Chinese Companies: The Dragon Whips  its Tail

Shenzhen based Chinese telecom equipment giants, Huawei and ZTE, are giving
sleepless nights to their mighty American and European counterparts. The
traditional equipment manufacturers are facing the heat, as they gear up to take
on the Chinese dragons.

In the first half of 2005, Huawei's global sales surged 85 percent to touch
$4.07 billion. More importantly, its international sales accounted for $2.47
billion or 61 percent of its total sales. Huawei added 19 new service providers
to its list of customers in 2005. The company has shown impressive growth.
Huawei's global sales reached $5.58 billion in 2004, up from $3.83 billion in
2003. Of the total sales in 2003, its international sales grew from $552 million
in 2002 to a whopping $1.05 billion in 2003, a jump of 90 percent over the
previous year. Proving its mettle in India, Huawei bagged orders worth Rs. 450
crore in 2004.

With sales worth $4.1 billion in 2004, ZTE is not far behind. The company
recorded a 169.5 percent increase in year-on-year international sales while
selling over ten million mobile handset. These giants have rebounded to secure a
place in the global market, after having marred by controversies relating to
copyright violation and price undercutting.

Eyeing the Global Trophy

The dream run of the Chinese companies touched a new milestone when British
Telecom (BT) chose Huawei as a preferred supplier of communications equipment
for its 21CN network strategy. It was indeed a recognition for a company that
started as a switch distributor in China. According to the announcement in May
this year, Huawei will manufacture, supply, and install multi-service network
access components and transmission equipment for BT. Huawei was one of the eight
companies selected by BT to participate in its $10 billion 21CN network tender.
The other companies, which share the honors include Fujitsu, Alcatel, Cisco,
Siemens, Lucent, Ciena and Ericsson. BT plans to convert it existing PSTN
network into a new multi-service IP-based network, which will carry both voice
and data. Despite being a leading supplier to BT for several years, Marconi,
failed to win a pie in the prestigious 21 CN project.

BT's
selection of Huawei could pave the way for other Chinese vendors to expand their
market.

Till sometime back, Chinese equipment vendors were selling their products
only within China. However, the recent sales figures show that a significant
portion of the revenue comes from international sales. Huawei's international
sales in 2004 stood at $2.3 billion, compared to domestic sales of $3.3 billion.
A big credit for the success of Chinese companies on the international landscape
goes to the government of China. In 2004, the Export-Import Bank of China
granted export financing of $600 million to Huawei and $500 million to ZTE over
the next three years. The money was aimed at allowing these two companies to
finance their sales of equipment to overseas operators. Additionally, Huawei
gained a $10 billion credit line from China Development Bank to finance overseas
expansion. ZTE, which raised $399 million through an IPO in Hong Kong, plans to
utilize 60 percent of the amount for overseas expansion. However, there is no
indication to suggest that Huawei is also planning an IPO.

The stigma rooted in the myth of low cost, low quality manufacturing haunts
the Chinese companies. They, however, to a large extent have been successful in
shattering the myth, which is clear from the number of orders they have managed
to grab. Chinese vendors are making all efforts to penetrate the US and the
European markets, which have been dominated by the old players. ZTE organized
the European Road Show in early 2005, starting in Turkey. It covered ten
countries in three months and showcased its new technologies and also its
ability to provide complete network solutions.

Last year, Huawei, which operates as Futurewei in the US, won its first US
contract from NTCH Inc, the US-based wireless operator for its CDMA2000 1X
wireless network.

Indications are that a strong cash flow for Huawei may mean that it would
move forward on its acquisition strategy. This is part of the Chinese government's
encouragement to the companies to expand abroad through liberal controls on
capital outflows owing to its forex reserves rising to a record $514.5 billion
in September 2004.

Competition and Controversies

Huawei and ZTE are up against the big and mighty competitors such as Lucent,
Siemens, Alcatel, Nokia, Ericsson, and Cisco. The competition is also amongst
the Chinese companies. Huawei itself is facing tough competition from ZTE. Some
of the recent contracts that were granted to Chinese companies have been
embroiled in controversy. After Huawei got the Rs 280 crore contract for eight
lakh lines in Delhi and Mumbai, ITI Ltd (which had bid with ZTE) is reported to
have lodged a formal complaint with MTNL asking it to reevaluate Huawei's bid.
The rumor mill is rife with speculation that Huawei is likely to get the BSNL
order worth $18.4 million for its GSM network. Though no vendor has come out in
the open, there are reports of a sense of dejection amongst the leading vendors
who feel Huawei has resorted to price undercutting. According to a Ramdev
Sharma, head, product marketing, Huawei Technologies, "Huawei has enabled
China's telecom operators save several billion dollars by providing cost
effective solutions with high quality, and thus helping them achieve better
return on investments. Our strategy benefits the Indian operators/service
providers and end users, and ultimately helps in the overall development of the
Indian telecom industry."

However, on the issue of price undercutting, the executive vice-president of
Huawei, Zheng Baoyong, said that the company's competitive advantage includes
its comparative low cost of labor, R&D and domestic resources. India being a
price sensitive market, the Chinese companies can hope to continue with their
winning streak. With more competition and declining tariffs, and with the talks
of a unified long distance tariff, operators are looking at reducing the capex.

The Indian Trail

The American and European vendors have largely dominated the Indian telecom
equipment market. Chinese giants, Huawei and ZTE, are out to change the
equation. Earlier, Chinese vendors were seen with suspicion, more due to
historical reasons. But that is a thing of the past. It was Huawei, which first
established its Research and Development under the name of Huawei Technologies
(I) Pvt Ltd in 1999. It was the single largest investment by a Chinese
corporation outside China. Incidentally, it is also the largest overseas R&D
center of Huawei. This was followed by the establishment of Huawei
Telecommunications (I) Pvt Ltd, the marketing arm of the company in 2001 as the
100 percent subsidiary of Huawei Technologies, China. It has partnered with HFCL
for bidding government tenders.

ZTE also started its operation around the same time partnering with ITI,
primarily for CDMA equipment and terminals. They got the transmission order from
BSNL for supplying DWDM equipment worth $30 million. ZTE also entered into
partnership with Bangalore-based United Telecom. FiberHome Technologies Group
(earlier called WRI) is also present in India. Fiber Home and Alcatel got the
order from RailTel to build its SDH /DWDM backbone network. Some of the handset
vendors, which have entered into India include China Kejian Corporation Ltd, TCL,
Hair, Amoi, Capitel and Ningbo Bird, and Konka Group. Amoi, another Chinese
mobile phones vendor, is reported to be in discussion with Reliance Infocomm.

An Eye on the Enterprise

Most of the Chinese vendors are primarily targeting the telecom
infrastructure and handset market. Except for Huawei, no Chinese vendor has made
any significant effort to address the huge enterprise market in India. The
biggest initiative on this front is from Huawei-3Com Technology, a company that
was established in November 2003 to cater to the enterprise customers. It was
borne out of the need to synergize Huawei's enterprise networking products and
brand position in the Chinese market with 3Com's product innovation, global
brand strength and extensive channel partners network worldwide. NEC and Siemens
are Huawei-3Com's strategic business partners in this venture.

Huawei's foray into enterprise business through a JV with 3Com was preceded
by a lawsuit filed by Cisco alleging that Huawei has unlawfully copied its
operating software. After about a year of legal tussle, Cisco withdrew the case.
Huawei competes with Cisco in the routers and switches market. Huawei-3Com has
launched datacom products in India, that it has been selling these directly to
corporates. The company has decided to continue with direct selling model to
corporates. The products include routers, LAN switches, security and VPN, VoIP,
WLAN, IP telecom and network. In the datacom segment, the company has direct
competition with Cisco. Huawei has around 38 percent marketshare in China and is
the leading datacom provider, according to IDC.

Cheap Handsets Not Enough

Apart from Huawei and ZTE, which are also in the handset business, there are
players such as China Kejian Corporation Ltd, TCL, Hair, Amoi, Capitel and
Ningbo Bird, and Konka and Amoi that have entered into the Indian handset
market. Handset is proving to be a difficult market for the Chinese companies
due to decline in prices of handset by leading vendors like Nokia and Motorola.

Despite the poor response, Chinese vendors are hopeful, due to explosive
growth of subscriber base in India. Most of the Chinese handset manufactures are
taking the bundling route fearing the lack of acceptability of its product in
the open market. Tata Indicom recently launched Huawei phone branded as "Indicom
Gem" which has been exclusively designed and manufactured for Tata Indicom.
On the handset front, Koreans have been more successful than Chinese largely due
to their strong branding strategy which is clearly lacking amongst the Chinese
companies.

Trust the Indians

According
to analysts and observers, despite a good response in the Indian market, most of
the Chinese vendors have not been able to show their commitment to India. They
also feel that most of the Chinese companies continue to be run by executives
from China indicating a sense of lack of trust in Indians. Some feel, putting
Indians at the helm will go a long way in instilling a sense of their
seriousness towards India. Also Chinese vendors have remained secretive about
their operations and do not share information and are not very media savvy. In
fact, very little is known about the top executives who run their show in India.

Planting For Plenty

Despite the perception, the Chinese companies are bullish about India, being
one of the largest telecom services market in the world. Both Huawei and ZTE
have aggressive expansion plan in India. Huawei plans to invest $100 million in
the next three years for the Bangalore R&D center and establish local
manufacturing center in India. The R&D center, which operates out of a hotel
in Bangalore, will soon move to its own campus. The company is awaiting
clearance from FIPB to sell its products directly. Chinese vendors have not made
much headway amongst the private GSM cellular operators and are overwhelmingly
banking on BSNL and MTNL for their business in India. In the CDMA space,
however, Tata and Reliance have given them some foothold. ZTE has also set up a
manufacturing unit at Manesar in Haryana with a total investment of $100 million
to develop CDMA wireless system, optical transmission, video broadband multi
service switches, IN systems, and handheld terminals.

The Recipe For Co-existence

Non-Chinese telecom vendors present in India should learn to be price
competitive in the age of cut-throat competition where services tariff are going
down very fast. Ultimately, it is the value that the product is delivering to
their customers which matters. It is not that Chinese companies are winning
contracts simply on price. Qualitywise also, they have come a long way which is
indicated by the major global wins they had in the recent times in Europe,
America, and Africa. Not all contracts are going to the Chinese. If price was
the sole criterion, then Nortel should not have got the contract that it won
from BSNL recently. There have been contracts where Chinese companies have
quoted more than their American and European vendors.

Sudesh Prasad