Bullish on China
IDG News Service 6/20/05
Sumner Lemon, IDG News Service, Taipei Bureau
In recent years, Huawei Technologies Co. Ltd., China's largest telecom equipment provider, has been seen as a rising threat to established telecom equipment makers.
However, most of the company's successes have been in developing countries, where cost was often considered the principal factor when choosing an equipment supplier. That all changed in April, when the U.K.'s BT Group PLC chose Huawei as one of eight suppliers for its ambitious 21st Century Network.
Being tapped as a supplier for the US$10-billion project, which BT will build over the next five years to carry voice, video and data traffic, was a significant win for Huawei and the Chinese telecom market in general.
"BT was the first major, Tier-one carrier to take [equipment] from China," says Duncan Clark, managing director of BDA China, a telecom consultancy.
The deal underscores the growing global importance of China's network industry. In recent years, Huawei and ZTE Corp., another Chinese telecom equipment maker, have won a number of contracts in emerging markets. Such deals helped to more than double Huawei's international revenue in 2004 to $2.3 billion, while ZTE saw its international sales jump nearly threefold to $1.6 billion.
While Chinese companies are not expected by most industry watchers to have much impact anytime soon on the fiercely competitive North American enterprise or carrier markets, the growing strength of these equipment makers will inevitably impact how key U.S. suppliers operate. This already has been seen to some extent, with 3Com Corp. forging a joint venture with Huawei and Cisco Systems Inc. taking the Chinese company to court over patent infringement.
The growth of Chinese network companies has come against a backdrop of rising high-tech exports from China to countries around the world. In 2004, such exports amounted to $327 billion, an increase of 44 percent over the previous year, according to China's Ministry of Commerce.
This could be the year when Huawei's international sales - which accounted for 41 percent of its $5.6 billion in 2004 revenue - will represent the bulk of its sales for the first time. That depends largely on when the Chinese government issues licenses to offer 3G mobile services, says Hu Yong, an executive vice president at the company. If that happens, Huawei will likely win substantial contracts for 3G equipment from Chinese operators, boosting its domestic revenue significantly, and pushing off the day when that revenue stream would be surpassed by international sales.
Even with a sizeable boost in domestic and international sales, Huawei's revenue will remain far smaller than that of major U.S.-based vendors. For example, Cisco generated $6.2 billion in revenue during its most recent quarter - more than Huawei had all of last year. However, the two companies are more closely matched in terms of manpower: Cisco has about 37,000 employees compared with Huawei's 24,000 employees.
The international success of Huawei and ZTE rests largely on their ability to undercut the prices of other equipment suppliers, BDA's Clark says. "They have very aggressive pricing and the ability to throw lots of people at R&D and sales," he says.
They also have the backing of the Chinese government, which wants to see more local technology vendors expand overseas.
To further this goal, the Export-Import Bank of China last year granted export financing, a tool commonly used by governments, worth $600 million to Huawei and $500 million to ZTE over three years. In addition, Wang Xudong, China's minister of information industry, earlier this year announced plans for additional preferential policies, including bank loans and credit insurance, to support the international expansion of local telecom vendors.
But financing is just one part of the picture. The Chinese government wants to see local companies play a bigger role in developing and setting international standards for telecom and network technologies. An example is Time Division Synchronous Code Division Multiple Access (TD-SCDMA), a 3G mobile standard that was largely developed in China.
Observers don't expect TD-SCDMA to be widely deployed when Chinese operators eventually roll out 3G services. However, development efforts have played an important industrial role, helping to boost the development and sophistication of Chinese vendors.
Not all of these efforts have been successful. Last year, controversy over a Chinese wireless LAN standard based on a homegrown security protocol, called WLAN Authentication and Privacy Infrastructure, nearly provoked a trade dispute between the U.S. and Chinese governments.
That controversy, which centered on licensing requirements that favored local vendors, was ultimately resolved during bilateral trade talks.
While Huawei and ZTE have made significant gains in recent years, their influence is limited, Clark says. The companies have been able to put pressure on weaker players, but they are still a long way off from posing a significant threat to top vendors such as Cisco, he says.
Even so, smaller Chinese network vendors, such as Harbour Networks Holdings Ltd. and Maipu (Sichuan) Communications Technology Co. Ltd., are looking overseas for growth. Harbour Networks specializes in access equipment, such as DSL access multiplexers; switches and routers; and optical transport equipment. Maipu primarily sells routers.
"They can produce products on par with larger domestic players such as ZTE and Huawei, but they have much narrower product ranges," says Wang Wei, an analyst at Norson Telecom Consulting.
In 2004, international sales accounted for 8 percent of Harbour Networks' $92 million in revenue, according to Andrew Tang, the company's CTO and vice president of corporate strategy and business development. Most of the company's international sales come from Japan, where major banks and telecom operators use its products.
"They've started to realize that the technology of Chinese companies is really getting up to speed with their locally produced goods," Tang says.
Analysts say Harbour and Maipu have had less impact outside of China than Huawei and ZTE.
"They have not been able to replicate the success of Huawei and ZTE overseas," Wang says, adding that both companies have been limited to selling network gear to customers in Asia.
No Chinese net vendors have had much success in the U.S., and they do not seem poised to make big inroads there anytime soon.
"Right now, we are focused on developing countries," says Meggie Liu, general manager of Maipu's International Business Department, noting that 10 percent of the company's $48 million in 2004 revenue came from international sales.
Her company has no plans for a major push into the U.S., in part because of Cisco's dominant position, she says.
Some of the top Chinese vendors do expect to compete for business in the U.S. someday. There was a special ChinaTel Forum at this month's Supercomm in Chicago, where Huawei, ZTE and other representatives spoke.
"There are a lot of suppliers in the U.S.; this is a very competitive market," Hu says.
Sumner Lemon is Taipei correspondent for the IDG News Service.
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