Corporate China | Troubled ZTE seeks transformation in 2015
ZTE's relaunch to focus on a wider range of interconnectivity products and services looks smart and well-conceived, but could be harder to execute if it tries to do too much too quickly.
The last few years have been a difficult time for telecoms equipment giant ZTE (HKEx: 763; Shenzhen: 000063), but the company is hoping to kick off a new chapter this year with the launch of a new strategy that focuses on interconnectivity at all levels. A news release and CEO's letter detailing this new approach are filled with hype and buzzwords, though the broader idea looks strategically smart. I'll admit I'm just a little skeptical that this company is capable of such a broad transformation, though I'm also hopeful that it can achieve at least some of its goals to jump-start its prospects.
ZTE and crosstown rival Huawei were 2 of China's earliest high-tech success stories, both founded around 30 years ago in Shenzhen, the southern boomtown that was the nation's first major testing ground for economic reform. Both grew rapidly in the 1990s and first decade of the 21st century, feeding off China's build-up of its telecoms networks and then aggressive overseas expansions.
But both have seen their growth stall in the last 3 years due to a number of factors. Some may blame politics related to cyber-security issues, but the bigger reason has been a global transformation that has seen a sharp slowdown in the building of traditional big telecoms networks. At the same time, a new generation of locally-based networking products and services like wi-fi have boomed at the enterprise and consumer levels.
ZTE sank deeply into the red and reported a massive 1.5 billion yuan (US$240 million) operating loss in 2013, as revenue contracted more than 10 per cent. The company's Hong Kong-listed shares sagged during that time, and are down about 40 per cent over the last 3 years. But after a painful restructuring, ZTE returned to an operating profit in 2014 and has made a strong push to diversify beyond its core business of building networks for big telcos. Its biggest push has been into cellphones, which have found an audience but are still largely perceived as a low-cost product without a very distinctive brand.
