China-based vendor ZTE ended 2018 with as much uncertainty as it started – especially when it comes to its ongoing operations in the U.S. The vendor spent the entire year in the center of international intrigue that included claims of espionage, direct intervention from President Donald Trump, a growing list of countries banning use of ZTE equipment, and a $1 billion hit to its bottom line.
This year’s excitement actually began in early 2017. That’s when the firm was slapped with $900 million in fines by the U.S. government after it was found to have sold equipment to Iran and North Korea that used components from U.S. companies in violation of a long-standing trade ban.
That initial agreement also included a seven-year suspended denial of export privileges, which could be activated if any aspect of the agreement was not met. That catch would prevent ZTE from acquiring necessary equipment components from U.S. companies.
That provision was activated this past April after the U.S. found the vendor had lied about taking action against company officials that were tied to the initial violations. Highlighting the impact of the ban, shortly after it was announced, ZTE said it had stopped all “major operating activities” in its Shenzhen, China, factory.
Lucky for ZTE, that move came at a critical junction in trade negotiations between the U.S. and China. That resulted in President Trump quickly announcing that the government was working on a deal to allow ZTE to regain access to U.S. components if it paid a fine and agreed to change its management board. That management change was initiated during ZTE’s annual general meeting and eventually ratified.
ZTE was able to quickly regroup from the ban, but not without significant damage. The ban and subsequent factory shut down hit ZTE to the tune of $1 billion, which is the amount the company slashed from its bottom line when it announced its mid-year financial results.
While this was going on, ZTE was also included alongside fellow China-based vendor Huawei in a piece of legislation that looked to prevent the U.S. government from using networks powered by equipment from the vendors. That limitation indirectly impacted telecom operators that have traditionally provided services to government entities.
The U.S. legislation was based on concerns that the Chinese government would be able to tap into the ZTE and Huawei equipment and spy on government agencies. That ban was included as part of the Defense Authorization Act.
ZTE countered the accusations by telling Chinese news service Xinhua that the company has always adhered to laws and remains a trusted partner of U.S. suppliers and customers. “ZTE is proud of the innovation and security of our products in the U.S. market,” a ZTE spokesperson told Xinhua.
The U.S. action snowballed throughout the rest of the year, with a number of the country’s allies also moving to ban the use of equipment from ZTE and Huawei. Those moves could undermine ZTE’s improving international positioning.
Optical Biz Recoups
While ZTE’s RAN business ended the year with significant uncertainty, the vendor’s optical transport business was improving. A recent Dell’Oro Group report noted that the vendor helped drive a 15 percent year-over-year surge in worldwide optical transport wavelength-division multiplexing (WDM) spending during the third quarter of this year.
The strong quarter was a bounce back from the second quarter in which worldwide optical sales declined 4 percent year over year. That drop was linked to a temporary shutdown at ZTE caused by U.S. sanctions.
Jimmy Yu, vice president at Dell’Oro Group, explained that the Chinese vendor came back strong following the U.S. ban being lifted. He said its rebound attributed 2 percent to the increase in optical transport equipment revenues compared to the third quarter of 2017. A majority of the segment’s revenue growth was from the Asia-Pacific region where ZTE has a significant presence.
ZTE moved into the No. 3 spot in market revenues, behind leaders Huawei and Ciena, and just ahead of Nokia. The Finnish vendor had temporarily moved in front of ZTE in Q2 revenues.