ZTE is undoubtedly facing a situation of life & death.
Last Monday, the Commerce Department of United States imposed a seven year ban on ZTE, forbidding it to use any hardware or software exported from the US in its products.
The US authorities claimed that ZTE had lied to them about its commitments to punish employees who violated US sanctions against North Korea and Iran.
The incident was first revealed in 2012. After five years of investigations (and haggling), ZTE agreed to pay US$1.2 billion to have the trade penalties suspended.
Apparently, the current US administration is not happy with ZTE’s compliance since. And ZTE became the biggest casualty of the current (or rather, potential) US-China trade war.
It is said that 25 to 30% of the components ZTE uses are from US suppliers.
What does it mean for ZTE?
On Friday, ZTE issued a response, saying that the ban will severe impact its survival. Its Chairman Yin Yimin has issued an internal memo to its 80,000 urging calm and solidarity in this crisis.
Hou Weigui, ZTE’s 76-year old Founder who had been in retirement for two years, has also reemerged to work on the crisis.
Reporting are saying that ZTE will run out of its stock of US supplies within months, and might start losing business almost immediately. Its mobile phone business, which some reports say occupy 10% of the US market (Huawei handsets are banned in the US), might be completely paralysed.
ZTE seems to be doomed. Its rivals Nokia & Ericsson, which seemed to be in irreversible decline, both got a decent boost in stock price this week.
But it is not the first time ZTE is in crisis. Mr Hou has certainly seen a lot since he left his government research job in 1985.
The company had CNY144 billion (US$23 billion) in total assets in 2017, among which CNY33.4 billion (US$5.3 billion) was cash. It has undoubtedly started R&D on its own chipsets and operating system – however, it has not been very aggressive on that for the past couple of years. Now with such a life and death situation, it has to be aggressive, and it has the ability to be.
Huawei has done that
Its major domestic rival Huawei, which remains a private company, has since 2012 allocated billions of dollars and tens of thousands of engineers to build its own chipset and operating system, reducing dependency on US and European components.
After six years of effort, Huawei has achieved a fairly good level of self-dependence. We think ZTE can do the same, with imposed, rather than self-imposed, urgency.
Also, we believe the Chinese government will actively help ZTE in this case, for two reasons. First, a national high tech champion’s survival and 80,000 people’s jobs are at risk; second, ZTE has clearly been used as a bargaining chip, and only the government has other chips to give and take. Even if they cannot reach a settlement with US government to reverse the ban, the Chinese government will not see ZTE fail.
It could well be a rebirth for the giant phoenix of ZTE.
How about Nokia & Ericsson?
The decline of Nokia & Ericsson, however, will unfortunately continue. Their entire workforce has become too comfortable, to entitled, and too corporate. Conference calls lead to no decisions; and family holidays are more important than project deadlines.
Even if ZTE does not survive the current predicament, there is still Huawei to finish them off.
And if you have not noticed, Alibaba has been building its own chip-making capabilities. Amazon & Facebook are already so good at enterprise grade networks that expanding to telco market is not that much of a challenge, technology-wise.
It is just a matter of time.