Chinese vendors' US ambitions stalled once more

Chinese vendors have made tremendous progress in their globalization efforts. Politics, though, have hobbled their efforts to penetrate some markets. Trade disputes in India have been resolved, but the US remains tough to crack: most recently, the two biggest Chinese vendors, Huawei and ZTE, were locked out of a big deal with Sprint.

This would have been their biggest breakthrough since entering the US about 10 years ago. Despite this and other setbacks, the time is ripe for a push into the US. Unfortunately, the playing field for foreign vendors in China remains tilted, which inevitably provokes complaints from rivals.
For Huawei, ZTE, and select other Chinese vendors to succeed in the US, they may have to forgo the government support that helped them grow, and insist on a more open market. Otherwise, entrepreneurial politicians in the US will continue to raise the national security issue to exclude Chinese competition.
Chinese vendors’ domestic share was stable in recent years, until 2009
Both Huawei and ZTE were founded in the late 1980s but were tiny through the late 1990s. In the interim, foreign vendors were the incumbents. Over the last ten years, though, Chinese vendors have become dominant in many sectors domestically, and, for Huawei, increasingly, internationally as well.
Circa 2010, we consider Huawei one of four global tier-1 telecom infrastructure vendors, along with Ericsson, Nokia Siemens, and Alcatel-Lucent; ZTE is a leading tier-2 player. These positions are due to hard work and creativity, but have been enhanced by government support.
China has a clear policy goal of supporting local vendors – whether government-owned or not – through R&D subsidies, tax policy, banking support, and procurement policies of state-controlled telcos.
From 2006-8, Chinese vendors’ share of their local market had been relatively flat. Data on Huawei, ZTE, FiberHome, and Grentech indicates they collectively held about 41% of China’s vendor-directed capex in 2006 and 2007, and 38% in 2008. This share then grew rapidly in 2009, reaching 55% in CY09 and roughly 65% for the four quarters ended 3Q10.
The rollout of 3G accounts for much of this increase, as local vendors were advantaged in several ways (including the use of a local standard, TD-SCDMA). Another factor was simply that competitors dropped the ball; Motorola and Nortel failed to effectively compete.
China has many other domestic vendors that we did not include in this share analysis, for example, Datang, Potevio, and Sun & Sea; adding them would increase local vendors’ share of the Chinese market.
The US market is not impenetrable
China’s openness should be discussed alongside its trading partners. In the US, government never controlled service providers through direct ownership. That means that politicians’ influence on procurement comes in drafting regulations, making speeches, and lobbying – techniques which can be just as meddlesome as direct influence. When national security fears are raised, almost any trade restriction can be justified.
But North America’s big incumbents absolutely look abroad for suppliers. Foreign vendors have played significant roles in the US market over the last 10-15 years. The biggest optical vendor in the US is Fujitsu (Japan). NEC won and lost big positions in optical over the years, and Nokia Siemens was key to AT&T’s initial 40G buildout.
In fixed broadband, Cisco and Alcatel-Lucent (Franco-American) lead. In wireless, Alcatel-Lucent and Ericsson (Sweden) both have big positions. In services, Ericsson is important due to Sprint. The lack of progress to date by Huawei and ZTE in North America is due mostly to their focus on Europe and emerging regions.
Time for tough decisions: take a shot at 26% of global capex or hold tight to 13%?
Governments often support fledgling industry, but Huawei and ZTE have already captured top spots in global rankings and in 2009 had a combined 165,000 employees and $30bn in revenues. At this point, they hardly need direct government assistance.
But there is nothing unique to China about corporations wanting to keep their special status, long after they need the initial boost; Boeing, GM, Halliburton, and dozens of other US companies lobby endlessly for special favors from the US government.
While Chinese vendors have their critics, few would dispute that they have been a boon to the industry over the last few years, with increasingly innovative products. But there’s a perception that they are upsetting the status quo overseas, while preserving it at home.
Despite the status quo’s power, what matters is that the US market remains far larger than China’s. Over the next five years, North American telco capex will total about $402bn, twice that of China. Huawei’s share of North American capex in 2009 was in the 1-2% range, which it clearly would like to grow.
If Huawei and other Chinese vendors want to get a real shot at the US market, though, and its 26% of 5-year global capex, China’s government will need to proactively start leveling the playing field for foreign vendors at home. That may be the only way to make US politicians restrain themselves from playing politics.