TELECOMS: ZTE Seeks Transformation In 2015
Bottom line: ZTE’s relaunch to focus on a wider range of interconnectivity products and services looks smart and well-conceived, but could be harder to execute if it tries to do too much too quickly.
The last few years have been a difficult time for telecoms equipment giant ZTE (HKEx: 763; Shenzhen: 000063), but the company is hoping to kick off a new chapter this year with the launch of a new strategy that focuses on interconnectivity at all levels. A news release and CEO’s letter detailing this new approach are filled with hype and buzzwords, though the broader idea looks strategically smart. I’ll admit I’m just a little skeptical that this company is capable of such a broad transformation, though I’m also hopeful that it can achieve at least some of its goals to jump-start its prospects.
ZTE and crosstown rival Huawei were 2 of China’s earliest high-tech success stories, both founded around 30 years ago in Shenzhen, the southern boomtown that was the nation’s first major testing ground for economic reform. Both grew rapidly in the 1990s and first decade of the 21st century, feeding off China’s build-up of its telecoms networks and then aggressive overseas expansions.
But both have seen their growth stall in the last 3 years due to a number of factors. Some may blame politics related to cyber-security issues, but the bigger reason has been a global transformation that has seen a sharp slowdown in the building of traditional big telecoms networks. At the same time, a new generation of locally-based networking products and services like wi-fi have boomed at the enterprise and consumer levels.
ZTE sank deeply into the red and reported a massive 1.5 billion yuan ($240 million) operating loss in 2013, as revenue contracted more than 10 percent. The company’s Hong Kong-listed shares sagged during that time, and are down about 40 percent over the last 3 years. But after a painful restructuring, ZTE returned to an operating profit in 2014 and has made a strong push to diversify beyond its core business of building networks for big telcos. Its biggest push has been into cellphones, which have found an audience but are still largely perceived as a low-cost product without a very distinctive brand.
In a bid to add momentum to its turnaround, ZTE has unveiled a new logo and proclaimed its intention to become a more diversified company as part of a broader company relaunch. (company announcement) The most striking things about the new logo are its softer blue color, less angular letters and the dropping of Chinese characters. Perhaps that’s how ZTE wants the world to see itself going forward, as a less brash, quieter and global company, rather than a Chinese name.
A letter from ZTE CEO Shi Lirong is filled with enough buzzwords and acronyms to make a person dizzy, including IT, CT, B2B, B2C and M-ICT in the first few paragraphs alone. Shi uses the second half of his letter to add more buzzwords that will become key focuses for the new ZTE, including “cool”, “green” and “open”. Clearly someone spent quite a bit of time studying the latest telecoms trends and vocabulary in crafting this strategy.
But all humor aside, I should end this post by returning to my original question of whether this new strategy is likely to succeed. Many of the trends ZTE points out are certainly happening, and a cutting-edge provider of telecoms equipment and services could be well positioned to become a major new player in the new interconnected world of smaller networks where people and devices all communicate with each other.
Whether or not ZTE will succeed in this transformation is another question that will only become clear over the next 2-3 years. Right now its smartphones are certainly selling well, though they haven’t really been able to distinguish themselves yet from similar low-cost products from domestic rivals like Huawei and Lenovo (HKEx: 992).
At the end of the day, ZTE will need to not only rebrand itself, but also come up with a sharp line of products and services that give consumers and businesses the tools they need to build smaller networks of the future. If I were advising the company, I would tell it to start slowly by focusing on a few key areas where it thinks it has an advantage and faces less competition, and then to build up from there.
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