Huawei and ZTE ready to take on wireless' big league

Amid the wireless downturn, China has consistently bucked the trend, and the latest financial results from its major equipment vendors Huawei and ZTE confirmed this, as both companies reported revenues up by over 40% and stepped up plans to increase their global ranking.

Huawei was held back by a fivefold increase in financing charges as it increasingly employed vendor financing to increase its market share, but all the same, boosted full year 2008 revenue by 43% to $18.3 billion, pushing it into the top five wireless infrastructure vendors. Its net profit rose 20% year-on-year to $1.15 billion and operating margin was up 3% to 13%.

Vendor financing pushes up the figures

Huawei is using financing to fuel its own expansion, and the cost of this rose from $199 million in 2007 to $971 million in 2008, though cash flow was up from $1.17 billion to $3.08 billion. Huawei said it had signed $23.3 billion in contracts and expects to increase that to $30 billion this year. It shipped about 25 million 'mobile broadband terminals' and 20 million CDMA phones.

This shows Huawei coming within reach of the wireless giants - market leader Ericsson posted $24.47 billion sales and $1.36 billion in net income for 2008, and excluding Sony Ericsson, its margin was 8% – indicating that Huawei's reputation for aggressive pricing is not hurting its profitability relative to the sector.

Greater concern over ZTE’s margins

Meanwhile, compatriot ZTE also announced healthy financial results for its first quarter, though there is far greater concern over its margins than at Huawei. The company seeks to address this by increasing its presence in what it calls the ‘high end telecom markets’ – Europe and north America – reducing its dependence on aggressively priced systems sold to emerging markets.

It has set up a new business unit to pursue this strategy and last month announced a $15 million credit line to fund international expansion, vendor financing and new R&D.

ZTE's revenue rose 35% year-on-year to $1.7 billion, but its sales base for equipment is less geographically diverse than Huawei's and much of its leap came from Chinese 3G sales. However, these did help boost its carrier network unit by 47%, while handset revenues rose by 22%. But margins were low – net income was up 29.2%, but only reached $11.5 million.

It outlined its main R&D and business development focuses for 2009 and beyond – next generation mobile networks such as LTE-Advanced. software defined base stations. next generation optical systems and PON, IMS and operations support systems.

The big league – some players under pressure

A study by Light Reading puts Huawei in fifth position in the telecoms equipment market, in revenue terms, and expects it to reach at least fourth by year end. For 2008, its revenue across wireless and wireline networks puts it behind first placed Cisco ($39.5 billion revenue last year), Ericsson ($24.47 billion), Alcatel-Lucent ($21.97 billion) and Nokia Siemens ($19.78 billion).

Nortel was in sixth place, and ZTE seventh, ahead of Motorola. In wireless, the top four are Ericsson, NSN, ALU and Huawei. If Huawei can perform as well in 2009 as in 2008, it could overtake at least one if not two of its recession-crunched rivals.

Rethink Wireless