Chinese vendor has been in talks with Tellabs and Ciena about potential OEM deals, according to Light Reading sources

September 29, 2005

3 Min Read
ZTE Talking to Tellabs, Ciena

ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) has held discussions with at least two big U.S telecom equipment vendors -- Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) and Ciena Corp. (Nasdaq: CIEN) -- in hopes of broadening its reach outside of China, Light Reading has learned.

A well-placed source close to Tellabs says ZTE has met with the company several times since Supercomm. It's not clear that the two firms have seriously discussed a merger, but our source says an OEM deal between ZTE and Tellabs would help both companies gain market share outside their respective home countries.

ZTE officials couldn't be reached for comment on its talks with other companies.

Tellabs could be reached, but it had nothing to say. "For competitive reasons, Tellabs does not discuss industry speculation," says Tellabs spokeswoman Ariana Nikitas.

Interestingly, both companies have left the door wide open to working together in past discussions.

"We have to learn to partner with the Chinese, especially if they can be a supplier in a supply chain and get us hardware components that are priced competitively," said Tellabs CEO Krish Prabhu in an LRTV interview this summer. "Our strategy going forward is to understand where we are good and where we can have a sustainable advantage over a low-cost manufacturer -- and where we need to partner with them either in an ODM or an OEM relationship, we will be very open to that."

Though he wasn't as specific as Prabhu, ZTE chairman Hou Weigui, in a statement sent to Light Reading last month, expressed an interest in growth outside of China. "With a well-developed overseas marketing regime, [ZTE] will be able to optimize its resource allocation and fully leverage its marketing strategies," Weigui said. "As such, we expect strong growth to continue in our international operations in the latter half of the year." (See Krish Prabhu, CEO, Tellabs .)

A former Tellabs technology supplier says that Tellabs would be wise to extend its reach worldwide to as many carriers as possible -- especially in the access market. But Tellabs isn't the only company ZTE is reaching out to; Ciena has been on the vendor's schedule as well, according to an analyst report released this morning.

Citing channel checks, Morgan Keegan & Company Inc. analyst Simon Leopold wrote today in an note to clients that "Ciena is about to ink a deal with Chinese vendor ZTE to initially distribute Ciena’s core switching and long-haul optical gear in China and perhaps other developing markets.

"While initially focused on core optical products, the relationship can be extended to all Ciena products including broadband access and data networking, and metro WDM," added Leopold. (See Ciena's Thrills and Spills.)

The news -- and a bag full of Ciena takeover rumors -- sent the vendor's shares up yesterday, then back down today.

As for ZTE, the company has made it clear that it aims to penetrate the North American market and sell to Tier 1, Tier 2, and Tier 3 carriers -- both wireless and wireline. The company has been steadily building its presence in the States and now has between 80 and 100 employees between its Dallas, New Jersey, and San Diego offices.

The company's international (non-China) revenues jumped by more than 100 percent for the first half of this year. But that's just the first part of its plan. The rest of it appears to involve some key strategic partnerhips, much like the ones it has already forged with Alcatel (NYSE: ALA; Paris: CGEP:PA) and Ericsson AB (Nasdaq: ERICY). (See ZTE Confirms Alcatel Deal and Ericsson Bets on Chinese 3G.)

According to ZTE and a report in the Light Reading Insider, the company aims to derive 40 percent of revenues from international sales in 2006 and more than half its revenues from international sales by 2008, without having to make any significant acquisitions. (See Insider Analyzes China's Big Three and ZTE: Set for Overseas Explosion.)

— Phil Harvey, News Editor, Light Reading

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