TELECOMS: ZTE Seeks Fresh Start with New Chief

Bottom line: ZTE’s change of leaders is a much-needed move to revive the company’s fortunes, though the choice of its former technology chief as new chairman looks a bit conservative.

ZTE gets new chairman

Following a turbulent period that saw it nearly lose access to many of its key suppliers, telecoms giant ZTE (HKEx: 763; Shenzhen: 000063) has just announced the arrival of a new chief, as it seeks fresh starts in its 2 main businesses selling networking equipment and smartphones. Many are pointing to ZTE’s recent run-in with Washington for illegally selling products to Iran as the direct reason for the departure of Shi Lirong, who was chairman for the last 6 years.

Perhaps that’s partly true, but the reality is that Shi’s tenure at the helm of ZTE has been marked by a much longer series of stumbles that has cost the company millions of dollars in sales and market value. Those missteps led ZTE to launch a major overhaul a couple of years ago that seemed to be showing results for its older networking equipment business. But more recently ZTE’s newer smartphone business has been showing signs of stumbling, and the latest Iran controversy may have driven the board’s decision to replace Shi.

The decision to look for new leadership appears to be unanimous, with Zhao Xianming formally appearing as chairman at the company’s latest board meeting, where he was also elected president by a 14-0 vote. (company announcement; Chinese article) Shi Lirong is called a non-executive director in the announcement, meaning he remains on ZTE’s board but no longer has any role in the company’s day-to-day operations.

This particular ZTE board meeting was originally set for last month, and would have included the release of ZTE’s annual results for 2015. But the meeting had to be postponed after Washington announced it would punish the company for selling US-made equipment to Iran in violation of American trade sanctions.

ZTE ultimately resolved the matter, at least temporarily, by cooperating with Washington’s investigation. As a result, Washington agreed last month to ease terms of the punishment, which would have prevented ZTE from buying any US-made components or software for use in its own products. Such a prohibition could have dealt a crippling blow to ZTE, since it purchases millions of dollars worth of goods each year from US-based suppliers like Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL).

Eyes on Outlook

With the US conflict resolved, ZTE will release its latest annual results today. Those are likely to show improving revenue and profits, though most company watchers will probably focus on ZTE’s outlook section of the report. There we can expect to see incoming Chairman Zhao’s first statement of his vision for the company, as well as any long-term impact he sees from the Washington conflict.

As an interesting footnote to the management shuffle, China’s Caixin website is also reporting that ZTE’s previous chairman Hou Weigui has also formally stepped down from any remaining roles he had at the company. Hou was a visionary when he set up the company more than 3 decades ago in 1985 in the sleepy new special economic zone that has become today’s boomtown of Shenzhen.

I’ve personally met and interviewed Hou, and he’s obviously a highly capable and likable man who has built ZTE into a major global player, alongside larger crosstown rival Huawei. But he is finally rightly realizing that perhaps it’s time to hand over the reins of ZTE to a newer generation of leaders who have better understanding of the emerging telecoms world dominated by smaller networks and computer-like smartphones.

It’s obviously far too early to say whether Zhao Xianming can return ZTE to its past prosperity. His background as the company’s former technology chief looks a little conservative to me, and echoes a past where many of China’s biggest technology companies were headed by engineers rather than marketing people. But I’m certainly willing to give Zhao a chance, as the company is in need of some fresh ideas that should hopefully come from this change at the top.

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