ZTE has not been having a great month. After being accused by US lawmakers of spying (which is bad enough), it announced its projected third quarter financial results, and boy do they make for grim reading. Net profit down between 254 and 263 percent compared to last year. Losses of more than $260 million. It was the company’s worst quarter in eight years. These are the sort of statistics that scare the crap out of investors, which is why ZTE’s stock price has dropped by more than 20 percent in recent days.
These are also the kind of stats that make companies start thinking — and employees start worrying — about layoffs. Rumors have been swirling of a plan for massive layoffs involving more than ten thousand employees losing their jobs. And while ZTE was quick to deny this, there are signs that some serious belt-tightening is coming. Reports suggest ten percent of the company’s employees have already seen their salaries slashed by 20 percent. CEO Shi Lirong and other upper management folks have taken 50 percent pay cuts and promised not to raise their own pay until the company is in the black.
So what’s the reason for ZTE’s sharp slide? Being accused of being a security risk certainly hasn’t helped, but actually neither Huawei or ZTE is actually blocked from doing business in the US, and the US congressional smack talking isn’t likely to affect ZTE’s business elsewhere until there’s some hard data to back it up. Actually, the company’s mobile handsets look to be a bigger problem, as what just a few years ago was rapid growth has turned into declining sales and a huge reliance on mobile operators. A shocking 90 percent of ZTE’s phones are sold through telecom carriers, which means that when consumers are out choosing phones on their own, they’re overwhelmingly not choosing ZTE. It also means a lower profit margin than ZTE could be enjoying if it were selling lots of devices directly like Xiaomi does.
Taking its cues from that company, ZTE seems to be hoping that cheap Android handsets will save it. But it is late to that market and thus far none of its offerings have been able to make that emotional connection to consumers that successful smartphones like the Xiaomi, the iPhone, and some of Samsung’s handsets have.
ZTE has also been having trouble with its telecom equipment sales. To a greater extent than with phones, these sales are influenced by everything from the global economic climate to specific mobile carriers’ plans, and ZTE has found that especially in China — previously quite a strong market for the company — the economic slowdown in concert with the move towards 3G has resulted in lower levels of incoming investment. Again, ZTE hopes to offset this with a move towards consumer-side products that have a faster and more stable turnover rate, but whether or not its phones can attract consumers in such a crowded market remains an open question.