Home > News content

ZTE Unleashes Difficulties and Huawei Is Injured: An In-depth Interpretation of the ZTE Incident

via:博客园     time:2018/6/10 13:31:33     readed:683


The official statement that the US Department of Commerce had reached an agreement with ZTE on June 7 indicated that the ZTE event ushered in phased results, but the final direction and outcome still need time to verify, so write this article to make a summary of the ZTE event. And anticipation.

The Positioning of the ZTE Incident: The Position of Non-politicization Opens the Door to the Solution of the ZTE Incident

In my opinion, for the ZTE incident, we cannot simply use politicization and conspiracy theories to cover it. Instead, we must review the individual behavior of ZTE, a listed company, to obtain an objective conclusion and investigate its root causes. The U.S. Department of Commerce This series of sanctions by ZTE is, objectively, a heavy price for ZTE's violation of commercial standards. What is exposed behind this is the painful lesson of ZTE Corporation's corporate governance failure.

The official media Xinhuanet published an international sharp commentary by Sheng Yuhong, an online commentator from China Online International, on June 7th. It was categorized as “The ZTE Incident was just a case of corporate violations, but the Chinese government has invested heavily in people-oriented considerations. Resources and the United States solemnly negotiated and finally changed back to a living path of ZTE. Personally think that this is basically the conclusion to meet the official needs.

The U.S. Department of Commerce’s official statement also emphasizes that the purpose of ZTE’s disposal is to correct ZTE’s violations, and it also sets a precedent for ensuring compliance monitoring. Previously, U.S. officials including Secretary of Commerce Ross and Minister of Finance Mukuchin have repeatedly stated that the ZTE incident has nothing to do with the trade friction between China and the United States, but has classified it as a law enforcement issue.

The depoliticization of the ZTE event is appropriate for China and the United States to deal with the more intractable issue of trade frictions, which reflects the great wisdom of both sides. The pressure on the Chinese side is the sentiment of the people in the country. Apart from the public sentiment, the United States has all the clouts of members of the Congressional Democratic Party. In fact, after the resolution was introduced, some Democrats still claimed that ZTE threatened US security. Continue to promote the bill introduced by Congress to oppose the lifting of the ban.

Therefore, the common positioning of China and the United States for the depoliticization of the ZTE incident has opened the door for the settlement of the ZTE incident. Otherwise, if it is further involved in the trade friction between the two countries, ZTE will be dragged down until Death is even more ugly.

In an internal letter issued to employees on June 7, Zengxing Chairman Yin Yimin apologized to customers, shareholders, and business partners and stated that the occurrence of this incident was based on the findings of current internal and external investigations. It is caused by the work negligence of a few cadres and employees, but its essence reflects the company's problems in compliance culture and management.

As a result, ZTE itself has made a final conclusion on the nature of the ZTE incident.

Explanation of ZTE’s lifting of the ban: A 10 year refusal order is more damaging than the US$2.2 billion fine.

$1 billion in fines, $400 million in margin, replacement of board of directors and management within 3 months, and 10-year compliance team on-site monitoring, plus a 10-year refusal order that the BIS can activate on time. …………

According to US Commerce Secretary Ross, plus the 890 million U.S. dollar fine that has been delivered in 2016, ZTE will face a total fine of 2.29 billion U.S. dollars, which is the largest fine the BIS has ever issued.

Because the United States explicitly requested that BIS will remove ZTE from the embargo list only after ZTE first paid a $10 fine and paid the $400 million guarantee to the account, ZTE’s priority is to raise money.

According to the latest quarterly report of 2018 disclosed by ZTE, as of March 31, the balance of its book cash and cash equivalents was only RMB 23.6 billion, and its net cash flow from operating activities, investment activities, and financing activities in the first quarter was The amount is negative. While the suspension of operations has caused the suspension of business activities without cash inflows, but with continuous cash expenditures such as wages for employees and bank interest, it is understandable that ZTE will have to pay fines and resume funding for procurement.

Fortunately, ZTE has government support behind it. For example, in the more than 50 days when ZTE’s operations were suspended, its sales team’s biggest task was to collect accounts payable from customers including the three major operators, according to informed sources. All of them focused on the overall needs of ZTE's requirements.

After the penalties have been paid, it will be the replacement of the board of directors and management at the same time as the resumption of production. According to the financial magazine, its chairman, CEO, CTO and some VPs will be replaced. The change of company management and board of directors was not only to meet the requirements of the United States, but also related departments and state-owned shareholders actively intervened in the management of ZTE and its controlling shareholder, Zhongxing, and started the timely recovery of the company’s decision-making executives and related management personnel. The need for accountability mechanisms.

The listed company ZTE has 14 members of the board of directors. Except for 5 external independent non-executive directors, one of the remaining 9 directors is from Xi'an Microelectronics, a state-owned scientific research institution, and four from the state-owned enterprise, Aerospace Guangyu. Four private enterprises from the group representing the founder’s shareholding, Zhong Xing Wei Xiantong.

Yin Yimin and Zhao Xianming from Zhongxing Wei Xiantong were the executive directors and were appointed as the chairman and president of ZTE Corporation and assumed the operational responsibilities on behalf of Zhongxing Wei Xiantong. Therefore, the replacement of management and the board of directors for the purpose of accountability is mainly to clear the board of directors of four directors who represent the interests of Zhongxing Wei Xiantong.

Zhongxing Wei Xiantong representatives were removed from the board of directors of ZTE Corporation and accordingly, the change in equity of Zhongxingxin, its controlling shareholder, should be initiated. The total market value of ZTE before the suspension of trading was approximately RMB 131.3 million, and the value of the equity held by Zhongxing Xin held 30.34% of the shares was approximately RMB 39.8 billion. Zhongxing WXT’s shareholding value based on its 49% shareholding in Zhongxingxin was RMB 19.5 billion. An equity transfer will be required.

From the current appointment of Tian Dongfang from Xi'an Microelectronics as party secretary of ZTE, it is more reasonable and reasonable for state-owned enterprises such as aerospace electronics and aerospace science and technology to transfer ZTE's equity in ZTE. As a result, Zhongxingxin, the controlling shareholder of ZTE Corporation, may become a state-owned enterprise with absolute control over state-owned legal entities.

According to the agreement, the U.S. Department of Commerce will select and appoint a compliance coordination group to remain in ZTE for 10 years to monitor whether ZTE’s business practices comply with U.S. export control laws in real time. According to media reports, ZTE will transform its former state-owned holding, authorized operation, and state-owned private enterprise model into a state-owned listed company supervised and operated by the U.S. government.

The power of US government oversight comes from a 10-year refusal order suspended in the agreement. This is the most serious and most damaging clause for ZTE’s penalties in the entire agreement. First, a fine of US$2.2 billion was paid in exchange for only a probation rather than a complete removal of the refusal, and the penalty was obviously excessive; the second was a period of 10 years. The year’s refusal order continues to be the sword of Damocles across the top of the resurgence chain. There is a risk of further sanctions when it is slightly inadvertent, which will seriously threaten ZTE’s business development.

ZTE's business trend analysis: ZTE may suffer the most damage will be Huawei

For ZTE, the most important thing is to survive. Therefore, the huge fines and ZTE after the management change will inevitably usher in the turbulent changes.

The 50-day suspension of ZTE’s business exposes the huge business risks that not only threaten its own survival, but also has a serious impact on the normal business development of telecom service operators and government-enterprise customers in more than 160 countries and regions it serves. .

According to Dow Jones News, ZTE’s base stations and other cellular equipment were idled in warehouses, causing major overseas customers to ask ZTE to pay fines for unfinished work. According to people familiar with the matter, one of ZTE’s largest European customers, Italian telecommunication company Wind Tre has asked ZTE to pay 100 million euros for network construction and maintenance work stoppage compensation.

Therefore, the refusal not only to completely dismiss but to continue to carry the probation sentence for 10 years has become the biggest obstacle to ZTE's overseas market operations. It accounted for more than 43% of ZTE’s annual revenue in the context of the increasingly tight Sino-US trade situation. The overseas stock market may not be able to be reshuffled in the next few years. It can be expected that ZTE's business scope will be forced to shrink back to the domestic market, and its revenue scale will also drop sharply.

The narrowing of the upper reaches of the market will inevitably affect the size of ZTE’s already large company. In order to gain weight, the business restructuring will become a choice for ZTE.

From the 2017 financial statements, it can be seen that in the three major business units of ZTE’s carrier network, corporate enterprise services and consumer services, the competitiveness of the consumer business, which accounts for about 32% of revenue, is relatively weak, and its mobile terminal market share The rankings are behind and the profitability is poor, with only 15.3% gross margin. Therefore, it will be a high probability event that the sale of the consumer business, which is mainly based on mobile phone terminals, will be sold. This is also the most urgent task for ZTE to supplement the cash flow of the company's blood loss.

For companies with less than 10% of their share, the best place to go may be to transfer the shares to ZTE’s founder team when making equity transfers with ZTE Xianweitong. One is to reduce equity considerations and save cash flow, and the other is for ZTE. The founders and the original executive team have a platform and opportunities for a comeback.

ZTE, which has stripped off handsets and corporate services, will focus on its operator's network business, which accounts for more than 58% of revenue. This is the focus of ZTE's R&D investment, and it is also its core asset that it hopes to use 5G industry opportunities to seek to surpass its competitors.

However, under the influence of the 10-year refusal order, risk aversion factors will be an important consideration for customers in overseas developed markets who choose suppliers. Therefore, Zhongxing’s future 5G opportunities may only focus on the domestic market. Overseas market opportunities, if any, are limited to The friendly countries with good relations with China along the Belt and Road.

In these markets, especially in the domestic market, ZTE’s biggest competitor is Huawei.

ZTE, which has become a state-owned enterprise, has lost its overseas developed market opportunities. It will inevitably hope to gain greater market share in the domestic market and friendly market to make up for its losses in order to maintain its survival. Its competition with Huawei, which holds the largest share of the domestic market, is inevitable. Doubled.

As a result, under certain tacit agreement and balance, Huawei may be entrusted with the task of winning more overseas markets with strong technical strength, and it is necessary to make active concessions in the domestic market.

As to why the European manufacturers such as Ericsson and Nokia are not harmed, first, because their share in the domestic market is not much, second, Huawei wants to develop its business in the European market, and the EU will also require the reciprocal opening of the Chinese market.

Therefore, after resolving difficulties, ZTE must rely on the survival and development of the domestic market. The relevant parties will inevitably need Huawei to provide urgency to the overall situation, and the harsh competitive relationship between the two formerly formed in the development history may be alleviated. This is for enterprises. The improvement of culture and industry atmosphere can also be regarded as the loss of scum.


The above is my cognition of the events of ZTE and the trend toward prejudgment. My conclusion may be unacceptable because it excludes the influence of national feelings, local feelings and other factors. However, professional interpretation is based on objective facts and rational thinking. It is what I hope to do. I hope this article will live for a long time, and we will verify the trend of events one by one as time goes by.

China IT News APP

Download China IT News APP

Please rate this news

The average score will be displayed after you score.

Post comment

Do not see clearly? Click for a new code.

User comments