China, the world's largest telecom market

Monday, October 31, 2005, The Jakarta Post

Huawei Technologies Co. Ltd, China's largest producer of telecommunications equipment, invited journalists from India, Malaysia and Indonesia, including Vincent Lingga from The Jakarta Post, to observe its operations in Beijing, Shanghai and Shenzhen from Oct. 17 to Oct. 22.

The visit also coincided with PT/Wireless & Networks Comm China 2005, considered Asia's biggest industry event in Asia, and a series of workshops on the telecom industry in Beijing. The following is his report.

Theoretically, differences in countries' wages should be reflected in differences in their productivity levels and that any misalignment will be corrected over time.

However, this economic theory will not likely apply in China, with its population of 1.3 billion, at least within the foreseeable future, as the country will still be able to out-compete other developing economies in the manufacturing of almost anything that is labor-intensive.

Millions of people are still moving from the countryside to the cities. According to China's National Bureau of Statistics estimate, from 150 to 200 million surplus rural workers are adrift between the villages and the cities.

This huge pool of surplus labor explains why China's wages have been rising less quickly than productivity and why the country will remain a highly competitive factory of the world for some time.

It could take at least two decades for them to be absorbed by industry and, as this process takes place, it will continue to subdue wage growth and global inflation, further strengthening China's important role as a factory of the world and a huge market.

China, however, does not stop at labor-intensive manufacturing; a factory of the world. It is rapidly turning its manufacturing leadership into technological strength, as the astonishing growth in its information and communication technology (ICT) has shown.

China's early decision to deregulate the ICT sector and break up the state telecommunications monopoly into four competing firms has now turned the country into the world's largest telecom market.

China's 1.3 billion-population may overstate its true consumer demand -- it is still classified as a poor country in terms of gross domestic product (GDP), which totaled US$1.65 trillion last year.

However, measured on purchasing power parity (PPP), China's economy stood as the second-largest in the world, after the United States, with a per capita income of $5,600 last year.

China's rapidly growing middle class, generated by an annual economic expansion of over 9 percent, has been snapping up consumer electronics, mobile phones and other sophisticated telecom gadgets, including third-generation (3G) wireless phone devices.

The latest annual reports of China's National Bureau of Statistics showed that fixed-line phone penetration in China last year reached 25 percent (of total population) and mobile penetration 27 percent (GSM and Code Division Multiple Access).

The number of Internet users exceeded 100 million and broadband subscribers 45 million.

Telecoms operators

Telecom operators in China are entirely domestic and comprise two big fixed-line operators with nationwide licenses (China Telecom and China Netcom), two small players (China Satcom and China Railcom) and two mobile carriers (China Unicom and China Mobile).

China Mobile operated a GSM network with 222 million subscribers as of last year and China Unicom also offers both GSM and CDMA with 84 million and 28 million subscribers, respectively, as of last year.
However, foreign ITC equipment vendors are well entrenched in China thanks to the opening early on the domestic market to foreign competition.

According to a study report released last March by the International Finance Corporation, the World Bank's private-sector arm, such foreign equipment manufacturers as Motorola, Nokia, Intel, IBM and Dell are among the largest foreign investors in China and the largest exporters from China.

A recent survey on China made by the Organization for Economic Cooperation and Development (OECD) showered great praise on China's bold reforms over the past 25 years, which have allowed market forces a much bigger role in the economy and opened up its market wide to foreign competition and investment.

Over the past decade alone, China has restructured or closed thousands of state companies every year with millions of workers thrown out of jobs each year.

After two decades of reforms and privatization, only about a third of China's economy is still directly controlled by the government through state companies concentrated in key sectors as utilities.

The biggest positive impact of this open market competition can easily be noted in the industry of ITC equipment, which links the Internet, telephone systems and computer databases together.

"Right from the outset, the domestic market has been opened wide to international competition," Ms. Zhang Qi, a director-general at the Information and Communications Ministry, noted at a seminar in Beijing recently.

The manufacture of such high-tech products as telecom-equipment also has greatly been bolstered by multinational companies, which moved their research and development (R&D) activities to China.

China and India have been the most favored destinations for transnational companies moving their R&D centers overseas, the United Nations Conference on Trade and Development (UNCTAD) said in its latest annual Investment Report issued last month.

In China alone, the number of foreign R&D units increased from zero to 700 over the past 10 years, the UNCTAD report added.

For example, giant telecom company Motorola set up its R&D center in Beijing and Lucent technologies in Nanjing.

Even though domestic ITC equipment makers emerged from the shadow of foreign market leaders, they have won significant shares in important segments within both domestic and international markets.

Domestic makers have now gained about 50 percent of the mobile handset market, which was previously dominated completely by foreign vendors.

Huawei, China's largest telecom equipment manufacturer, held almost 45 percent of the ADSL market, while state-owned ZTE and Harbour Networks, two other domestic makers, held 16 percent and 9 percent, respectively.

Moreover, Huawei and ZTE have developed mature 3G products and are set to win a significant portion of operators' capital investment in 3G networks.

Fully supported by the Chinese government, which wants to see Chinese companies have global competitiveness, domestic vendors have steadily improved and expanded their research and development work and established partnerships with foreign suppliers.

Take for example, Lenovo's recent US$1.25 billion purchase of IBM's PC business in cash and stocks. TCL, China's second-largest handset maker, set up a joint venture with Alcatel in 2004 in the handset business, while Huawei tied up with 3Com in 2003.

Software industry

The software industry also has grown rapidly along with the telecom equipment industry. The IFC report estimated the Chinese software industry at almost $20 billion in 2003, growing at an annual rate of over 25 percent.

Currently, Japan and the United States dominate the software market, as Chinese companies still work to qualify for international standards.

China's software exports, including software outsourcing, were estimated at $3.2 billion in 2004, up from $2 billion in 2003 and a mere $250 million in 1999. The rapid expansion of software outsourcing in China is the result of government support, the shifting of foreign companies' R & D centers to China.

Unlike India, where large Indian companies dominate the software outsourcing market, foreign firms moving their own software development operations to China, represent key drivers in China's outsourcing market.

These developments will, however, greatly benefit China because expertise developed at these centers will eventually diffuse into the Chinese market, thereby improving the capabilities of Chinese software outsourcing firms.

Even though Indian and Western companies have been expanding in China, Japan will likely remain China's largest software export market for the foreseeable future due to the geographic proximity of the two countries, low-cost labor in China and cultural or linguistic reasons.

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Huawei harbors global telecom ambitions

Monday, October 31, 2005

At a glance, it could be any university campus with studious young men and women continually strolling to and from their rooms carrying books and laptops. Its residents also like to call their huge compound a campus.

However, this is not a university. The vast complex is the Shenzhen headquarters of Chinese telecommunications equipment giant Huawei Technologies, where at the noon bell thousands descend from their gleaming office towers and march like factory workers past manicured lawns and soaring palm trees to the cafeterias.

The campus-type complex is like a mini-village housing graduate recruits -- engineers and scientists -- who are the main young business and technology brains behind the company's high-tech product portfolios.

Huawei's impressive headquarters facility is surrounded by a number of sleek stone and glass structures that house the company's various departments.

The headquarters and its huge research and development (R&D) center -- more than 45 percent of Huawei's 35,000 employees are engaged in R&D work -- is a testament to the company's confidence and global ambitions.

Even its main rivals in the developed countries now express great respect for Huawei's rapidly growing R&D capability, with its highly skilled, yet relatively low-paid engineers.

And, judging by Huawei's stunning track record, the strategy is working, as can be seen from the broad range of its products and market acceptability of its equipment in 90 countries around the world.

Set up in 1988 as a PABX distributor with a few thousand dollars-worth of sales, Huawei has grown into China's largest provider of telecoms infrastructure equipment and associated software.

It has more than 40 percent of the domestic market for fixed-line switchers and 55 percent of the transmission equipment market, with domestic sales totaling US$3.3 billion in 2004 and $1.70 billion in the first half of this year alone.

Through foreign partnerships and its own extensive overseas sales networks, Huawei has also turned its international business into a multibillion-dollar operation, generating US$2.28 billion in international revenues in 2004, up 117 percent from 2003, according to the company's annual report.

In the first half of this year alone, Huawei booked $2.47 billion in international sales revenues.

Impressive portfolio

Huawei has developed an impressive portfolio including wireless products (UMTS, CDMA2000, GSM/ GPRS/ EDGE and WiMAX), network products ( NGN, xDSL), optical network and data communications, value-added services (intelligent network, CDN/SAN and wireless data), and mobile and fixed terminals.

Huawei Technologies, nearly unknown before the telecoms bubble, has become an overnight sensation in its aftermath. Based in China -- where labor is cheap and engineers plentiful -- telecom demand is still rising and local companies are often favored. Huawei is now a tough competitor for Western suppliers.

However, Huawei's Director of Corporate Communications, Fu Jun, denies that his company focuses on the lower end of the telecoms equipment market.

"Our main competitive edge is our ability to meet customer requirements and, by doing that, we can still produce gross margins of between 40 percent and 60 percent," Fu says.

"Huawei possesses leading and quick service supply capabilities in the development of telecom value-added services, which deliver good platforms for service providers to implement original applications globally," noted Laurent Mayer, president of 123Multimedia, the biggest content provider in France, at a seminar in Beijing recently.

True, Huawei still stands deep in the shadows of industry heavyweights like Nokia, Lucent, Alcatel, Dell, Cisco Systems Inc. and the Nortel Networks Corporation. But its domestic and foreign sales to developed and developing markets have grown by leaps and bounds, especially over the last five years, thanks to its expanding partnerships with foreign technology suppliers.

Huawei can now legitimately claim to be a world-class telecom supplier, the most global of any Chinese company that has succeeded in penetrating what formerly resembled a gentleman's club of suppliers for mobile network infrastructure.

Last year, for example, Huawei out-competed many rivals, including Alcatel and Siemens for rights to build 3G (third-generation) wireless phone networks in the United Arab Emirates. It asserted its American ambitions by tying up with 3Com, the arch rival of Cisco.

Huawei also clinched a contract with Dutch operator Telfort for 3 G network infrastructure that could reach the value of $500 million.

The company won over $400 million in contracts in Africa from telecom operators in Kenya, Nigeria and Zimbabwe covering third-generation (3G), NGN, optical transmission, switches, routers and intelligent networks products.

Huawei has also become one of the mainstream equipment suppliers in Indonesia. It has signed a deal with PT Excelcomindo in Jakarta to provide a customized network solution covering many isolated islands.

The project will deliver GSM and GPRS services to 40 percent of Indonesia's 220 million population. The company has also set up a 3G trial network in Bali.

Accessing Western management techniques

From the outset, Huawei has been fully aware of the problem inherent within many Chinese businesses -- top-down management. It therefore early on set up partnerships with foreign management consultants that offered the best expertise in their fields: With IBM (in IT projects and process reengineering), Hay Group (in human resource management), PricewaterhouseCoopers (in financial management) and Germany's Fraunhofer Gesellschaft (in production management and quality control), to ensure a world-class performance by Huawei in all areas of its business.

This leaves nearly half of the company's 35,000 staff free to focus on technology R&D and a further third on sales, marketing and customer service, with about 11 percent of staff working on the production floor.

This ratio of resource allocation and Huawei's investment in R&D, which takes up at least 10 percent of its revenues, is considered by most analysts as the most appropriate for a company that focuses on high-tech and knowledge-based products, such as telecom equipment.

Huawei looks overseas for research and development expertise as well as sales. It set up a big software development center in Bangalore, India -- the software hothouse of Asia -- a research center for advanced mobile technology in Stockholm, Sweden, and two other R&D facilities in Silicon Valley and Dallas, Texas.

The R&D center in Bangalore, designed to tap into India's huge pool of highly skilled workers, already employs almost 1,000 on advanced research and development in telecommunications and networking solutions, especially 3G systems, said Huawei's senior vice president Liu Xinsheng.

The facility also conducts software testing for mission-critical resources and delivers world class technologies, including wideband switching, embedded systems, 3G mobile communications, wireless infrastructure, network management, data communications, intelligent networks, and IP applications like VoIP.

Competing in China has not, as some outside analysts believe, been all that easy. Ever since market reforms and deregulation were introduced into the market, numerous foreign vendors have entered the Chinese market, establishing local production and R&D facilities and hiring local staff for sales and marketing.

"We created from the outset a level playing field for all market telecom equipment vendors," asserted Ms Zhang Qi, a director general at the information and communications ministry at a seminar in Beijing on Oct. 20.

And, of course, Huawei was not the only domestic company to seize the opportunities offered by a booming telecommunications market as a clutch of other Chinese companies have entered the fray as well, including state-owned ZTE Corporation, now the second-largest vendor.

The telecom operators themselves have changed beyond measure. No longer content to follow slavish central directives, they are locked in a fierce battle to deliver real value to their consumer and business customers, and expect their suppliers to be key partners in the process. (Vincent Lingga)