Telecom's China Syndrome
The inclusion of Huawei Technologies Co. Ltd. as a primary supplier for in BT Group plc's (NYSE: BT; London: BTA) 21st Century Network initiative is being viewed a huge step forward into the global marketplace for China's top telecom vendor – and other Chinese telecom vendors by extension.
There's no doubt that Huawei is making exceptional progress in its efforts to enter the international telecom arena, and that China's other big equipment vendors – UTStarcom Inc. (Nasdaq: UTSIE) and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) – are branching out beyond their home market as well.
The emergence of China's Big Three is ratcheting up the fear, uncertainty, and doubt among established incumbent vendors – and there's no denying that a clear and present danger exists, especially for vendors that have slipped into the second tier of suppliers. Buyer perceptions of China's telecom vendors continue to improve, as demonstrated in the 2005 Telecom Equipment Market Perception Study published this spring by Heavy Reading; and the ability of China's vendors to compete aggressively on price can seem limitless.
But there are, in fact, limits to how far China's vendors can go in their price aggression, as the latest edition of Light Reading Insider makes clear. In fact, after a thorough analysis of financial and operational data for China's Big Three, we identify 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 its significantly lower labor costs. But how big is that advantage, exactly? We worked the numbers for Huawei, UTStarcom, and ZTE and found that the labor-cost advantage is not as vast as their price-cutting would suggest.
While Chinese vendors often set their prices 25 to 50 percent below incumbent vendors' to win reference customers abroad, the cost advantage held by China's vendors on the labor front is significantly less than that. This report confirms the general view that China's vendors are sacrificing profitability for market share.
Clearly, they cannot continue to do so indefinitely: It's not in their best interests, nor in the interests of the Chinese government, to subsidize foreign telecom carriers. Moreover, as China's vendors increase their sales and marketing personnel in industrial markets, their labor-cost advantage will begin to deteriorate. The bottom line is that the Chinese cannot indefinitely rely on a low-cost strategy to seize business in developed markets.
The problem for Western vendors right now is figuring out a way to withstand the immediate threat from China's telecom suppliers without engaging in a suicidal price battle. Which markets and product sectors are Chinese vendors best positioned to compete in, and which incumbent vendors are at greatest risk from that competition? We managed to uncover some interesting vulnerabilities for each of China's Big Three in terms of product portfolios and market positions – even within their home territory.
One weak spot is wireless infrastructure. Even in their home market, Huawei, UTStarcom, and ZTE combined have managed to win only around 10 percent of the mobile infrastructure contracts awarded to date. As incumbent suppliers of analog systems, Ericsson AB (Nasdaq: ERICY) and Motorola Inc. (NYSE: MOT) have remained the dominant wireless vendors in China. On the GSM front, Nokia Corp. (NYSE: NOK), Siemens AG (NYSE: SI; Frankfurt: SIE), and Alcatel (NYSE: ALA; Paris: CGEP:PA) all succeeded in winning share before Huawei and ZTE launched competing products.
China's big vendors – and particularly Huawei – certainly have a solid opportunity to establish themselves in the global telecom market. But at present, incumbent suppliers still have a chance to defend their turf.
— James Crawshaw, Contributing Analyst, Light Reading Insider
China’s Big Three Vendors Take On the World, a 36-page report in PDF format, is available as part of an annual subscription (12 monthly issues) to Light Reading Insider, priced at $1,350. Individual reports are available for $900.