Mobile biz thriving, but market for network infrastructure products gloomy
Shares in Chinese telecom and mobile operator ZTE plunged 15 per cent in early trading today [15th October 2012] after it warned that Q3 losses would wipe out first half profits. Only three weeks ago ZTE, the world’s fourth largest mobile phone company, revealed it was to step up production of smartphones to 35 million this year having sold 66.1 million mobile phones overall in 2011. Its meteoric rise has caused concern to other phone makers, particularly in the USA where last week a US Congress report branded ZTE and its larger rival Huawei a national security threat and called for the government and telecom carriers to do more to block them from acquisitions and contracts there.
Though Congressional concern relates more to how Chinese manufacturers are penetrating the markets for sensitive network infrastructures, their threat to mobile firms like Apple, Motorola and Canada’s RIM has led to growing commercial fears too.
For the moment, though, it is weak global demand across the telecom industry that is hurting ZTE’s profits. Last night [14th October 2012] it warned that sluggish third quarter performance would act as a drag on the first nine months of 2012, resulting in a net loss of $303 million-$319 million.
In Hong Kong early today the news wiped more than a sixth off the company’s share price, though ZTE says it will now review its strategy on products and operations in different regions in order to minimise losses.
Apart from political hurdles, another problem facing ZTE in the network infrastructure sphere is that it is not yet recognised as a top-tier supplier whereas its handset business, until now, has been built on producing mainly low margin devices to OEMs, particularly those in Asia and other emerging economies.
Earlier this year the company, formed in 1985 from a group of state-owned enterprises associated with China’s Aerospace Ministry, reported its steepest profit decline since going public six years ago, with net profit in the second quarter sliding 85 per cent.