Despite a positive earnings alert for 2013, it is too soon to conclude that Chinese telecom equipment maker ZTE Corp (00763.HK) is out of the woods. Doubts remain if the company’s cost-driven turnaround will sustain. And challenges facing its handset unit add to the uncertain business outlook.
ZTE said on Monday that it expects to report a profit in the range of 1.2 billion yuan (US$198 million) to 1.5 billion yuan for 2013, in stark contrast to the 2.8 billion yuan loss posted in the preceding year. It attributed the turnaround to improved gross margin and strengthened control over costs and expenses.
ZTE has indeed been cutting costs furiously. The firm slashed 40 percent of its work force during the past two years, and the employee number has shrunk to 60,000, media reports have said. Moreover, the group sold some assets in subsidiaries to derive alternative income, the National Business Daily cited an internal source as saying.
But cost reduction and one-off gains are not enough to restore full confidence among investors over ZTE’s future. Telecom network equipment and handheld devices are the two biggest businesses for ZTE, with the two segments accounting for 50 percent and 33 percent of the firm’s operating revenue respectively during the first six months of 2013.
Thanks to the large-scale 4G deployment projects fired up last year, the network equipment business is doing great. But the devices business is lagging.
ZTE has said earlier that aims to be in the top three in the industry in the handheld device business by 2015. In 2012, the group ranked No. 4 in global handset shipment but dropped out of the top five as of last quarter in 2013, according to data compiled by Tencent technology portal.
Branding is the weakest link in ZTE’s handsets business. The company puts too much effort on the low-end market; it depends largely on carriers’ channel to sell its phones. Products in general lack strong identity.
Having moved out of the red, ZTE can certainly return to the right track. But to achieve that, it needs some follow-through initiatives. The company is aware of the problems and is taking some action.
Hoping to ride the 4G wave, the group carried out a personnel shuffle at the end of last year in order to rejuvenate its management team.
The then-vice president Zeng Xuezhong is now the executive vice president overseeing the operation of the terminals business. Zeng, who is 39 years in age, is relatively young and is said to have a good internet mindset.
Meanwhile, ZTE has also made the terminals business more independent, showing its determination to reinforce the operation.
While the signs are encouraging, the company will be watched closely in the coming year for more initiatives to beef up the business and sustain the earnings turnaround.
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