Chinese vendors enjoy domestic success

Huawei, ZTE, and FiberHome have all reported their 2010 results. Collectively, the three vendors reported domestic China revenues of $15.07 billion (€10.5 billion), up 9.7% from 2009. While both ZTE and Huawei have significant device businesses, all three get the vast majority of revenues from service providers’ capex budgets. Hence, it’s hard to reconcile their surge in China revenues with the 17% decline in 2010 Chinese capex.

 

We believe this inconsistency can be explained by two factors. First, China remains a tough market for foreign suppliers, even for localized vendor Alcatel Shanghai Bell. Second, there is increased private (non-carrier) spending on carrier-grade network infrastructure in China. Government, finance, energy, transport, media/cable/broadcasting, and other vertical industries are driving this. We expect these factors to persist for some years.

 

At least three key local Chinese vendors had double-digit increases in global revenues for 2010:

Huawei and ZTE are discussed in numerous Ovum reports. FiberHome, though, usually flies under the radar. It is relatively small, publishes results only in Chinese, and is influenced by its 1974 founding as the Wuhan Research Institute of Telecommunications. That has some benefits, such as access to government R&D support, cheap financing, and a strong pipeline of skilled labor in local universities, but it also contributes to a relatively conservative corporate culture.

 

Particularly in optics, though, FiberHome is important to watch, because of its systems products, its cabling division and affiliates (including a big venture with Fujikura), and its components subsidiaries, notably WTD and Accelink. The latter went public in Shenzhen in August 2009.

 

FiberHome’s 2010 filing confirmed its tiny overseas presence: 93% of 2010 revenues were from China, from 96% in 2009. Its annual report flags internationalization as a key goal, and targets an improved marketing system to accomplish this.

 

For 2010, service provider capex in China was $39.4bn, 16.9% less than 2009. SP revenues grew 8.3% in 2010. These two factors combined to push down capital intensity (capex/revenues) in China to 26.6%, the lowest since 2006. Despite the drop, three local vendors increased their domestic revenues substantially in 2010:

 

 

FiberHome benefits from high exposure to China’s FTTx market. FTTx began to take off in China by mid-2010, and helped drive global FTTx revenues to reach the $1bn per-quarter mark in 4Q10, for the first time ever. FTTx is one of several segments dominated by local vendors in China; local vendors held 93% collective share of China’s 2010 optical transmission market, and 67% of service provider switching and routing.

 

Explaining 2010 revenue trends for Huawei and ZTE in China is trickier. These two also benefited from Chinese FTTx growth, but their drop in domestic mobile revenues was likely much larger.

 

The more likely driver is non-carrier spending on carrier equipment. Like the US, Australia, Europe, Japan, and other regions, China is ramping up spending on carrier infrastructure by non-carrier entities. These do include large private enterprises, but in China the most active non-carrier verticals are government, energy, transport, and cable/media/broadcasting.

 

Non-Chinese vendors have gotten small slices of some of these projects. For instance, NSN, Juniper, Force10, Acme Packet, Brocade, and Commscope have all announced deals in the last year in China’s non-carrier sector. However, they are fighting an uphill battle. Most of these non-carrier entities have an incentive to buy local, just as many similar entities do in countries like the US.

 

Some of that comes from government policy, but also from the mix of local vendors’ technical, pricing, and support options. The latter is key, as non-carrier entities have greater need than service providers for local technical support and systems integration. As their spending has scaled in China, local vendors are winning.