 2012, down 22 percent from a positive operating profit of $107.0 million during the same time last year in the first half of 2011. This marks the first time that Shenzhen-based ZTE has ever recorded a loss of any kind.
The negative turn in operating profit, which deducts total operating expenses from gross profits, threatened to eclipse the strong revenue growth of the company during the period. In comparison to the dreary profit picture, revenue for ZTE was up 15 percent to $6.7 billion.
Slowing economic growth globally is weighing heavily on ZTE’s operating revenue, and the company’s margins increasingly are also coming under pressure on several fronts. For instance, mobile devices take up a significant portion—up to 33 percent—of ZTE’s top line, but profit margins are tight in the ultracompetitive mobile device business. Similarly, the firm’s telecommunications equipment business has suffered after its customers became ensnared in a swirl of global financial debt, IHS iSuppli believes.
ZTE has also been very aggressive in its quest to expand market share overseas, particularly in Europe, where it has hoped to make large-scale contract breakthroughs with mainstream European carriers since 2010. The push for increased market share has been costly to the company, however, as ZTE gross profits in Europe are down for the last two years.
Founded in 1985, ZTE is the world’s fifth-largest telecom equipment vendor, after fellow Chinese maker Huawei Technologies, Ericsson of Sweden, Alcatel-Lucent of France and Nokia Siemens Networks of Finland, in that order. Among the five, ZTE had the strongest revenue growth in the first half this year, and it may overtake either Alcatel-Lucent or Nokia Siemens Networks in the next three years, especially if ZTE maintains its rate of revenue growth, averaging about 15 percent at present.
Nonetheless, the company found itself in the center of unwanted attention earlier this month. Citing security concerns, the U.S. House of Representatives Intelligence Committee warned American telecom operators not to do business with ZTE, along with other Chinese entity Huawei. While the committee’s announcement may not have a major negative impact on the current sales levels of both ZTE and Huawei, it could deal a further setback to the Chinese vendors’ efforts to penetrate the American market in the future. Both have been unsuccessful in their attempts so far to woo American carriers to partner with them, resulting in the absence—or banishment—of the Chinese players in virtually the only telecom market left for them to conquer in the world.
Elsewhere, ZTE continues to distinguish itself in the Chinese-sanctioned wireless standard of TD-LTE. The company is awaiting large-scale deployments of the next-generation 4G standard not just domestically in China but also in India.
Within China, ZTE will be a major supplier of TD-LTE equipment to government-owned China Mobile, the country’s largest mobile phone operator. ZTE is one of two vendors, along with Ericsson, chosen to construct China Mobile’s TD-LTE network in Hong Kong.
Read More >> ZTE Sees Stable Revenue Growth, but Missed Out on Profits