ZTE Is Betting On China’s Nascent 4G Network To Bolster Its Flagging Profitability

ZTE is honing in on increased investment in 4G networks by China’s major telecom operators as it struggles to catch up with domestic rival Huawei Technologies, reports Reuters.

ZTE and Huawei are expected to compete for most 4G network contracts with China’s three major carriers (China Mobile, China Unicom, and China Telecom) because the two telecom equipment makers have support from the Chinese government.

Securing contracts is especially important for ZTE because its performance has been lagging behind Huawei. ZTE warned in January that it will post its first-ever annual loss for 2012 (its earnings release is scheduled for later this week). According to ZTE, its net loss for 2012 will be between 2.5 billion yuan and 2.9 billion yuan due to delays in network projects and a decline in handset revenue. That is the first annual loss for the company since it went public in Shenzhen in 1997.

ZTE’s strategy since the mid-1990s has been to focus on aggressively expanding overseas, taking on rivals Ericsson, Huawei, Alcatel-Lucent, and Nokia Siemens in emerging markets such as India. The company’s expansion has often shaved away at its profitability because ZTE offers prices so low competitors often give up instead of matching the bids. But Huawei still holds an advantage over ZTE because Huawei’s larger size gives it an edge when offering lower bids on contracts with carriers. Huawei, the world’s second-largest telecoms equipment maker after Ericsson, has forecast that its 2012 net earnings will rise 33 percent to 15.4 billion yuan.

ZTE has said that it hopes to recover and make a profit in 1Q2013 by cutting costs and focusing on developed markets like the U.S., Europe, and Japan.

Though China’s 4G network expansion will also be a key part of ZTE’s strategy, the company may have to wait a bit longer for to reap the rewards because TD-LTE is still waiting for approval from the Chinese government. But China Mobile, China Telecom, and China Unicom have already been busy building out their infrastructure. Together, the three companies will spend 345 billion yuan ($56 billion USD) on expanding their 4G networks this year.

China Mobile, the world’s biggest wireless network operator by subscribers, wants to set up trial networks in 100 large cities by the end of this year. In February, the telecom giant turned up pressure on the Ministry of Industry and Information Technology (MIIT) to start issuing 4G licenses soon by announcing that it was preparing to launch a “trial commercial” service in Guangzhou and Shenzhen with customized Galaxy S3 smartphones from Samsung.

China Mobile chairman Xi Guohua said at the Mobile World Congress last month that his company’s 4G network would cover about 500 million people in 100 cities by the end of this year, and that his company is working with ZTE and HTC in addition to Samsung to develop smartphones that can run on TD-LTE networks.