ZTE will suffer lasting damage even if Trump lifts the ban

  Trump to help Chinese phone manufacturers after the ban

ZTE of China will have difficulty recovering from the ban on buying American components, even if the Trump administration throws a controversial lifeline to the technology company.

ZTE ( ZTCOF ) which manufactures smart phones and telecommunications equipment, has been in crisis since the US Department of Commerce. UU He banned him from buying crucial pieces from US companies six weeks ago. The department said ZTE had not complied with an agreement under which it admitted violating sanctions against Iran and North Korea.

The Trump administration has a tentative agreement to get it back on track by lifting the ban and imposing other punishments. But a negative reaction from members of Congress has added uncertainty to the result.

Whatever happens next, experts say that ZTE faces a long list of problems, including billions in lost revenue, tense relationships with important customers and a tarnished brand.

Related: Companies become trading chips in the trade confusion between the United States and China

ZTE, which employs about 75,000 people, relies on American technology for its products, obtaining chips from companies such as Qualcomm ( QCOM ) and Intel ( INTC ) . The ban stopped their factories. Shareholders, meanwhile, have stayed in limbo, with the company's shares on the Hong Kong list suspended since the ban went into effect.

Cautious customers

Even if the ban is replaced with a large fine and a review of the ZTE administration, it is likely that the company will suffer lasting damage crisis.

Charlie Dai, an badyst at the Forrester research firm, estimates that the disruption will have wiped out between 10% and 20% of the revenue that ZTE is expected to earn in the current fiscal year. The company had revenues of approximately 109 billion yuan ($ 17 billion) last year.

  zte beijing 2
A ZTE building in Beijing.

ZTE did not respond to a request for comment on the financial impact of the ban. In his latest earnings report at the end of April, he said that "he still can not complete a comprehensive and accurate badessment or forecast."

Repeated disputes with the United States government could damage its core business of selling equipment such as wireless base stations and fiber optic cables to telecommunications operators around the world.

"ZTE may have more difficulties securing new overseas customer customers in the next 12 months, since customer confidence is now lower," wrote Edison Lee, telecommunications badyst at investment bank Jefferies, in a note of research this month.

Related: ZTE is the center of the scene in the commercial fight between EE. UU And China

Its big rivals in Europe – Ericsson ( ERIC ) and Nokia ( NOK ) – could benefit.

Analysts at the Swiss bank UBS ( UBS ) said that some of ZTE's international customers can buy more from Ericsson and Nokia, even if the ban is removed of the Chinese company. .

ZTE may be forced to reduce its prices in an attempt to attract new business, UBS badysts predicted in a note published this month.

The company has many clients in emerging markets in Asia, Latin America and Africa. The ban has already forced some of them to fight for alternatives.

MTN ( MTNOF ) a major operator in Africa, said earlier this month that it was considering contingency plans "given our exposure to ZTE in our networks. "


Damaged reputation

ZTE also manufactures smartphones, a business that accounts for approximately one third of its annual revenues. Its main market for smartphones is the United States, where it is the fourth largest seller.

Some badysts say that the company could have problems to repair its reputation.

Mo Jia, an badyst at research firm Cbadys based in Shanghai, said that ZTE's brand image with consumers and operators selling their phones is now "damaged".

Some large operators – MTN and Australia Telstra ( TLSYY ) – have already stopped selling ZTE smart phones due to supply problems.

"It will take time for ZTE to recover or repair their badociations," Jia said.

Related: China's largest technology companies have reason to be concerned

The company's devices were criticized earlier this year by US intelligence agencies. The top officials of the FBI, the CIA and the NSA testified before Congress in February that ZTE and Huawei, another Chinese smartphone manufacturer, pose a threat to the security of American customers.

Both companies have repeatedly rejected such claims, but have faced other public setbacks, including the Pentagon that recently ordered US military base stores to stop selling their phones.

Analysts expect that kind of pressure to continue even if the Commerce Department waives the ban on ZTE spare parts.

"ZTE's smartphone business will face challenges, especially in the United States, where ZTE and Huawei remain under fire from other branches of government," said Avi Greengart, a New York-based badyst at the research firm. Global Data.

ZTE has stronger links with EE operators. UU That Huawei. But Greengart predicts that ZTE could lose business with other affordable handset manufacturers such as Alcatel and LG.

CNNMoney (Hong Kong) First publication May 29, 2018: 7:47 am ET


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