Matt Walker is a principal analyst in Ovum's Network Infrastructure practice. For more information visit www.ovum.com/
Huawei, ZTE leading vendor finance wars
Most governments help local companies export their wares. One technique is to offer attractive financing to their overseas customers. This is common in telecom, especially in emerging markets. Some vendors, notably Cisco, also maintain their own customer financing programs. Chinese government finance has tilted the market, though, due to the vast pool of funds and deal sizes.
Huawei and ZTE have benefited, as many sizable customers have proven willing to take on loans tied to equipment purchases. Notable recent deals include DiGi (Malaysia), Globe (Philippines), Megafon (Russia), Etisalat (UAE), America Movil (multi-country), Tele Norte (Brazil), and Reliance (India).
As the capex climate remains tight, vendor financing should be appealing. To thrive in this environment, rival vendors may need their own financing tools, whether government-assisted or not.
The Chinese government, in helping local vendors grow globally, is keeping with industry tradition. In the 1990s, when telecom was bound tighter to the state, North American and European officials often lobbied actively for export deals. Export loans often came into play. During the bubble, vendor-run financing became important, but the high default rate turned the industry against vendor financing.
Some vendors still offer financing, though. Cisco Capital may be the biggest example, even if its deep cash reserves make it an exception. More common, though, is government-facilitated vendor financing. Ericsson has the Swedish Export Credit Corp, for instance, and won awards in 2010 for four separate Ericsson deals it financed. Nokia/NSN has Finnerva for financing. US-based vendors sometimes turn to the US Ex-Im Bank. But these are generally small deals.
What’s different in China is the scale. The loans tend to be spread across multiple years, and multiple product lines or projects, and are often enormous in size. America Movil and Reliance have both signed loan agreements for $1 billion (€765 million) or more with the China Development Bank (CDB), for instance; these are tied to Chinese vendor equipment purchases. Notably, these loans are guaranteed by “policy banks” such as the CDB, not the vendors.
Policy bank loans are designed to “explicitly support the government’s policy objectives.” (See the February 2012 Inter-American Dialogue report, The New Banks in Town: Chinese Finance in Latin America.) The CDB’s president noted last year that through its support for Chinese tech companies such as Huawei and ZTE, the CDB has “become the principal source of finance of our country’s overseas investments.”
Government-facilitated bank financing is used selectively, as a supplement to other tactics. For big deals in emerging markets, vendor-arranged financing can often be a key factor. Moreover, the last two to three years have been tough for carriers funding large capex projects, and times will remain tight (see Prepare for Slower-growing Telecom Revenues and Capex, January 2012). Carriers are looking at many ways to lower their capex burden: network sharing, joint procurement, equipment leasing, pay-as-you-grow pricing, and yes, vendor financing.
Huawei and ZTE on a tear
Over the last decade, Huawei has grown tremendously. In 2000 it was virtually unknown outside China. By 2010 it had grown to rival Ericsson as the biggest telecom vendor. ZTE hasn’t reached that status, but is at the top of a second tier of vendors with around 5% of the network infrastructure market globally (including services). Huawei’s share is roughly triple that. Chinese vendors are driving the market.
Their growth is due to a range of factors; cheap prices were important in the early years, often needed to get in the door. But innovation, service, and reliability are the driving factors now. They are now accepted into nearly all tier-1 networks worldwide. Huawei in particular has proved itself to many of the most demanding customers around. Vendor financing has also helped win quite a few large deals, and turned some small deals into big ones.
Whether Chinese vendors’ access to government-subsidized loans is “fair” or not, rival vendors need to accept it - it’s a market reality. And deal activity seems, anecdotally, to have increased in the last year, as the two vendors have been fighting harder for incremental growth. Growth is getting tougher for them, as they both aspire publicly to improve their profitability, and “walk away” from unprofitable deals. They are battling each other more directly than usual; as Huawei’s head of solutions said recently, “ZTE is a huge threat for us.” As the vendor competitive landscape continues to shift, vendor financing seems likely to play a part. Vendors without the ability to help arrange financing may be disadvantaged.
Given that many western suppliers remain strapped for cash and can’t afford the risk of financing, they will have to be ready with a sales pitch that: 1. highlights downsides of Chinese bank financing; 2. avoid[s] bidding wars for projects that require financing, as the Chinese vendors have access to extremely deep pockets; and 3. focus on their many other capabilities (for instance, professional services or management capabilities).