While many foreign telecoms equipment makers look to China as a big market to sell products, their Chinese counterparts are finding a key growth engine in overseas markets.

That odd turnabout has been accentuated by a whopping increase in overseas sales posted by China's technology stars - Huawei Technologies and ZTE.

Huawei, the country's No 1 telecoms gear vendor, last week said its sales in 2003 rose 42 per cent, to 31.7 billion yuan (US$3.83 billion), while its unaudited net income more than doubled, to exceed US$300 million.

Most of the growth was from overseas.

The privately held firm's overseas sales in 2003 reached US$1.05 billion, a 90-per-cent increase compared with the previous year.

In stark contrast, sales at home increased 29 per cent year-on-year.

ZTE, China's second-largest networking firm, said its contracted sales in 2003 totalled 25.193 billion yuan (US$3.035 billion), up 49.96 per cent year-on-year.

The value of overseas contracts in 2003 more than doubled to US$610 million.

Shenzhen-listed ZTE is expected to announce its full-year financials on March 2.

The solid increase of international sales is a clear indication the overseas expansion efforts made by Huawei and ZTE, both based in Shenzhen, a boom town in South China's Guangdong Province, have started to pay off significantly, industry observers said.

"Chinese telecoms equipment manufacturers have realized they cannot rely solely on the domestic market if they want to continue to significantly expand their revenues," said Lea Cai, an analyst with Norson Telecom Consulting.

China, as the world's No 1 mobile market and the second-largest Internet population, remains the magnet for all telecoms manufacturers.

China has 270 million mobile phone users and 87 million Internet users.

However, the domestic telecoms equipment market, besieged by global giants such as Ericsson, Nokia, Siemens and Motorola, has become increasingly competitive, which has forced Huawei and ZTE to expand their revenue streams into overseas markets.

Their overseas expansions were also partly due to delays in the roll-out of 3G (third generation) mobile services in China.

"Huawei and ZTE lag behind their foreign peers in the 2G equipment and systems, but in the 3G race they are at the same starting line with foreign rivals," Cai said.

Both Huawei and ZTE have invested hundreds of millions of dollars in the research and development of 3G technologies.

Chinese authorities have yet to indicate when licences will be awarded to operators to build the 3G networks.

Now, most industry observers believe the awarding might not occur this year.

Even if the licences are allocated, large-scale network build-out will still be two to three years away.

Huawei's vice-president, Xu Zhijun, told China Business Weekly in November that Huawei was forced to look overseas for business growth due to the delays.

The overseas 3G markets have experienced several hiccups, but most industry professionals believe the market will witness a major uptick in 2004-05.

That would be good news for Huawei, which is seeking to strengthen its presence in the overseas 3G markets.

Huawei recently secured two major 3G contracts - from Sunday Communications in Hong Kong and Etisalat in the Middle East.

The 3G supply contract with Sunday was worth US$115 million.

High-profile rise

The rise of Huawei and ZTE overseas is marked.

In 2000, combined overseas sales of Huawei, ZTE and Chinese-American telecoms equipment maker UTStarcom, accounted for only 1 per cent of their combined total revenues, indicates a research report released by Norson.

Overseas sales in 2003 accounted for 27 per cent of Huawei's revenues.

For ZTE, the figure is around 20 per cent.

Both Huawei and ZTE have adopted the low-price strategy to compete in other developing countries, as telecoms operators there are usually price-sensitive.

Huawei has said Asia-Pacific, the Middle East and North America are its top three overseas markets.

Its products have been sold to more than 40 countries and regions, while ZTE said its CDMA (code division multiple access) gears have been used in more than 20 countries and regions.

"In average, Huawei and ZTE's equipment is sold for 15-30 per cent lower than that of their foreign counterparts," Cai said.

"It (the low price) is reasonable given Huawei and ZTE's vast pool of engineering talent at home. Besides, they have paid more attention to cost controls."

Huawei now employs around 220,000 people, 46 per cent of whom are engineers.

Each year the firm allocates no less than 10 per cent of its annual sales to R&D.

Engineers at ZTE account for 45 per cent of its 150,000-plus employees.

In China, the cost of employing an engineer is just a very small portion of that in developed countries.

Typically, an engineer paid US$30,000 a year in China can make more than US$130,000 in North America.

That has made Huawei and ZTE much more competitive as engineering talent is vital to telecoms equipment makers' businesses.

Huawei is aiming to double its overseas sales again this year.

The firm hopes its overseas sales will account for 35-40 per cent of their total revenues in the future.

"Huawei is a step closer to that target," Cai said.

Norson predicts the combined overseas sales of Huawei, ZTE and UTStarcom will reach US$2.4 billion this year, accounting for 32 per cent of their total revenues.

Lehman Brothers said in November that ZTE expects overseas revenues to increase 60 per cent this year.

And the firm is aiming to increase sales to US$10 billion by 2008, half of which it hopes will come from overseas markets.

Bumpy road ahead

Wang Yuquan, an analyst with consulting firm Frost&Sullivan (China) said Huawei and ZTE's roads towards the overseas markets remain bumpy.

"The long-term prospects of Huawei and ZTE's overseas business growth are dim," he said.

"The low-price strategy has been effective in the first phase of overseas expansion for Huawei and ZTE, but it is just a makeshift arrangement."

Observers are worried Huawei and ZTE will become victims of vicious price wars - which they initiated.

A former Huawei employee, who asked not be named, said Huawei once offered less than 1 million yuan in rebates to secure a purchase order with a domestic operator.

In contrast, its foreign peers offered about 20 million yuan.

Such aggressive price cuts have squeezed rivals like Alcatel and Ericsson and helped Chinese operators save significant investments in network build-outs.

But they also dent Huawei's profit margins.

Insiders said that is one of the reasons why Huawei and ZTE are turning to the overseas markets for growth.

Besides, Huawei and ZTE have become too tech-savvy and ignored operators' needs, Wang said.

Huawei's "blunder" in its limited mobility service strategy is a typical example.

The firm dismissed Xiaolingtong as a backward technology, which it believed would not see an uptick in China.

As a result, Huawei was unwilling to commit money and R&D resources to Xiaolingtong.

However, Xiaolingtong has posted rip-roaring growth.

Huawei entered the Xiaolingtong terminal business late - around last November.

Analysts said Huawei has missed the best opportunities in the Xiaolingtong market.

"Over the long term, Huawei and ZTE should foster a keen understanding of operators' needs to win orders, instead of maintaining low-price strategies," Wang said.

When upgrading or expanding their networks, telecoms carriers usually choose suppliers to their existing networks.

Huawei and ZTE should also do more to build brands in the overseas markets and offer a package of complete solutions to overseas operators, Cai said.

Besides, the two firms should also enhance their awareness of IPRs (intellectual property rights), she said.

Huawei has been locked in an IPR dispute with Cisco, the world's largest network gear maker.

Cisco has accused Huawei of infringing upon its IPRs.

With the increasing presence of Huawei and ZTE overseas, rows over IPRs might also increase, insiders said.

For example, Cisco, which controls the largest share of the global router market, uses proprietary protocols, which are different from open standards.

Proprietary protocol refers to a protocol that an individual or organization uses, produces, or markets under exclusive legal right.

If the owner monopolizes the market, the proprietary protocol can become the de facto industry standard, as without the protocol, the latecomers' equipment would be incompatible with the existing equipment already in use.

Late market entrants usually need to pay the owners for proprietary protocols.

If latecomers' requests to buy the proprietary information is refused, they will have a very difficult time entering the market.

"It's a common practice for countries to set up barriers to protect their own technical standards," said Du Zhenhua, a professor with Beijing University of Posts and Telecommunications.

Some foreign rivals might use IPRs to block Huawei and ZTE's overseas expansions, experts said.

(Business Weekly 01/20/2004 page1)