The race is on - Editorial - Statistical Data Included

CommunicationsWeek International, April 1, 2002

As we bounce along the trough in telecoms, operators, vendors and banks are wondering where growth is going to appear first. JP Morgan recently increased its forecast for U.S. wireline capex reductions in 2002: down 32.6% from the older estimate of down 25.5%. Worse, in 2003, the bank's projected rebound of around nine percent has become a 2.7% decline. So is it Europe for growth? Not likely, given the recent capex announcements: Deutsche Telekom has lopped another [euro]1.4 billion and other operators are talking double-digit reductions. Wireless expenditure is forecast to show steady growth, but this hinges largely on 3G.

At least there has been one key event that will boost the telecoms sector: the award of the 2008 Olympics to Beijing. Chinese vendors believe the government will stimulate unprecedented capital investment in the runup to the games. ZTE, for example, believes that before 2008 there will be two major upswings in capex, peaking in 2004, by the fixed-line operators.

It remains to be seen whether the current restructuring, which reduces the big six operators to four--China Telecom South, new China Netcom, China Mobile and China Unicom--will provide the growth vendors are anticipating. The massive project shows no sign of an early conclusion, and China Telecom's subsequent navel-gazing has precipitated a real drop in network sales in both fixed and mobile.

Although the China Telecom situation is unique in terms of a dampener on capex, other factors in the Chinese market are familiar to the rest of the world. in the late Nineties, 15 or so national and regional long-haul backbone networks were deployed, but utilization has subsequently proved to be less than 10%. This has sent the operators seeking new growth areas in their business, which include building out the connectivity in more cities and broadband access.

So far, there has been a mixed response by foreign vendors after a flurry of deal announcements in 2001. Ericsson has predicted demand to slow for 2002, despite almost $3 billion in sales last year, a 22% increase over 2000. Nokia said its first quarter sales had dropped by 25%. However, Alcatel Shanghai Bell is still signing contracts, and Cisco Systems believes sales should pick up in the second quarter, but it is relying more on the enterprise router market, in particular sales to banks in China. But despite having 57% of the high-end router market and 34% of the low-end market, Cisco will be fighting hard to remain dominant as the Chinese Government champions domestic talent to win the networking race.

According to Beijing-based Consultants BDA, domestic vendors are being supported by China's State Development and Planning Commission, the Ministry of Information and a so-called "863" project to develop high-end router intellectual property. Led by Huawei with its NE80 core router, Datang, ZTE and Quighua Biwei are moving to challenge. And according to one local vendor, China's R&D costs are only one-seventh of those in the U.S. or Singapore.

But are Chinese vendors immune to the market that has affected their foreign competitors?

Without doubt, there has been a significant slowdown in network sales. ZTE said transmission products are flat compared to last year. Huawei says it has market leader-ship in five of the six market segments where it has products, and it is still aiming to hit revenues of $4.2 billion for 2002 compared to $3 billion in 2001. Fu Jun at Huawei says in the past few years China has seen telecoms growth of seven times gross domestic product--not bad when your GDP is growing at around 7%. But he also predicted that the market will now be looking at increases of around the same as GDP or 7% for the next few years.

Both vendors are convinced the new Chinese operators will spend again and--encouragingly for foreign operators--both expect the WTO to give opportunities to newcomers in the domestic market.

But a number of operators have already lost millions when the Chinese government did a volte-face on foreign investment in the carrier Unicom. Although the WTO rules have broken services into basic and value-added, with the latter license easier to obtain, any player looking to offer services must still partner with a Chinese company. And it is this stipulation that has foreign operators considering China as a marathon rather than a sprint.

Simon Dux, Executive Editor