Cautious spending on the part of China's telecom carriers hit ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) during the third quarter, it said yesterday, as the equipment vendor saw profits fall by 27.4 percent.

According to Chinese news agency Xinhua, ZTE reported net income of 154.83 million yuan renminbi (US$19.1 million) compared with CNY213.17 million ($26.3 million) in the third quarter of last year, while revenues rose to CNY4.73 billion ($583.5 million) from CNY4.56 billion ($562.5 million).

ZTE's share price was down 0.88 percent to HK$22.60 (US$2.91) on the Hong Kong Stock Exchange in morning trading.

While the vendor continues to see strong international sales, that growth was outweighed by restrained spending from operators at home. "During the quarter under review, domestic carriers adjusted their capital expenditure structure in line with the progress achieved in the commercialization of 3G applications," ZTE said in a statement.

It says carrier capex in China fell by 14.4 percent from January to August compared with the same period last year, and there was a significant decline in spending on PHS, CDMA systems, and switch systems.

Heavy Reading, Light Reading's research division, recently reported that uncertainty over when the Chinese government will issue 3G licenses has caused most of China's operators to scale back their capex levels this year. The report, Telecom in China: Carrier Capex Trends, examines the spending plans of China's biggest operators and finds spending will remain flat in 2005-6.

"Almost all operators show flat or declining capex this year," write authors Ruixin Gao and David Wang. "Mobile operators have curtailed investment in existing CMDA and GSM networks in anticipation of a quick ramp-up to 3G, once licenses are awarded. Meanwhile, fixed-line operators have reduced their spending on PHS buildouts."

Recent reports suggest 3G licenses will be awarded in the first quarter of 2006 so that carriers can have services up and running in time for the 2008 Olympics in Beijing. But carrier investment ratios have also continued to shrink as operators scale back investment to go after profits and shift their emphasis away from network build-outs toward delivering new services.

"China's incumbent carriers are now in position to strictly control the cost of equipment available onstream, and consequently they tend to make investments prudently and rationally. The current market conditions clearly indicate the transformation from network competition to service competition is underway," write Gao and Wang.

"In 2004, the investment-to-revenue ratio of the Chinese telecom industry was 38 percent, compared with 45 percent in 2002 and 43 percent in 2003. The drivers of growth are changing – i.e., growth is becoming less dependent on the increase of capital investment in this industry."

Table 1 shows the investment levels of China's top four carriers, {dirlink 5|31}, China Unicom Ltd. (NYSE: CHU), {dirlink 5|33} (NYSE: CHA), and {dirlink 5|32} (NYSE: CN; Hong Kong: 0906). China Telecom, for example, cut capex by 5.4 percent last year. Table 1: Investments by China's Top Four Carriers

ZTE isn't the only one to suffer. {dirlink 2|9} (NYSE: ALA; Paris: CGEP:PA), which reported its third-quarter results today and a 9 percent year-on-year increase in revenues, has lowered guidance for full-year operating margins from 10 percent to 9 percent. (See Alcatel Reports Q3 Results.) "The strong seasonal sequential growth will be somewhat mitigated by the softness of the Chinese market," said Alcatel's chairman and CEO, Serge Tchuruk, in a statement.

— Nicole Willing, Reporter, Light Reading