India compromises on Chinese telecom gear

OvumThe Indian government’s recent freeze on procurement of Chinese telecom equipment weighed heavy on the growth ambitions of ZTE and Huawei.
The freeze generated lots of debate in the industry, with Indian operators bemoaning the negative impact on their business plans. After several weeks of uncertainty, India has now adopted an interim solution requiring core network equipment to pass security testing before being eligible for purchase by Indian operators.
Indian authorities’ concerns about security risks from the use of Chinese equipment were concretized for the first time when Chinese vendors were declared ineligible for new telecom infrastructure contracts.
State-owned operator BSNL was barred from inviting Chinese vendors to bid for GSM infrastructure tenders, and private operators have faced a soft ban that has hampered their business planning in the run up to 3G.
There is much more to this issue than simply security aspects. Politics are involved and economical aspects are also significant. For instance, the current balance of trade is rather skewed in China’s favor and this could be India’s attempt to establish some reciprocity.
The ban would have derailed the strong momentum of Chinese vendors in India. ZTE’s stated 2010 goal was to be among the top three suppliers of 3G infrastructure systems in new 3G markets such as India.
Public statements by Huawei officials put the financial impact from the ban at more than $150 million in sales, so a protracted ban could have been a disaster for the two vendors.
Chinese vendors responded rapidly, lobbying hard to find a compromise. Huawei even offered to make its source code available to authorities. Chinese vendors have also re-emphasized their plans to further raise investments in India.
Indian operators also stood to be negatively impacted by the ban. Restricting vendor competition to Western vendors (Ericsson, NSN, and Alcatel-Lucent) would have risked higher equipment prices.
The ban would also have further stretched the business case for 3G in India, since several operators likely built their plans on the assumption of using Chinese equipment.
The Indian government has agreed to allow the import of Chinese-made telecom equipment if pre-certified by international security agencies such as Canada’s Electronic Warfare Associates, US-based Infoguard, and Israel’s ALTAL Security Consulting, until India sets up a dedicated certification center and test lab for this purpose.
The list of core equipment that will require security approval includes MSC, SGSN, PDSN, routers, SBC, and OSS. The government also sought to assist Indian operators’ deployment plans with a new self-certification procedure for imported telecom equipment to be performed directly by mobile operators.
But operators and vendors now face delays as they plan 3G deployments in time to launch services late this year. Huawei and ZTE will have to scramble to get their equipment certified by the international agencies.
Even in the best-case scenario, the entire process could take around a year, since the certification testing process is time consuming. Huawei and ZTE must also prepare for certification at the proposed Indian labs, which would involve a much longer timeframe.
Operators opting for the self-certification path will have to reserve funds for bank guarantees and provisions (to cover the risk of prosecution) that would otherwise have been invested in network expansion.
These financial provisions may negatively alter operators’ deployment plans if operators need to raise cash to offset these requirements.
The decision by the Indian government can be viewed as the best possible compromise under the circumstances.
It remains good news for Huawei and ZTE as well as for the Indian operators that are already relying on their solutions and were planning to use them for future network expansion.
The bad news is that 3G deployment schedules are likely to be delayed, which could adversely affect 3G service launches.