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Struggling ZTE Sees U.S. Products Halved After Government Row

ZTE saw the number of its Android devices offered by United States prepaid operators halved following its row with the federal government, a new report from GlobalData reveals. The company that was rated as the fourth-largest smartphone maker in the country last year with some 11-percent of the stateside market is now being pushed to the brink of obscurity, with an increasing number of prepaid service providers dropping its handsets in favor of other brands. Over a three-month period ending this September, the number of the company’s Android smartphones offered by prepaid operators dropped by 48-percent, the new data reveals. While some 40 different ZTE models were being retailed by prepaid service providers this summer, that number now dropped to 21 and there are currently no indications of the firm looking to replace the pulled devices with new ones.

The analytics firm believes the sharp decline is evidence of the stateside wireless industry’s “wariness” as mobile service providers are falling to political pressure and declining to do business with ZTE so as to not clash with Washington. The industry as a whole is already heavily regulated and wireless carriers want to avoid being hit with additional scrutiny from American regulators, according to GlobalData Senior Analyst Anisha Bhatia. The Chinese firm still has a significant presence in the U.S. as almost every prepaid operator continues to sell its products. In some cases, ZTE smartphones comprise up to 14-percent of a company’s prepaid offerings and are even more prevalent in the entry-level price bracket, i.e. the one below $150.

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Bhatia believes ZTE needs to place a larger focus on financial transparency in order to regain the trust of the U.S. wireless industry and see a larger number of its products returned to the shelves. For much the same reasons, the Shenzhen-based firm ought to make a clearer distinction between its smartphone business and its wireless infrastructure operations that remain a major cause for concern among U.S. regulators and legislators, according to the veteran analyst. The industry watcher also raised the possibility of ZTE rebranding its stateside business in the future and drop its existing name in favor of a completely new one or replace it with one of its existing product brands such as Axon.

Background: The U.S. Department of Commerce hit ZTE with a crippling denial order in mid-April, preventing American companies from selling and licensing any kind of technologies to the smartphone maker over a seven-year period. The move was made in response to a violated 2017 settlement meant to conclude an earlier episode that saw ZTE break trade embargoes imposed on Iran and North Korea. The issue hasn’t been fully resolved until late August, which is when ZTE resumed normal operations in the U.S. However, to get to that point, the company agreed to a $1 billion fine, $400-million escrow payment, new business strategy that will see it spend much more resources with American suppliers in the next several years, and a wide variety of structural changes, including an entirely new board of directors and management.

Former Chairman Yin Yimin recently described the new settlement as “disastrous,” with the original equipment manufacturer being estimated to lose over $3 billion in the near term as a direct consequence of the ordeal. A drop in its prepaid market presence in the country reported by GlobalData is believed to be just one of many components of that performance decline. The firm is now also in danger of overleveraging itself as it has taken out a new $10 billion loan in order to escape from its current predicament. Even though it has the Chinese government’s full backing given how its essentially owned by Beijing, major cost cuts may be on the horizon if it’s unable to stop its commercial decline over the coming quarters, some analysts believe.

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The idea that ZTE rebrands its American unit has already been floated around the industry for several months now but the OEM gave no indication of considering such a move. While it also enjoyed a significant presence in the stateside hotspot market, it’s unlikely to return to that dominance in the foreseeable future, especially with the advent of 5G fixed wireless access solutions poised to replace some of those products, many analysts agree. While ZTE narrowly avoided bankruptcy, some industry watchers remain unconvinced that the company’s U.S. arm can be saved without more major changes to its operations, the kind of moves that it still appears to be unwilling to make. Being majority-owned by a state-backed firm, ZTE is still seen as a potential national security risk in the U.S. and has been effectively blocked from participating in the stateside 5G race. It categorically denied being used as China’s spying tool but the intelligence community remains adamant the sole fact that Beijing could easily force it to spy for it is reason enough for its U.S. ambitions to be opposed.

Impact: ZTE’s newly observed decline is neither surprising nor easily reversible and the company is widely believed to be in for a rough 2019. Between close to $2 billion in fines it paid to the U.S. government since 2017 and a new trade compliance committee overseeing its every move, as well as a massive $10 billion loan it took out to survive the latest episode more easily, it’s facing a significant risk of overleveraging itself, especially seeing how its business lost a lot of steam after being left on ice for over four months.

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While the company still isn’t publicly talking about worst-case scenarios, it may be forced to resort to major cost cuts in the coming years. One thing that’s certain is that its stateside arm will remain operational for the foreseeable future as ZTE repeatedly ruled out the possibility of exiting the U.S. market that it deems too profitable for such desperate moves. Its high-end Axon line of Android smartphones is expected to continue being refreshed moving forward but this year’s row with Washington will almost certainly see ZTE cut down on the number of entry-level models it develops and manufactures given how it already lost a significant portion of their buyers.

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