Is a Bubble Building in Asia?
That's the question posed by recent news items that have drifted through the barrage of "good news" coming from Asia. Amongst the incessant announcements of new offices and contract wins (see Ciena Opens Chinese Office, China Netcom Picks Alcatel, and Asia: Biggest Growth Is Yet to Come), there are rumblings that Asia may not be the key to telecom industry salvation so many vendors seem to think it is.
During a conference call with investors this week, for instance, Mike Parton, CEO of Marconi plc (Nasdaq/London: MONI), said the Asia-Pacific region is the worst place on earth for competitive pricing pressure (see Marconi Heads for Spring Relaunch). That's reduced the opportunity for Marconi there in the near term, he indicated.
There's also talk of a glut in fiber and other components. "We think perhaps fiber and cable producers are making more than they're selling domestically in some places," says Michael Arden, analyst at research firm KMI Corp.
In a report on Furukawa Electric Co. Ltd. on November 19, Morgan Stanley analyst Toru Nagai cites a "dramatic downturn in sales and earnings" driven by ongoing expected weakness not only in the company's fiber business but also in sales of WDM components. The firm remains "skeptical" of Furukawa's guidance toward better performance in the near term, which is based in part on the progress of fiber-to-the-home (FTTH) rollouts by Japanese incumbent carrier NTT Communications Corp.
But don't hit that button yet. Industry observers say that while Asia-Pac has its own set of kinks, there's little or no danger the region will produce a North American-sized technobubble.
"It's very unlikely," says Farooq Hussain, general partner at Network Conceptions LLC, a consultancy. The region is complex, and there isn't the chance for forces to build a bubble the way they did in the West, as vendors added capacity willy-nilly for multiple customers addressing the same markets.
Hussain says there is a fiber glut in some parts of Asia, including Hong Kong and Singapore. But elsewhere there is not. Indeed, Asia has enormous holes in its infrastructure that remain unfilled, such as international links, he notes.
This isn't to say the region doesn't have its pitfalls. China, for example, deserves its reputation as a difficult market. "There's a suicidal fascination with China" on the part of American suppliers, Hussain says. That's most unfortunate for startups, he notes, because the market in China is very difficult to navigate and takes a lot of experience and special contacts. What's more, it's unlikely that Western companies such as Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT), which have been operating there for a while, will be willing to concede any market share, Hussain says.
Others agree that China's tough. Despite winning a recent multimillion-dollar contract in Japan, Movaz Networks Inc. has decided to walk away from any bids in China (see Movaz Wins in Nippon).
According to CEO Bijan Khosravi, pricing pressure from existing players Ciena Corp. (Nasdaq: CIEN) and Nortel, as well as Huawei Technologies Co. Ltd., forced Movaz out of the bidding.
"Some of their prices are so low that in some cases we believe they're below cost," Khosravi says. He claims to have 35 percent to 45 percent better margins than the established players in other markets in Asia, but he says Movaz would have lost considerable money in China despite that advantage.
At press time, Ciena and Nortel had not responded to inquiries about their pricing policies in China.
Despite the difficulties, Khosravi is bullish on other opportunities in Asia and sees no sign of the money stream drying up. He says carriers in Korea, Japan, Taiwan, and Hong Kong in particular are buying wave services to link up consumer services like DSL. As more capacity is added, more opportunities open up to add interface cards and other features to installed gear in future.
At least one other source says the key to success in Asia is knowing the markets, which differ widely from country to country. "A critical component is an Asian partnership with a local supplier," says Nan Chen, director of product marketing at Atrica Inc.
Unlike Movaz, Atrica's enthusiastic about its chances in China, although no contracts have been announced. "We feel there's a large market for us in metro Ethernet," Chen says. He thinks Atrica has the density and scaleability the government procurers are looking for.
Like Khosravi, Chen isn't worried that competition will saturate the Asian market or lead to limited opportunities. "Some deals in the region are really very large, multiple orders of magnitude over contracts elsewhere," Chen says. Part of the reason is population density -- as high as 50,000 people per quarter mile in some regions -- which adds to the size of consumer market opportunities.
If anything, Chen says, he worries more that North America will miss the broadband boat than that growth will dwindle in Asia.
"A friend of mine has a flat in Beijing on the twentieth floor. When he moved in, the Ethernet jack was right next to the phone jack," Chen says. He thinks the fact that this kind of connectivity isn't happening stateside could be more of a concern than any prospective slowdown in the Asia-Pacific region.
One observer says the key to balancing expectations is not to look to the region as a savior for the industry's woes. "Certainly anyone looking to Asia as a solution to the downturn will be disappointed," writes Richard Webb, European market analyst at Infonetics Research Inc., in an email. "The region is not going to be able to 'pull up' the global market." This is because, while there is a sizeable market for a few key providers, that market isn't open to a huge number of outsider carriers and suppliers.
Another source warns of a trap in the region as well. While North American suppliers may see Asia-Pacific as the "last bastion of hope" for immediate revenue growth, many are at risk of being drawn into a tight spot. "The fierce tussle for business amongst the suppliers has led to aggressive vendor financing arrangements, which may ultimately be quite costly for the suppliers," writes Steven Koh, director of research for Asian equities at Standard & Poor’s in Singapore, in an email.
Koh says that even though service demand is high in fixed-line and cellular markets, there's a weakness in capital funding in the region. That's making telcos exert more pressure on suppliers to reduce prices, causing margins to evaporate. "In short, equipment suppliers are in an unenviable position; damned if they do business in Asia, and damned if they don't," he says.
— Mary Jander, Senior Editor, Light Reading