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ZTE Confronts Another U.S. Penalty After Years of Rebuilding

MarketDash Editorial Team
9 hours ago
Reports of a potential $1 billion U.S. fine over alleged bribery in Brazil sent ZTE shares tumbling over 10%, threatening to erase the telecom giant's entire 2024 profit. The company has spent years recovering from its last major clash with Washington, but this new challenge arrives as it pivots away from Western markets and explores AI-powered smartphones with ByteDance.

Just when ZTE Corp. (0763) thought it had put its U.S. regulatory troubles behind it, Washington appears ready for round two. The Chinese telecom equipment maker spent years clawing back from a devastating 2018 fine and export restrictions, only to face fresh allegations that could cost it another billion dollars or more.

A report from Reuters last week dropped a bomb on ZTE investors: the U.S. Department of Justice is investigating the company for allegedly making illegal bribes in Brazil, and a settlement approaching $1 billion could be on the table. That figure would rival the $1.19 billion penalty ZTE paid back in 2018 after violating export controls and sanctions related to Iran.

The market reaction was swift and brutal. ZTE's Hong Kong-listed shares collapsed 13% following the report, wiping out about half the stock's gains for the year. While shares remain more than double their 2018 lows during the peak of the company's last confrontation with U.S. regulators, investors are clearly worried about how this sequel might unfold.

Can ZTE Weather Another Storm?

The timing couldn't be much worse. According to Reuters, the Justice Department launched its investigation earlier this year over potential violations of the Foreign Corrupt Practices Act in South America and other regions. Details remain scarce, but the core question looming over ZTE is whether China's second-largest telecom equipment maker can absorb another massive U.S. penalty along with the reputational damage and heightened scrutiny that would inevitably follow.

The financial hit would sting considerably. A penalty exceeding $1 billion would nearly obliterate ZTE's 2024 net profit of 8.42 billion yuan and could force the company to scale back research and development spending at a critical juncture. The company's recent performance hasn't exactly inspired confidence either, with third-quarter net profit plummeting 88% as operating costs ballooned. Revenue is still growing, but barely, inching up just 5.1% in the third quarter to roughly 29 billion yuan.

ZTE acknowledged last Thursday that it's in ongoing discussions with U.S. regulators, insisting that operations "remain normal" while pledging to "resolutely defend its rights and interests through legal means." Management attempted to reassure nervous investors by announcing a share buyback program for 19 million shares worth up to 1.2 billion yuan, or about $170 million.

Part of ZTE's current weakness stems from a painful transition happening in its home market. After several years of rapid expansion, spending on 5G networks in China has slowed considerably, pressuring the company's core business. One bright spot has been sales to government and enterprise clients, which skyrocketed 109% in the first half of this year to account for more than a third of total revenue. The problem? That segment's gross margin sits at a meager 8.3%, compared to a much healthier 52.9% for its traditional carrier networks business, whose revenue actually declined 6% during the quarter.

This shift means carrier network revenue—historically a cash cow for ZTE—has fallen below 50% of total revenue for the first time in nearly a decade. Not exactly the trajectory you want when facing a potential billion-dollar penalty.

A Different Company Than 2018

Before we write ZTE's obituary, though, there are reasons to think the company might navigate this crisis better than its last encounter with U.S. enforcement.

The original clash involved ZTE and rival Huawei Technologies selling U.S.-origin products to Iran and North Korea, violating sanctions and export-control laws. Washington threatened to cut off ZTE's access to critical U.S. suppliers of components like chips and software unless it accepted a stringent settlement. Huawei faced an outright ban on buying U.S. products with no settlement option at all.

This time around, depending on the settlement terms, a new agreement could actually help remove some of the regulatory uncertainty that's hung over the company for years. Unlike Huawei, ZTE has continued sourcing chips from Qualcomm and Intel, plus glass from Corning for its high-end smartphones. The company's quick response to the latest allegations—and its declaration that it will "defend its rights and interests"—suggests it expects support from Beijing. That backing could prove crucial, especially as the Chinese government funnels resources to tech companies working to reduce their dependence on foreign technology.

Like many Chinese tech firms targeted by U.S. export controls, ZTE has systematically reduced its exposure to Western markets, both for suppliers and customers. Revenue from the U.S., Europe, and Oceania represented just 13% of total revenue in the third quarter of 2025, down sharply from 25% in 2017. More than 70% of revenue now comes from domestic sources, as growth in Africa has stalled and the rest of Asia also softened, according to company disclosures.

The company is also expanding into emerging Asian markets as those countries build out their telecom infrastructure. Both Huawei and ZTE have secured multiple contracts to supply 5G equipment in Vietnam, Reuters reported in November. Meanwhile, ZTE's research and development spending has jumped from 11.9% of revenue in 2017 to nearly 21% in the first quarter of 2025, signaling a determined push to move up the value chain and appeal to a broader customer base.

The ByteDance Wild Card

Here's an intriguing development that hasn't gotten much attention: ZTE's growing relationship with ByteDance, the company behind TikTok. Sales of the Nubia M153—a ZTE-developed smartphone and the first to feature ByteDance's agentic AI capabilities—have surged since launching in December. Users can ask the phone's Doubao AI assistant to edit photos, compare prices across shopping apps, and even make investment decisions.

If the AI smartphone trend takes off in China, this partnership could open significant new revenue streams for ZTE beyond its traditional telecom equipment business. It's exactly the kind of diversification the company needs as its core carrier business matures.

Financially, ZTE appears capable of absorbing a major penalty without facing an immediate liquidity crisis. The company's debt-to-equity ratio of 0.88 and free cash flow of $131.6 million in the first half of 2025 provide some cushion. The bigger question is whether any settlement includes another probationary period with U.S. oversight similar to what was imposed after the 2018 agreement. That kind of arrangement could constrain the company's strategic flexibility for years.

Wall Street Remains Surprisingly Optimistic

Despite the latest turmoil, analysts haven't dramatically changed their tune on ZTE. Of 16 analysts surveyed this month, 12 rated the stock a "buy" or "strong buy," with only one assigning an "underperform" rating, according to Yahoo Finance. The company's Shenzhen-listed shares currently trade around 37 yuan, well below the average analyst target of 53.54 yuan.

The stock will likely face more volatility if a formal settlement emerges. But setting aside the political drama, ZTE ultimately needs to prove it can successfully transition beyond its core carrier business into areas with stronger long-term growth potential. The ByteDance partnership looks like a smart step in that direction, as does its rapidly expanding government and enterprise segment, profitability concerns notwithstanding.

For a company that once seemed on the brink of collapse during the height of U.S.-China trade tensions, ZTE has shown remarkable resilience. Whether that's enough to weather whatever comes next from Washington remains to be seen, but the company is at least entering this fight in better shape than it was seven years ago.

Back to News

ZTE Confronts Another U.S. Penalty After Years of Rebuilding

MarketDash Editorial Team
9 hours ago
Reports of a potential $1 billion U.S. fine over alleged bribery in Brazil sent ZTE shares tumbling over 10%, threatening to erase the telecom giant's entire 2024 profit. The company has spent years recovering from its last major clash with Washington, but this new challenge arrives as it pivots away from Western markets and explores AI-powered smartphones with ByteDance.

Just when ZTE Corp. (0763) thought it had put its U.S. regulatory troubles behind it, Washington appears ready for round two. The Chinese telecom equipment maker spent years clawing back from a devastating 2018 fine and export restrictions, only to face fresh allegations that could cost it another billion dollars or more.

A report from Reuters last week dropped a bomb on ZTE investors: the U.S. Department of Justice is investigating the company for allegedly making illegal bribes in Brazil, and a settlement approaching $1 billion could be on the table. That figure would rival the $1.19 billion penalty ZTE paid back in 2018 after violating export controls and sanctions related to Iran.

The market reaction was swift and brutal. ZTE's Hong Kong-listed shares collapsed 13% following the report, wiping out about half the stock's gains for the year. While shares remain more than double their 2018 lows during the peak of the company's last confrontation with U.S. regulators, investors are clearly worried about how this sequel might unfold.

Can ZTE Weather Another Storm?

The timing couldn't be much worse. According to Reuters, the Justice Department launched its investigation earlier this year over potential violations of the Foreign Corrupt Practices Act in South America and other regions. Details remain scarce, but the core question looming over ZTE is whether China's second-largest telecom equipment maker can absorb another massive U.S. penalty along with the reputational damage and heightened scrutiny that would inevitably follow.

The financial hit would sting considerably. A penalty exceeding $1 billion would nearly obliterate ZTE's 2024 net profit of 8.42 billion yuan and could force the company to scale back research and development spending at a critical juncture. The company's recent performance hasn't exactly inspired confidence either, with third-quarter net profit plummeting 88% as operating costs ballooned. Revenue is still growing, but barely, inching up just 5.1% in the third quarter to roughly 29 billion yuan.

ZTE acknowledged last Thursday that it's in ongoing discussions with U.S. regulators, insisting that operations "remain normal" while pledging to "resolutely defend its rights and interests through legal means." Management attempted to reassure nervous investors by announcing a share buyback program for 19 million shares worth up to 1.2 billion yuan, or about $170 million.

Part of ZTE's current weakness stems from a painful transition happening in its home market. After several years of rapid expansion, spending on 5G networks in China has slowed considerably, pressuring the company's core business. One bright spot has been sales to government and enterprise clients, which skyrocketed 109% in the first half of this year to account for more than a third of total revenue. The problem? That segment's gross margin sits at a meager 8.3%, compared to a much healthier 52.9% for its traditional carrier networks business, whose revenue actually declined 6% during the quarter.

This shift means carrier network revenue—historically a cash cow for ZTE—has fallen below 50% of total revenue for the first time in nearly a decade. Not exactly the trajectory you want when facing a potential billion-dollar penalty.

A Different Company Than 2018

Before we write ZTE's obituary, though, there are reasons to think the company might navigate this crisis better than its last encounter with U.S. enforcement.

The original clash involved ZTE and rival Huawei Technologies selling U.S.-origin products to Iran and North Korea, violating sanctions and export-control laws. Washington threatened to cut off ZTE's access to critical U.S. suppliers of components like chips and software unless it accepted a stringent settlement. Huawei faced an outright ban on buying U.S. products with no settlement option at all.

This time around, depending on the settlement terms, a new agreement could actually help remove some of the regulatory uncertainty that's hung over the company for years. Unlike Huawei, ZTE has continued sourcing chips from Qualcomm and Intel, plus glass from Corning for its high-end smartphones. The company's quick response to the latest allegations—and its declaration that it will "defend its rights and interests"—suggests it expects support from Beijing. That backing could prove crucial, especially as the Chinese government funnels resources to tech companies working to reduce their dependence on foreign technology.

Like many Chinese tech firms targeted by U.S. export controls, ZTE has systematically reduced its exposure to Western markets, both for suppliers and customers. Revenue from the U.S., Europe, and Oceania represented just 13% of total revenue in the third quarter of 2025, down sharply from 25% in 2017. More than 70% of revenue now comes from domestic sources, as growth in Africa has stalled and the rest of Asia also softened, according to company disclosures.

The company is also expanding into emerging Asian markets as those countries build out their telecom infrastructure. Both Huawei and ZTE have secured multiple contracts to supply 5G equipment in Vietnam, Reuters reported in November. Meanwhile, ZTE's research and development spending has jumped from 11.9% of revenue in 2017 to nearly 21% in the first quarter of 2025, signaling a determined push to move up the value chain and appeal to a broader customer base.

The ByteDance Wild Card

Here's an intriguing development that hasn't gotten much attention: ZTE's growing relationship with ByteDance, the company behind TikTok. Sales of the Nubia M153—a ZTE-developed smartphone and the first to feature ByteDance's agentic AI capabilities—have surged since launching in December. Users can ask the phone's Doubao AI assistant to edit photos, compare prices across shopping apps, and even make investment decisions.

If the AI smartphone trend takes off in China, this partnership could open significant new revenue streams for ZTE beyond its traditional telecom equipment business. It's exactly the kind of diversification the company needs as its core carrier business matures.

Financially, ZTE appears capable of absorbing a major penalty without facing an immediate liquidity crisis. The company's debt-to-equity ratio of 0.88 and free cash flow of $131.6 million in the first half of 2025 provide some cushion. The bigger question is whether any settlement includes another probationary period with U.S. oversight similar to what was imposed after the 2018 agreement. That kind of arrangement could constrain the company's strategic flexibility for years.

Wall Street Remains Surprisingly Optimistic

Despite the latest turmoil, analysts haven't dramatically changed their tune on ZTE. Of 16 analysts surveyed this month, 12 rated the stock a "buy" or "strong buy," with only one assigning an "underperform" rating, according to Yahoo Finance. The company's Shenzhen-listed shares currently trade around 37 yuan, well below the average analyst target of 53.54 yuan.

The stock will likely face more volatility if a formal settlement emerges. But setting aside the political drama, ZTE ultimately needs to prove it can successfully transition beyond its core carrier business into areas with stronger long-term growth potential. The ByteDance partnership looks like a smart step in that direction, as does its rapidly expanding government and enterprise segment, profitability concerns notwithstanding.

For a company that once seemed on the brink of collapse during the height of U.S.-China trade tensions, ZTE has shown remarkable resilience. Whether that's enough to weather whatever comes next from Washington remains to be seen, but the company is at least entering this fight in better shape than it was seven years ago.