China's $20 Billion Loan to ZTE to Change Telecom Industry: Report

ZTE has received a $20 billion credit line from a bank backed by the Chinese government. The money, says TBR, will change the telecom industry.

ZTE, the struggling telecom equipment company and smartphone maker based in China, has received a five-year, $20 billion credit line from the China Development Bank (CDB), an organization controlled by the Chinese government.

The funding will not only help to make ZTE the telecom market's third-largest player, but enable it to shape the market over the next few years, analysts with Technology Business Research (TBR) said in a Dec. 20 report.

"TBR believes ZTE will exacerbate the decline in competitor sales as it can leverage its financing advantage and price competitiveness to take market share and enter new markets, such as enterprise network infrastructure," the firm said in its report.

First, however, TBR analysts expect ZTE to use the money to regain traction in the market and to stabilize its operations. During the third quarter, ZTE's sales fell by more than 13 percent from the same period in 2011, and its operating losses grew to $414 million; these results led the company to restructure and implement pay cuts.

Those billions will enable ZTE to finance its high-interest debt and invest in new technologies, the analysts said, as well as to "streamline internal processes and reduce redundancies."

As for regaining its footing, "with close competitors Alcatel-Lucent and Nokia Siemens looking to exit certain types of managed services and certain countries as they too restructure," wrote TBR, "ZTE has an opportunity to land new customers, consolidate its market position and grow sales."

While ZTE and CDB didn't disclose the terms of the deal, TBR analysts expect that, to encourage use, the rate was well below average market borrowing rates.

This will also pay off for ZTE if it looks to lend the money to others. During the recession, as funding became increasingly difficult to come by, ZTE was successful in extending financing to potential customers, said TBR.

"This advantage helped ZTE, and its close rival Huawei, [which] also received loans from the CDB in past years," said the report, "to carve out strong positions in emerging markets such as Africa, the Middle East, Southeast Asia and Latin America."

In October, Huawei and ZTE were the focus of a U.S. House Intelligence Committee report that warned that equipment from the companies, with their ties to the Chinese government, presented a possible threat to U.S. national security.

"Any bug, beacon or backdoor put into our critical systems could allow for a catastrophic and devastating domino effect of failures throughout our networks," Committee Chairman Mike Rogers (R-Mich.) said in an Oct. 8 statement.

"We have serious concerns about Huawei and ZTE," he added, "and their connection to the communist government of China. China is known to be the major perpetrator of cyber-espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation."

The 2012 telecom industry was dominated by Huawei, Ericsson, Alcatel-Lucent, Nokia Siemens and ZTE, respectively. ZTE saw revenue of $13.6 billion, which TBR analysts expect will increase to $15 billion in 2013 and $16.5 billion in 2014, at which time ZTE is likely to pull ahead two slots into the number-three position.

While the funding will breathe life into ZTE, TBR added, "it portends more woes for close competitors."

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