Five years of "seal" lifted ZTE slowly recovered

The sanctions imposed by the United States on ZTE have finally ended, which has also relieved ZTE from the tug-of-war that began in 2016. Ten years ago, when the domestic smart phone was just emerging, to ask who was the boss of the communications industry at that time, it was naturally ZTE mobile phone. However, due to its inability to master the core technology, ZTE, which focuses on network infrastructure operations, has been passive for a long time. Now that the dawn has dawned and ZTE is slowly recovering, there is still a long way to go to get back to the top.

Seven years of bumpy "probation"

On March 23, ZTE announced that on March 22, 2022, U.S. time, the Company received a judgment from the Federal District Court for the Northern District of Texas, ruling not to revoke ZTE's probation, that is, the probation period would expire on March 22, 2022 (U.S. time), without any penalties, and confirmed that the term of office of the Ombudsman would end on March 22, 2022, the original U.S. time.

For the relevant details of the judgment, ZTE told the Beijing Business Daily reporter that "the announcement is the mainstay".

It also means that ZTE's five-year compliance observation period since its ruling in 2017 has ended. Shen Meng, executive director of Chanson Capital, told the Beijing Business Daily reporter: "ZTE has completed the legal dispute with the United States in stages, and can resume normal operations after that. More insiders bluntly said that ZTE can "breathe a sigh of relief" this time.

Affected by this good news, ZTE's stock price rose sharply on March 23, with the highest intraday hk$24.9, its Hong Kong stock price rose by 60%, and its A-share stock price also rose at the opening. At the same time, the entire 5G industry chain is also moving, and the communication sector has once again set off a rising tide.

If calculated from March 2016, the tug-of-war between ZTE and the United States has lasted for seven years, when the United States accused ZTE of violating export restrictions and producing finished products from devices purchased by the United States and selling them to Iran and North Korea. ZTE was actively communicating with the U.S. side at the time, and the relationship between the two sides was briefly eased at the cost of having to remove the executives involved in the violation. In March 2017, the U.S. Department of Justice, commerce, and the Treasury Department's Office of Overseas Asset Management jointly decided to issue a $1.19 billion fine to ZTE, the largest fine ever issued to a non-financial institution.

However, the matter is far from settling down, in April 2018, the United States believed that ZTE did not punish the employees involved as required, and made false statements in the previous two letters, so it activated the rejection order against ZTE, which means that ZTE cannot purchase US parts and faces the risk of business shutdown.

In June 2018, ZTE agreed to pay a $1 billion fine to the U.S. government and another $400 million in escrow funds. In addition, ZTE is required to appoint a "coordinator" at its own expense to oversee ZTE's compliance with the U.S. Export Control Act of 1979. In March 2022, ZTE announced that it would attend a hearing on the suspension of sentence on March 14. Today's results also mean that ZTE finally won the "victory" of the above-mentioned hearing.

Three years of hard turnaround

The impact of U.S. sanctions is also reflected in ZTE's finances. In 2016, when the tug-of-war began, ZTE's net profit loss was about 2.4 billion yuan, a year-on-year decrease of about 173%. Analysts believe that the one-time provision of $892 million has seriously affected ZTE's financial performance. In 2018, ZTE lost about 7 billion yuan for the whole year.

After the impact, it took ZTE three years to slowly recover. According to the financial report, in 2021, ZTE achieved operating income of 114.52 billion yuan, an increase of 12.9% year-on-year; net profit of 6.81 billion yuan, an increase of 59.9% year-on-year.

Liang Zhenpeng, a veteran industrial economy observer, told the Beijing Business Daily reporter: "The impact of the US government's sanctions on ZTE is huge, before ZTE and Huawei were basically the same size enterprises, and after several years of suppression, now it has lagged far behind Huawei." ”

In fact, due to the Mastery of Cutting-edge Technology in the United States, for a long time, the development of ZTE has relied on American parts, and the data shows that 20%-30% of ZTE's products use parts from the United States, especially chips.

Liang Zhenpeng said that ZTE started by doing communication equipment, mainly commercial B2B business, but in the upstream core components field, ZTE does not master independent intellectual property rights, which also allows the United States to hit ZTE's "soft underbelly". The United States also imposes sanctions on Huawei, but because Huawei masters certain core technologies, the main impact of US sanctions is in the field of consumer electronics, mainly mobile phones, and for upstream communication infrastructure, sanctions cannot shake Huawei's fundamentals.

You need to make up for the shortcomings before you go

Today, ZTE has basically dismantled the "time bomb" of US sanctions, but the industry view believes that ZTE needs to pay more efforts to return to the peak.

According to the 2021 annual report data, the most important source of ZTE's revenue is the operator network, accounting for about 66%; consumer business accounts for about 22%, and government and enterprise affairs account for only about 11.4%. By the end of 2021, a total of 1.425 million 5G base stations have been opened nationwide, covering about 98% of county towns and 80% of townships; 5G mobile phone shipments reached about 266 million units, an increase of 63.5% year-on-year. Industry insiders believe that if ZTE wants to develop rapidly in the future, it must increase its strength in consumer business and government and enterprise affairs to make up for shortcomings.

However, some experts believe that ZTE still has many growth points after the end of sanctions. Shen Meng said: "Although all businesses have been greatly suppressed during the regulatory period, competitors in the same period are also under development pressure, and after ZTE lifts the supervision, if the strategy is appropriate, it can quickly fill the previously vacated market share." ”

"This means that the obstacles to ZTE's long-term development have been basically removed." Kang Zhao, editor-in-chief of the operator's financial network, said that because most of ZTE's important components rely on American companies, if the United States includes ZTE in the "entity list", ZTE cannot carry out business, so the "penalty observation period" set by the United States is always zTE's tight curse, so ZTE cannot be taken lightly.

Liang Zhenpeng believes that the most direct benefit for ZTE is the rise in stock price, which is conducive to its financing in the capital market at a smaller cost and promotes future development, and pointed out that ZTE may have a deeper understanding and more urgent need for independent production of upstream components through this campaign.

Beijing Business Daily reporter Jin Chaoli intern reporter Wang Zhuli