Despite a late entry, ZTE is making rapid strides in the Indian telecom market. After establishing full-fledged operations in the country in 2003, the China-based telecom vendor has come a long way to notch up revenues of $750 million in 2007-08 from India. In fact, India is the second largest market for ZTE after China, and accounts for about 10 per cent of the company’s revenues.
The Indian telecom equipment market is a fiercely competitive one, and is dominated by European companies such as Nokia Siemens Networks, Ericsson and Alcatel-Lucent. But by leveraging on its 10-20 per cent cost advantage and growing engineering capabilities, ZTE has not only held its own but has grown from strength to strength in this market. “The company has made significant investments in R&D over the years and this has clearly paid off as it has enabled the company to develop cost-effective solutions and take on established vendors,” says Dr Dilip Ghosh, chairman and managing director, ZTE India.
The past two years have been particularly good for ZTE. With an aggressive market strategy, not only has it won key contracts in India, it has also made significant inroads into the developed markets of Europe and the US. This is a far cry from the past, when ZTE had a limited presence, operating only in China.
ZTE in India
While ZTE did not figure among the top 10 vendors in India till as recently as 2006, it has fought its way past image problems to become the fifth largest telecom vendor in the country. It currently accounts for 22 per cent market share, and is targeting the number one slot. In 2006-07, ZTE India’s turnover increased by an exponential 123 per cent to Rs 25.96 billion.
The company has witnessed impressive growth in all its business segments including handsets, network equipment and next-generation networks (NGNs). It has successfully partnered with leading telecom operators including Reliance Communications (RCOM), Tata Teleservices Limited (TTSL) and Bharti Airtel to supply handsets as well as wireless infrastructure. For example, in the wireless infrastructure segment, the company has won a large order from TTSL to build a countrywide CDMA2000 network over the next three years. ZTE has also signed a contract with RCOM to supply CDMA and GSM base tower stations.
The multi-pronged strategy has proved to be beneficial. “We have maintained a focus on product differentiation, cost effectiveness and quality. While the European vendors provide operators with overengineered products which have more capabilities than are required by Indian operators, we have been developing cost-effective customised products to suit countries like India,” says Ghosh.
As of December 2007, ZTE had set up a total network capacity of 43 million lines in India. The company is a market leader in CDMA and has captured the largest share of the CDMA base station market. Of the 55,000 base stations shipped by the company globally from 2001 to 2007, India accounted for over 35 per cent with about 20,000 CDMA base station shipments.
The company is a dominant player in the Indian NGN segment, and accounts for almost 100 per cent of the market. AlcatelLucent and Huawei are the other players. ZTE has implemented commercial operations for Tata Communications, and is conducting NGN trials for Bharti Airtel and other operators. It recently won NGN contracts from Bharat Sanchar Nigam Limited (BSNL) as well as Mahanagar Telephone Nigam Limited. ZTE intends to further strengthen its position in this market, which is worth $600 million.
The company also has a strong presence in the broadband segment. In 2007, it received a large contract, along with UTStarcom and Siemens, from BSNL. Revenue from the segment is rapidly increasing. While ZTE earned just $4 million from broadband equipment sales in India in 2006-07, in 2007-08, revenue had crossed the $75 million mark by December 2007.
However, the company lags behind in the GSM space. Says Ghosh: “We were unfairly disqualified on technical grounds in public sector tenders by competitors with vested interests. However, we have been steadily increasing GSM operations in the country and are hopeful of gaining our rightful place in this segment. India is one of the company’s three key GSM markets after Brazil and Russia.”
ZTE has a manufacturing facility in Gurgaon and an R&D centre in Bangalore. The plans to build another manufacturing facility in India were, however, shelved keeping in view the greater manufacturing cost advantages in China.
Targeting total revenues of $1 billion from India in 2008-09, the company intends to capitalise on the opportunities offered by the entry of new operators and the imminent launch of 3G services in 2009. It has already started discussions with new operators, and has recently signed a contract with Shyam-Sistema for a countrywide CDMA network rollout.
The company has increased its workforce in 2008 by over 50 per cent. “We intend to further increase our workforce as we have some new orders from BSNL and private telecom operators. We will also bid for BSNL’s contract for 90 million GSM lines,” says Ghosh. Further, ZTE is betting big on the upcoming 3G and Wi-Max tenders in the country. According to Ghosh, most of the contracts signed with the new players have a 3G component.
Handset sales are increasing steadily. According to company officials, ZTE shipped 10 million handsets in India in 2007. The figure is expected to reach 15 million in 2008. Both GSM and CDMA handsets are sold by the company in India, but only in partnership with mobile operators, including RCOM, TTSL and BSNL. In 2007, the company signed a long-term contract with Vodafone for selling handsets in the country.
There are plans to start selling handsets independently by the end of this year. As India has emerged as one of the largest markets for low-cost handsets, ZTE is planning to focus on this segment initially, and is banking on volumes to drive growth. However, according to analysts, the company may find it difficult to gain a foothold in the Indian mobile handset market where Nokia commands a 60 per cent share.
Global operations
Chinese telecom suppliers, led by ZTE and Huawei Technologies, have been challenging the leading telecom equipment vendors in the global market. In fact, according to industry experts, the rise of Chinese vendors is one of this decade’s most compelling developments in the telecom equipment segment.
ZTE is clearly growing from strength to strength. According to research firm IDC, ZTE was the fastest growing telecom equipment and solutions provider in the world in 2007. Informa Telecoms & Media, another research firm, slots ZTE amongst the top six handset vendors globally.
The company recorded the highest industry sales growth in the area of optical networking (ON) last year, according to the Ovum report, “Market Share 4Q07 and 2007 Global ON”. The company’s ON product sales grew by 120 per cent in the October-December 2007 period compared with that in 2006.
Ovum has ranked ZTE second in terms of global market share for LH dense wavelength division multiplexing and add-drop multiplexing area, proving that ZTE’s continuous effort in investing and developing new optical technology is paying off.
The company’s ON products have successfully penetrated more than 90 countries worldwide, including APAC, Europe, North America, Africa and the Middle East. In the near future, ZTE intends to expand its ON product portfolio to address the market needs for higher bandwidth, as well as to sustain sales growth of its optical networking product range.
The company is witnessing a rapid increase in revenue. In 2007-08, overall revenue rose by 49.8 per cent, with revenue from the wireless infrastructure business increasing by an impressive 61.7 per cent. ZTE’s performance was in sharp contrast to the rest of the industry, which witnessed low margins due to price erosion.
According to IDC, in 2007, China accounted for 42 per cent of ZTE’s total business. Revenue from the emerging markets, including Africa, grew by 111 per cent, revenue from the Asia-Pacific grew by 67 per cent, while that from the rest of the world grew even more sharply by 155 per cent. IDC attributes ZTE’s revenue growth to developing markets, where there is a big demand for increasing network capacity. For instance, in 2007, about 65 per cent of ZTE’s GSM tenders were from emerging markets.
The company is gaining ground in developed markets as well. According to ZTE’s recently released annual report for 2007, revenue from Europe and North America increased by 8.3 per cent over the year. “Sales revenue from Europe, at $4.7 billion, was 50 per cent higher in 2007 than in 2006,” says Ghosh.
Key issues
Despite the progress that ZTE has made over the past few years, questions persist about its ability to sustain the momentum over the long term. While the company has a significant advantage over most of its rivals regarding development and manufacturing costs ?? especially labour costs ?? it remains to be seen whether that advantage will be maintained as the company expands into Western markets.
In the Indian market, one of the major challenges is stiff competition. According to Vishal Malhotra, partner, global advisory services, Ernst & Young, it will be a while before ZTE can emerge as a big telecom equipment supplier in India.
Ghosh recognises this challenge. “We believe that the cut-throat competition in the Indian market has put pressure on margins, which makes business unviable at times. Moreover, there needs to be clarity and stability in policies at the national level, as lack of clarity makes it difficult for us to plan and strategise for the future,” he says.
All in all, while ZTE has made significant headway in the Indian and global markets, what is now important is sustaining the growth momentum. The company’s ability to do so will go a long way towards determining whether it establishes a leading presence in the telecom equipment sector over the next five to ten years.
