ZTE Profits Slide, But What’s the Cause?

Chinese handset maker and general telecommunications megacorp ZTE recently released first half estimates for this year that would make even the gutsiest CEO’s heart sink: profits are likely to be down 60-80 percent compared to last year. Specifically, last year’s first half profits totaled 769 million RMB ($122 million), but the company has estimate this year’s number will be between 154 million RMB and 308 million RMB ($24 million-$48 million). On the one hand, it’s hard to be too sad about millions of dollars in profit, even if it’s a lot fewer dollars than last year, but on the other hand, if this is a trend then ZTE could be in big trouble pretty damn quick. So what’s going on here?

ZTE has stated publicly that the numbers are a result of China’s big telecom operators (Specifically China Mobile and China Unicom) delaying invitations for cooperative bids and the closing of some deals until the second half of the fiscal year, meaning that the profits ZTE generated from similar deals last year didn’t make it into this year’s first half numbers.

Others have speculated there’s more to it than that, and predict layoffs within the year, although there doesn’t seem to be much to substantiate the layoff rumors just yet. It’s worth remembering, too, that ZTE is very international and was thus impacted more significantly by international financial troubles like the European financial crisis than most other Chinese tech firms.

But if ZTE is telling the truth about its flagging profits that also indicates a problem in a way: the firm is clearly heavily reliant on contracts with China’s major telecoms. As domestic smartphone makers increase exponentially, many of them with more appealing brands than ZTE, the company could find itself less appealing to big telecoms and boxed out of the contracts that clearly make up a big percentage of its current revenue stream.

The company recently announced a 4G smartphone, and is apparently banking on getting in on the ground floor as TD-LTE increases in popularity and (hopefully soon) becomes available to Chinese users.

[Sina Tech]