Huawei’s Hollow Victory, ZTE’s Slashes 华为空欢喜 中兴难脱困
It wouldn’t be proper if I went for more than a day or 2 without examining the latest news bits from the embattled telecoms equipment duo of Huawei and ZTE (HKEx: 763; Shenzhen: 000063), which have suffered a non-stop stream of setbacks in the last few months. Of course most readers will know that the pair received their biggest blow just a couple of weeks ago when a US Congressional panel ruled that their networking equipment posed a national security threat and thus should be blocked from sale in the country. (previous post) More bad news came earlier this week for ZTE, which announced it would post a massive loss in the third quarter, marking its first-ever quarterly loss since going public and wiping out all of its profits for the year. (previous post)
ZTE’s shares have tumbled 16 percent since that announcement, leading to the latest news bit that is seeing the company’s top executives take a 50 percent pay cut to apologize to shareholders. (English article). Meantime, Huawei is probably feeling some vindication from other media reports saying a White House review has found no evidence that the company’s equipment has been used for the kind of spying by Beijing that the Congressional panel worried about. (English article; Chinese article)
I’ll come back to Huawei in a moment and explain why this White House conclusion is largely a hollow victory. But first let’s have a look at the ZTE news, which had a top company official announce that he and other top managers would take the big pay cut to apologize to investors for ZTE’s big and sudden reversal of fortune.
In fact, ZTE’s sell-off this week was really just the latest in a long string of declines for the stock. ZTE investors saw their shares trade as high as HK$29 as recently as April 2011, only to see the stock sink rapidly since then to its latest close at about HK$11, translating to a 62 percent decline over that period.
The US setback certainly won’t help the company’s decline, but ZTE’s bigger problems stem from aggressive pricing for its newer smartphone business that it hopes will help to offset slowing growth for its core telecoms equipment business. Look for ZTE’s woes to continue, as the smartphone business will continue to drain profits and other western government could soon follow the US lead in banning ZTE’s telecoms equipment.
Moving on to Huawei, foreign media are reporting that a White House-ordered review of potential security threats to US telecoms networks posed by Huawei equipment found no clear evidence that the Chinese company had ever spied for Beijing. This finding actually isn’t too different from the Congressional panel report, which also didn’t publicly cite any specific evidence of spying by Beijing coming from Huawei or ZTE-supplied equipment.
I’ve previously said that I doubt Huawei and ZTE currently include spying capabilities in their equipment, and the US Congressional and White House reports both seem to support that. Instead, the Congress’ major concern — which is very real — lies in Beijing’s history of meddling in the affairs of major Chinese companies.
It’s that potential which US leaders believe could jeopardize the security of Huawei or ZTE equipment in the future if and whenever Beijing decides it wants the companies to help with its intelligence gathering. That concern is unlikely to go away anytime soon, regardless of how many reports Huawei, ZTE or others issue saying their equipment is currently safe to use and poses no security risks.
Bottom line: A positive White House review for Huawei equipment is unlikely to help the company very much, while ZTE’s woes will continue as it suffers from problems with its core businesses.
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