Huawei/ZTE: poor US-Saudi relations offer window for telecoms groups

US bans on Chinese telecoms groups four years ago gravely injured them. The Biden administration’s ban last month on approvals of new equipment from local makers Huawei and ZTE only salted the wounds. But worsening US-Saudi Arabia relations provide these two a rare opportunity for revival.

Privately held Huawei, the world’s top smartphone maker in 2020, has fallen to 10th spot following US laws that blocked it from critical technologies. ZTE also suffered a profits and stock price plunge.

Chinese president Xi Jinping’s visit to Saudi Arabia this week marks a turning point. US-Saudi relations have soured over Opec’s oil production cuts. Saudi Arabia wants a happy China, the world’s second-largest oil consumer. Deals with Huawei on cloud computing and high-tech complexes help.

Importantly, telecoms gear is less affected by US chip export bans, not needing the advanced chips crucial for smartphones. Also, margins for this kit are much higher than for consumer electronics.

Huawei ships about 500,000 units of network equipment annually generating Rmb281bn ($40bn) of revenue last year, nearly half the total. Just four companies account for 90 per cent of the world’s supply, a much more concentrated market than smartphones.

US prohibitions offer Huawei an opportunity to boost its local chip business. Huawei owns China’s largest chip design company, HiSilicon Technologies.

ZTE could well benefit from Huawei’s success in the Gulf. Its shares have halved from its peak in 2020. At 16 times forward earnings that is not far from three-year lows despite net profit rising 17 per cent in the first nine months. Its operating margins have expanded beyond that before other US trade bans hit ZTE in 2016.

A key growth market for the duo is automotive parts. For the thousands of components used in electric cars, just a handful require any banned chips. The rest can be made using Chinese technology and should prove a lucrative business. Do not write off these equipment makers just yet.