There was a ghost-like quality about ZTE in 2018 after the Chinese tech company nearly went out of business. Photo: AFP
Like a phoenix rising from the ashes, ZTE has been reborn.  Juicy state contracts have helped turn the Chinese high-tech juggernaut around after nearly suffering a slow death in 2018 when it was dragged into the trade war between Washington and Beijing.  Last year, revenue jumped 6.1% to 90.74 billion yuan (US$12.82 billion) compared to the same period 12 months ago. Net profits also surged more than 173% to 66.6 billion yuan ($9.4 billion) from its consumer retail operation, such as smartphones, and telecom infrastructure division on the back of China’s massive 5G rollout. But that resurgence could be short-lived after the United States Federal Communications Commission classified ZTE and its larger rival Huawei as national security threats in June. “Subsidies are a big part
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Like a phoenix rising from the ashes, ZTE has been reborn. 

Juicy state contracts have helped turn the Chinese high-tech juggernaut around after nearly suffering a slow death in 2018 when it was dragged into the trade war between Washington and Beijing. 

Last year, revenue jumped 6.1% to 90.74 billion yuan (US$12.82 billion) compared to the same period 12 months ago. Net profits also surged more than 173% to 66.6 billion yuan ($9.4 billion) from its consumer retail operation, such as smartphones, and telecom infrastructure division on the back of China’s massive 5G rollout.

But that resurgence could be short-lived after the United States Federal Communications Commission classified ZTE and its larger rival Huawei as national security threats in June.

“Subsidies are a big part of this story. Beijing uses state support to weather short-term, acute market threats, as well as to underprice foreign competitors,” Emily de La Bruyere, a co-founder of Horizon Advisory, a consultancy in Washington and New York that tracks Chinese government and economic activity, told Asia Times. 

“Between 2007 and 2019, ZTE’s subsidies exceeded its net profit. ZTE’s so-called profits after [its] 2018 blacklisting have been driven in large part by a fresh set of such subsidies. Publicly available documentation shows those subsidies accounted for at least 24% of the company’s profit in 2019,” she said.

“Another part is overseas engagement. ZTE has established a global presence and across non-US markets that grants it both international scale and the ability to hedge against or circumvent US regulations,” de La Bruyere, who has testified before the congressional US-China Economic and Security Review Commission, added.

The headquarters of ZTE in Shenzhen, which is across the border from Hong Kong. Photo: AFP

Yet two years ago, Zhongxing Telecommunications Equipment Corporation faced being consigned to a technological wasteland after breaking a settlement agreement with the US for illegal telecom shipments to Iran and North Korea.

On April 17, 2018, the Hong Kong-listed group was forced to suspend trading before closing down its Shenzhen operation for violating the deal. ZTE had previously pleaded guilty to the original offense and was fined up to $1.4 billion.

As part of the settlement, it also agreed to either dismiss or discipline senior executives. The US Commerce Department judged that the company had breached that ruling and banned it from buying American components, such as semiconductors and Google-type software for seven years.

In a nanosecond, ZTE was on the brink of destruction.

“[The company] may go bust … we will go off the air if the sanctions [banning the use of US technology] kick in,” Hou Weigui, the quietly-spoken 79-year-old founder of ZTE, told the Chinese media at the time.

“It will take a long, long time for Chinese companies to become competitive on the international market and ZTE’s hardship in venturing into overseas markets should serve as a warning to many others,” he added in remarks made before the US ban was rescinded nearly three months later on July 13.

Despite email and telephone requests by Asia Times to comment on the rise, fall and rise again of the group, senior executives of the telecom operator declined to be interviewed.

ZTE’s Axon 10 Pro smartphone was the first 5G model to hit the market in China last year. Photo: AFP

Still, this is what we do know about the firm Washington brands a national security risk.

ZTE was set up in 1985 by Hou, a former senior engineer at Xi’an Microelectronics Research Institute, an affiliate of the state-run China Aerospace Science and Technology Corporation.

Its headquarters are in Shenzhen, a sprawling metropolis and an emergent Chinese technology center across the border from Hong Kong. In 1997, the company listed on the Shenzhen Stock Exchange and was added to Hong Kong’s Hang Seng Index in 2004. 

ZTE is now part of the Hang Seng Stock Connect Greater Bay Area Index, which was rolled out in 2018, and has a market cap of 172.2 billion yuan ($24.4 billion).

Total assets were 141.2 billion yuan ($20 billion) last year, while its share price hit a 2020 high of 55.11 yuan ($7.80) in February before falling back to 47.12 yuan ($6.67) on July 9. 

Tasty government contracts have helped beef up the company’s bottom line.

“Shenzhen and Guangdong [Province] will, of course, give priority to local companies such as ZTE and Huawei when building and extending 5G networks, especially when these companies are being locked out of the Western market,” Chen Ke, a spokesperson for the Shenzhen’s Municipal Bureau of Industry and Information Technology, told Asia Times.

A high-rise residential estate built by ZTE for its staff in Shenzhen’s Nanshan District. Photo: Asia Times

But its involvement in China’s military-industrial complex runs much deeper through a labyrinth of interwoven shareholdings. ZTE comes under the umbrella of Zhongxingxin Telecom Co, which is 49% owned by founder Hou’s Zhongxing Wxt Equipment Co Ltd.

His old employer, Xi’an Microelectronics Technology Research Institute, also holds a 24.9% stake in Zhongxingxin Telecom, while Aerospace Guangyu Shenzhen has a 14.5% investment in the holding group. 

Both have strong links to the China Aerospace Science and Technology Corporation, a state-controlled behemoth, and one of the country’s leading SOEs.

Other key ZTE stakeholders are Bank of China, through a 5G-themed securities fund, and Central Huijin Asset Management, an investment company with close ties to the influential State Council, a key body of the ruling Communist Party government.

Shenzhen Huitong Rongxin Investment is yet another stakeholder through its subsidiary Shenzhen Huitong Financial Holdings, which is owned by the Nanshan district government of Shenzhen. All this information is available on ZTE’s website.

But while the firm stressed that Zhongxingxin Telecom is not involved in its business decisions, state aid proved crucial during the dark days of 2018. Of course, it could again act as a “lifeline” in a future crisis. 

“If a big company is in trouble, local governments usually rush to the rescue. Although it is rare for officials to directly pour in money, they can coordinate with local lenders to throw cheap or even interest-free loans as a lifeline,” a senior academic at the prestigious Peking University, who spoke on condition of anonymity, told Asia Times.

“High-tech companies like ZTE and Huawei represent China’s feat in innovation and research and development, so they can be spoon-fed with loans and more credit quotas whenever they need. For lenders, issuing loans to ZTE and other non-SOE clients is also in line with Beijing’s policy to help the private sector,” the academic said.

ZTE is undoubtedly big. It operates in 160 countries and has a workforce of more than 70,000, while its telecom equipment supports the digital backbone of a great swath of the developing world. It also provides services for 100 million customers in India, 300 million in Indonesia and 29 million in Italy.

ZTE smartphones advertised prominently at a National Basketball Association game in Oakland, California, in a file photo. Image: Twitter

Along with Huawei, it has been at the forefront of China’s 5G revolution. In what is a virtual monopoly, they will build the vast majority of China’s wireless network of 630,000 base stations in 2020. 

Earlier this year, they were awarded 85% of the contracts in a tender from state-owned China Mobile, worth a total of 37 billion yuan ($5.2 billion). The deal involves constructing more than 200,000 base stations in 28 provincial-level regions.

Again, this simply reinforces the connections ZTE has with President Xi Jinping’s administration.

“Most people don’t realize that the biggest stakeholder in ZTE is Zhongxingxin. And, that when the company that would eventually lead to ZTE was created, the investors were all from the [former] Ministry of Aerospace Industry [in China],” Abishur Prakash, founder of the Center for Innovating the Future, a Toronto-based strategy consulting firm, told Asia Times. 

“Regardless of how much ZTE wants to distance itself from China’s government, there will always be questions as to where ZTE’s strategy originates: from the board room or Beijing?” he said.

Even though the group beat Huawei last year to launch the country’s first 5G smartphone, the Axon, its core business revolves around digital infrastructure, as well as big data, cloud computing, and AI, or artificial intelligence. In May, ZTE signed an agreement with state-run China Unicom to work on 6G, the next great leap forward.

The firm has also increased spending on research and development. During the three months that ended on March 31, R&D funding jumped by 15.1% to 3.2 billion yuan ($460 million) compared to the same period in 2019.

“The move into 6G is certainly not a gimmick. As China’s lead in the 5G era [illustrates], you have to first build multiple-lane highways as the backbone of infrastructure … and given time there will be traffic,” Wong Kam-fai, of the Chinese University of Hong Kong’s Faculty of Engineering, told Asia Times.

Yet ZTE still lives in the shadow of its big brother Huawei, a near neighbor in Shenzhen but a world apart on the global stage. Built by the charismatic Ren Zhengfei, the brand name is as famous internationally for its consumer products and high-speed networks as it is for controversy.

The logo of Chinese company Huawei at its main UK offices in Reading, west of London. Photo: AFP/Daniel Leal-Olivas

Indeed, this is another dubious distinction they have in common along with R&D.

“It makes commercial sense for ZTE and Huawei [to collaborate]. They are based in the same city, where they could compare notes and swap ideas and technology,” Wong, of the Chinese University of Hong Kong’s Faculty of Engineering, said. 

“They have also been singled out by the US and denied access to US technology,” he added.

The latest incident in the long-running China-US technology conflict erupted on June 30. Wrapped up in national security issues, the US Federal Communications Commission barred American firms from dipping into an $8.3 billion government fund to buy telecom equipment from ZTE and Huawei.

In 2012, ZTE had five US-based R&D centers, employing roughly 300 people. Now, it has three research facilities in Dallas, its American headquarters, San Deigo and New Jersey, according to the company’s website. There are also five “sales and liaison offices” in a sprinkling of US cities, including Seattle, Chicago and Atlanta.

Back in China, an extensive semi-conductor program has been wheeled out just in case the tech champion is eventually banned from using chips manufactured by US companies.

“ZTE is a Chinese state-owned and state-directed vehicle that uses non-market measures to integrate into the foundations [of the] US, and global, information technology infrastructures. This comes with both acute and systemic risks to the US [economy] and national security,” de La Bruyere, of Horizon Advisory, said.

“I would like to add that ZTE – like China’s scientific and technological ecosystem writ large – advances in large part by siphoning innovation from abroad, including from the US. For example, ZTE has three R&D centers in the US. Those are there for a reason,” she claimed.

“Beijing actively invests in defending itself against repercussions for siphoning foreign technology,” de La Bruyere added.

A ZTE smart robot at the 2018 China Mobile Global Partner Conference in Guangzhou city in Guangdong province. AFP

Naturally, the group has dismissed similar allegations before, but they continue to resurface even after it was frozen out of the lucrative US market.

Instead, ZTE has rebranded its international image through the strategic Belt and Road Initiative (BRI), a major foreign policy program highlighting Beijing’s global ambitions. 

These New Silk Road superhighways will connect China to more than 70 countries and 4.4 billion people across Asia, Africa, the Middle East and Europe in a maze of multi-billion-dollar infrastructure projects, including a web of digital strands.

“Look at China’s geopolitical strategy. For instance, having a strong presence in the Indian Ocean has long been a priority for China. To build a presence, China has been offering loans to countries in South Asia [with] ZTE either building or upgrading telecommunication networks,” Prakash, of the Center for Innovating the Future, said.

His views were echoed by Horizon Advisory’s de La Bruyere. She pointed out that the group’s “commercial incentives” blur when it comes to Beijing’s “strategic” policy. 

“ZTE is fully integrated into the Belt and Road program. That means that Beijing facilitates and funds ZTE’s foreign contracts…[It] also means that its overseas engagement is driven by China’s strategic intentions rather than commercial incentives,” de La Bruyere said.

But then, ZTE in Mandarin translates to “China’s rejuvenation.” In a way, that is rather apt when you consider the company’s checkered history and its cozy relationship with Beijing.