Power shift

Telecom Asia, March, 2005 by Geoff Long

Major infrastructure contract wins by Chinese vendors and aggressive moves to court western partners suggest that the center of power in the telecom equipment market is shifting to Asia. So far price has been the main lever to win new accounts. But Asian vendors are slowly moving up the value chain toward tier-1 carriers, forcing other suppliers to reshuffle their strategies to avoid pricing wars.

Anyone doubting what a formidable competitor Chinese equipment vendor Huawei is should have been in Thailand on January 24. In a packed room that included the Thai Prime Minister and ICT Minister as well as representatives from the US, Swedish and Chinese embassies, its reputation for offering prices that few can match was on display in one of the most highly visible forums possible--an open online auction for equipment to expand CAT Telecom's CMDA network.

Even Prime Minister Thaksin Shinawatra, founder of rival mobile service Advanced Info Service (AIS), was shocked, commenting that "the winning price is much lower than my expectation." The comment is all the more flattering when you consider that AIS itself was Huawei's first major customer in Thailand and its intelligent network installation is still something of a reference for the Chinese vendor.

Huawei's bid of 7.199 billion baht came in well under the rival bids from consortia led by Motorola and Ericsson, and also well under CAT Telecom's budget of 13 billion baht for the deal.

Wake-up call

Jean-Charles Doineau, a research director with Ovum, called the Thai deal a "wake-up call" for rival equipment vendors. "What is most significant is that Huawei closed this deal at a price 46% lower than the average bid price from its competitors," he said. "This further confirms Huawei's very aggressive pricing strategy in its international operations, with a primary focus in APAC and Europe in the service provider market."

Of course rival equipment vendors are certainly alert to the presence of Huawei and other Chinese vendors, notably ZTE, in international markets these days. While their early forays abroad were into developing countries or the former Soviet bloc, nowadays the contract wins are also coming from the establishment.

Huawei, for example, is now a technology partner with UK incumbent British Telecom (BT) and is also providing softswitches for new operator EEscape, which is 49% owned by BT. Elsewhere in Europe it has won deals with Dutch mobile operator Telfort and France's second-largest ISP, Free, to name some of the more recent ones.

While ZTE doesn't have as big a profile as its Shenzhen neighbor, it's also making inroads around the globe. It's first ever deal was for an ATM network contract in Pakistan in 1997, where it beat out the likes of Siemens, Alcatel, Ericsson and NEC. But more recently it has supplied the DSL network for the Athens Olympics, which led to a further contract with Greek operator OTE, and last month signed an R&D agreement with Portugal Telecom that will see the two partners jointly bring to market new products and services.

Perhaps one reason that the Chinese vendors have risen so quickly on the international scene is that they're used to dealing in a highly competitive market at home. According to Beijing-based Norson Telecom Consulting, the rise of Huawei and ZTE raised the bar of vendor competition to unprecedented levels. In a recent research report, Norson noted that both companies leverage young and massive sales teams, maintenance personnel and R&D staff to compete with multinationals on price.

"They began their attack with traditional equipment where technology entry barriers were lowest and have progressively moved up the value chain into areas such as optical transmission, data products and wireless," the researchers noted. "As in the mainland, domestic vendors' primary competitive advantage in overseas markets is the ability to undercut their competitors on price."

But both vendors are quick to point out that price is not their only drawcard. "There was an old stereotype in international markets that thinks 'made in China' means cheap product with poor quality. But for Chinese manufacturers like ZTE, we are striving to provide our customers with high performance-price, not merely low-price products," said ZTE vice president of overseas marketing Yi Cut. "We understand that it's not easy to change formed opinion in people's minds, but currently ZTE products are developing very quickly in international markets."

Huawei is equally insistent that its deals are won with a combination of good quality and competitive price. "Actually, in many cases we didn't quote the lowest price in the bid but we still won the contracts," claimed Huawei spokesman Fu Jun. "For Chinese vendors, because of comparatively low cost human resources we naturally have price competitiveness. But low cost is absolutely not the only reason that we get market share."

Partnering for success

Of course multinationals can and do make use of China's cheaper skilled labor force themselves. Alcatel has been one of the most bullish in setting up in China, merging its various interests there in 2002 to create Alcatel Shanghai Bell (ASB), the first foreign-invested limited company in China's telecommunications sector. It also has its Asia-Pacific headquarters in Shanghai.