Oer the last few years, Chinese telecom vendors have been making rapid inroads into the global infrastructure and handset space, forcing the Alcatels and Nokias to sit up and take note. Buyer perceptions of China’s telecom vendors continue to improve even as the ability of these companies to compete aggressively on price seems limitless.
Their success of late has been so quick and visible that it has ratcheted up the anxiety, uncertainty and doubt among established incumbent vendors. Today the perceived threat has become all the more real, especially for vendors who have slipped into the second tier of suppliers. “The big vendors are terrified because of the kind of business they will be losing in the next two to three years,” says John Ryan, president of RHK, Inc., a San Francisco-based telecom research and advisory firm.
Huawei
Leading the Chinese bandwagon is Huawei, the country’s largest telecom equipment maker. While the big European and North American companies have retrenched, Huawei has expanded its reach to 100 countries and won contracts not only in developing markets like Brazil and Mexico but also in mature markets like those of Europe. It has yet to make significant inroads into the US, however.
From virtually zero at the end of the 1990s, Huawei’s international business today accounts for 65 per cent of its total revenue at $5.2 billion. In less than a decade, Huawei has penetrated almost every major world infrastructure market and has invested enormously in its business and technology lines.
In January 2005, the company’s $187 million contract with Thailand’s state-owned telecom carrier, CAT Telecom, was a wake-up call for rival equipment vendors. According to Jean-Charles Doineau, research director, Ovum, Huawei closed this deal at a price 46 per cent lower than the average bid price of its competitors, thereby confirming Huawei’s aggressive pricing strategy in its international operations, with a primary focus in the service provider market in APAC and Europe.
While much of its success has been in the developing markets, Huawei snapped the 3G stranglehold of European vendors in Europe by landing Dutch provider Telfort’s UMTS network contract in the Netherlands in late 2004. In 2005 it broke into the highest level of global service providers, securing a future global UMTS infrastructure commitment from Vodafone and a specific deployment contract for its networks in Spain.
Further, the inclusion of Huawei as a primary supplier for the deployment of its multi-service access network (MSAN) and transmission equipment in the BT Group’s 21st Century Network initiative was viewed as a huge step forward into the global marketplace for Huawei ?? and other Chinese telecom vendors by extension.
Last year, Vodafone rewarded Huawei with its first significant handset deal.Huawei became a supplier of Vodafonebranded UMTS handsets to be sold across 21 countries for the next five years.Another significant contract was with telecom operator Telefonica for constructing the largest GSM network for 2006 in Latin America.
The company is head-to-head against Ericsson and Nokia in the global wireless marketplace. According to Peter Jarich, wireless infrastructure analyst, Current Analysis, while its European deals may not be the exclusive ones it is signing with carriers in developing markets, it is often dislodging one of the incumbents.
Huawei officials attribute the company’s success in the international arena to providing optimised and custom-built solutions that focus on particular carrier needs and not low prices.For instance, in its Vodafone deal, Huawei is providing mid-range and entry-level 3G phones intended to get the masses involved with mobile data.That may seem to contradict Huawei’s claim of not competing on price, but according to M:Metrics analyst John Jackson, the deciding factor was which company was willing to make an inexpensive phone. “One of the reasons Vodafone went with Huawei was because it was flexible,” says Jackson.
Clearly, Huawei has established an international presence and a reputation as esence and a reputation as a Tier I vendor. If anything, it is forcing telecom equipment majors like Ericsson and Nokia to undercut Huawei.
For instance, Huawei claims that its UMTS/ high speed downlink packet access (HSDPA) kit went to the final round of consideration only to find its price undercut by Ericsson and Nokia in TMobile’s recent award of its US 3G contracts.
Regardless of whether Huawei’s success is coming at the expense of other carriers or is a result of an expanding global market, it is seeing success nonetheless. A look at the limited financial data of the company shows that the vendor is growing at a brisk clip.According to Huawei’s own numbers, from 2004 to 2005, revenues jumped 47 per cent from $5.6 billion. The previous year’s growth was just as impressive, increasing 46 per cent over 2003 revenues of $3.8 billion. And, of its $8.2 billion in 2005 sales, 58 per cent comprised international sales. The company’s wireless, wireline and networking infrastructure solutions have been deployed by more than half of the top 50 carriers.
ZTE
Meanwhile, not lagging far behind in the race to capture a part of the global telecom market is Zhongxing Telecom Limited (ZTE), Huawei’s main domestic competitor.
While ZTE does not have as big a profile as its rival Huawei, it has also been making its presence felt around the globe.Its first deal was for an ATM network contract in Pakistan in 1997, where it outdid established players like Siemens, Alcatel, Ericsson and NEC. More recently, it has supplied the DSL network for the Athens Olympics, which led to a further contract with Greek operator OTE. In early 2005, it signed an R&D agreement with Portugal Telecom that will see the two partners jointly bring to market new products and services.
In October 2005, the company outbid four other global providers to win a contract to supply Angola with a Wi-Max network ?? a wireless digital communications system that enables wide-ranging broadband access. This was the first-ever commercial Wi-Max network contract for ZTE.
In September 2006, the company signed a deal with BT to supply dual-mode handsets for a mobile TV service. The company is also reconstructing France Telecom’s ATM-based DSL system.
Interestingly, while Huawei has not met with much success in the US, ZTE has managed to claim a stake in this market.For instance, ZTE replaced Huawei as ClearTalk’s network vendor to build out its five-state rural network in December 2005. In addition to other small CDMA deals with Copper Valley Wireless in Alaska, Oceanic Digital Jamaica and HaiTel in Haiti, ZTE became the first of the two to win a Tier 1 carrier deal, selling EV-DO cards to Telus in Canada.According to company officials, ZTE won 41 per cent of the orders for CDMA neTworks worldwide in 2006.
ZTE’s revenue reached $2.68 billion in 2005, compared with $2.56 billion in 2004. Its portfolio includes products for mobile communications, Personal Handyphone System phones and fixed line products. In 2005, approximately 25 per cent of its revenue came from the international market. The company aims to achieve up to half of its total revenues from overseas markets by 2008.
While ZTE appears less well placed to take a share in Western markets, it clearly has strong potential in developing countries, particularly in wireless networking.
Reasons for success
The newfound success of Chinese telecom vendors beyond the mainland stems from several factors. First, Chinese vendors are used to dealing in highly competitive markets at home. According to Beijing-based Norson Telecom Consulting, the rise of Huawei and ZTE raised the bar for vendor competition to unprecedented levels.
Moreover, many developing countries in Latin and South America have deregulaTed their telecom market in recent years, ushering in new competition and new technology. These have become huge, new markets, where longstanding ties between carriers and vendors have less importance.
Finally a growing amount of telecom equipment has become a commodity, which makes price more important in purchasing decisions. With their lower-cost and larger labour force, Chinese companies can often offer prices 25 per cent or more below those of their competitors.
The downside
However, there are limits to how far Chinese vendors can go in price aggression. In fact, after a thorough analysis of financial and operational data of these vendors, research firm Heavy Reading has identified several factors that may ultimately work against these vendors in their efforts to become international players.
Regarding price competition, the biggest advantage that China’s vendors hold over suppliers from established markets is their significantly lower labour costs. But, according to analysts from Heavy Reading, this advantage is not as vast as their price-cutting would suggest.
While Chinese vendors often set their prices 25 to 50 per cent below those of the incumbent vendors to win reference customers abroad, the cost advantage held by them on the labour front is significantly less than that. This implies that these companies are sacrificing profitability for market share.
Clearly, they cannot continue to do so indefinitely. It is not in their best interests, nor in the interests of the Chinese government, to subsidise foreign telecom carriers. Further, as China’s vendors increase their sales and marketing personnel in industrial markets, their labour cost advantage will begin to deteriorate.
Moreover, both Huawei and ZTE are not very strong in wireless infrastructure. Even in their home market, Huawei and ZTE combined have managed to win only around 10 per cent of the mobile infrastructure contracts awarded to date. As incumbent suppliers of analog systems, Ericsson and Motorola have remained the dominant wireless vendors in China. On the GSM front, Nokia and Alcatel have succeeded in winning share before Huawei and ZTE launched competing products.
Finally, according to Matt Walker, managing director, MWL Consulting, these companies are continuously facing established incumbents in nearly all the geographic and technology segments ouTside China that they target.
“Incumbents also have pricing flexibility, better reputation, strong technology and smart marketing, and will not sit still,” Walker points out.
Nevertheless, China’s big vendors, particularly Huawei, have made exceptional progress in their efforts to enter the international telecom arena. Both Huawei and ZTE are expected to make further inroads into the international markets in the next few years. And they are likely to be joined by a new crop of Chinese players.
