After a few weeks of silence, embattled telecoms equipment makers Huawei and ZTE (HKEx: 763; Shenzhen: 000063) are back in the headlines again for the wrong reasons, with more bad news for each of these 2 companies that have lately entered an endless downward spiral. Exactly where this spiral of bad news will end is anyone’s guess, and I suspect 2013 won’t be a particularly good year for either company. But we could finally see the situations at both firms stabilize around the middle of the year, especially if either starts to gain some traction for its less controversial newer smartphone business.
On this final day of 2012, let’s step back and take a look at the latest news that has put both companies back in the negative headlines. ZTE has announced it is selling its 80 percent stake in a unit engaged in the surveillance business, in its latest sale of non-core assets as tries to raise cash to stem mounting losses. (company announcement) Meantime, foreign media are reporting that a major Huawei partner offered to sell equipment from US tech giant Hewlett Packard (NYSE: HPQ) to Iran, even though such sales are forbidden under a US embargo. (English article)
In a way, both of these pieces of news are related because they show increasing desperation at both Huawei and ZTE as they look for new business opportunities to offset slowing growth in their core telecoms business due to political resistance in the west and sluggish demand in developing markets.
Let’s take a look at the ZTE news first, which will see it sell its 80 percent stake in Shenzhen ZNV, a maker of surveillance systems, to a Hong Kong company called Ocean Delight for 1.3 billion yuan, or about $200 million. ZTE says the move is part of a broader strategy to sell its non-core assets as it focuses on its older telecoms equipment business as well as its newer smartphone unit.
This particular sale comes just over a month after ZTE announced a similar plan to sell its 81 percent stake in Changfei, a unit that does research and development for mobile phones, also for just over $200 million. (English article) Both of these deals look designed to raise cash after ZTE posted a massive loss in its latest reporting quarter due to slowing sales for its telecoms equipment and big costs related to its newer smartphone business. (previous post)
Both ZTE and Huawei are still reeling from a Washington decision in October banning the 2 companies from selling their telecoms equipment in the US due to national security concerns. (previous post) I wouldn’t be surprised to see more similar sales like this in the coming year, and for ZTE to look to China’s big state-run banks for more support as it tries to improve its finances.
Meantime, foreign media are reporting that a Hong Kong company called Skytech, which is a Huawei partner, approached an Iranian mobile carrier with a proposal to sell it HP equipment back in 2010. The sale ultimately never happened, but the proposal shows how Huawei and ZTE have both tried to help Iran evade US sanctions aimed at punishing the country for its nuclear development program. Foreign media previous reported that ZTE previously sold Iran a sophisticated telecoms network that included US-made equipment, again in violation of US sanctions.
This latest revelation about Huawei’s Iranian connection probably won’t have any immediate consequences, especially since the sale never happened. But the news certainly won’t help Huawei’s image in the US or other Western markets, meaning the company could face a tough 2013 as buyers in those markets avoid its products due to political concerns.
Bottom line: ZTE’s sale of another non-core unit and revelations of Huawei’s engagement in Iran are further signs of desperation by the 2 companies as they scramble to offset slowing sales.
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