Talking Point, Telecoms

Brothers in arms

Two major Chinese companies go to war – in Europe’s courts

Brothers in arms

Based in Shenzhen, feuding with ZTE in Germany, France and Hungary

Sibling rivalry is commonplace in Chinese history. One of the most famous stories takes place during the Three Kingdoms Period. Famous warlord Cao Cao had five sons. Cao Zhi was the smartest but it was Cao Pi, his younger brother, who was Cao Cao’s favourite. Although the two brothers affected fraternal love, in practice they spent most of their time trying to get rid of the other.

When Cao Cao died in 220 AD, Cao Pi took the throne and declared that Cao Zhi should be killed.

But before taking the life of Cao Zhi, who was renowned for his literary talents, the older brother said he would spare his sibling’s life if he could produce a poem on the spot, based on their fraternal relationship but without using the word ‘brother’.

After pacing for a few steps, Cao Zhi recited verse that used the metaphor of beans being cooked in a fire fuelled by beanstalks. Since beans and beanstalks come from the same root, it was meant to imply how the two brothers were seeking to hurt one another.

Cao Pi, moved to tears, decided to let his brother go.

Executives at Huawei and ZTE have probably long-forgotten the story. Since April, the two companies, both based in Shenzhen, have been at each other’s throats over mobile phone patents. After years of competing against foreign rivals like Ericsson and Nokia Siemens Network, the country’s first-and-second-largest telecom equipment makers are now facing off against each other.

What happened?

The feud started in earnest when Huawei filed lawsuits against its biggest Chinese competitor for patent infringement in Germany, France and Hungary.

Huawei accused ZTE of infringing a series of its patents related to data card and high-speed fourth-generation (4G) technology, called Long Term Evolution, or LTE.

It also said ZTE illegally used a Huawei-registered trademark on some of its own data card products sold in the three European markets, costing the company tens of millions of dollars.

ZTE quickly retaliated, filing a lawsuit the following day in China. Its court papers claim that Huawei infringed several important patents held by ZTE, including an LTE patent.

But ZTE thinks Huawei’s move had more sinister origins. Wang Jianping, ZTE’s public relations director, told Century Weekly that Huawei has the “ulterior motive of a villain,” and that its attack on ZTE was designed to undermine the smaller rival’s growth in Europe.

But why the public aggression?

The latest dispute between the two Chinese firms has caught many by surprise. After all, aren’t they both playing on the same team? As the Financial Times notes, competitors have come to see the two as “part of one big plot – a mercantilist plan by Beijing for national champions to squeeze Western rivals out of business.”

Indeed, the Shenzhen pair’s ascendency in the telecommunications industry has been nothing short of astounding. The two have proven adept at driving down costs and bringing about consolidation across the industry. They were in large part responsible for the mergers in 2006 between Alcatel and Lucent, and the network-equipment arms of Nokia with Siemens. They have also been placed at the scene for the collapse in January 2009 of Nortel, and the sale of many of its assets to Ericsson.

With $28 billion in revenues last year, Huawei is the world’s second-largest supplier of telecom network infrastructure, behind Ericsson. While ZTE lagged behind with revenues of $10.8 billion last year, it still ranked sixth, behind Alcatel-Lucent, Cisco Systems and Nokia Siemens Network.

However, for people who work at the two companies, the public feud has been a long time coming. After years of competing against foreign rivals in China, the two now clash head-on in most major overseas markets.

In emerging markets like Africa, the Middle East and Latin America, competition is especially intense. Western vendors have shown less interest in those regions but the Chinese firms have gone head-to-head. Trash-talking is common. A China Unicom executive told Century Weekly that employees of both companies often “say bad things about their rivals in front of prospective clients”.

But why file a lawsuit in Europe?

The reason, analysts say, is to derail ZTE’s growth in the region. Europe already represents an important market for the two companies as countries move to upgrade their existing mobile networks to the faster 4G LTE technology. Both Huawei and ZTE are competing to be the global 4G leader.

With that much at stake, the insults have taken on a new intensity. ZTE likes to portray Huawei as Beijing’s policy tool because Huawei’s founder, Ren Zhengfei, formerly served as an officer in the People’s Liberation Army (plenty of American lawmakers agree with this characterisation, true or not – see WiC96).

Huawei, too, calls ZTE a freeloader. Sources close to Huawei told the Financial Times that the only reason its cross-town rival has been awarded more contracts domestically is because it is a state-owned firm. Although ZTE is publicly traded in Hong Kong, it was founded in 1985 by a handful of state-owned companies affiliated to the Ministry of Aerospace Industry. And today, ZTE continues to derive most of its revenue from the Chinese market. For Huawei, it’s only 30%.

There’s also bad blood between the two over ZTE’s efforts to win more business overseas. When it comes to expanding outside China, Huawei is more aggressive, says Tian Ying, chief telecom analyst at market research firm Gartner. “ZTE mostly adopts a follower strategy.”

The accusation is also that, in some markets, ZTE will only appear on the scene after Huawei has made headway. (Some of Huawei’s rivals will enjoy the irony in that complaint).

Posing as a cheaper alternative, ZTE then tries to win business by promising similar products at lower prices, says Century Weekly.

Take data cards – the product at the centre of the current dispute.

In the data card business (a product that connects laptops to cellular networks), Huawei previously controlled about 70% share of the European market. That was until ZTE decided that it also wanted a piece of the pie, and its arrival forced Huawei to cut prices too. Data cards that used to sell for €100 are worth €15 today, says Southern Metropolis Daily.

In fact, the price war between Huawei and ZTE prompted Option NV, a Belgian maker of wireless modems, to take both the Chinese manufacturers to court in February, claiming that they were dumping wireless modems at “unfair prices” into Europe.

So how to reconcile?

Policymakers don’t like the current wrangling. According to China Business News, company executives were called into the Ministry of Industry and Information Technology (MIIT) for discussions before and after the lawsuits were filed.

According to the report, Huawei refused to budge.

But the telecom tantrum probably says something about the evolution of Chinese businesses, as they seek to expand overseas, and as their business models need to adapt in search of growth.

One interesting angle ahead is how the Chinese courts will respond, plus which of the two firm’s can best keep the government’s ear. Just because both companies have state-backing (both directly and more obliquely) doesn’t mean they cannot be at war with one another. Different ministries may pick alternate sides, too.

But it is the first time that two such prominent Chinese companies have tried to duke it out in court (and in the foreign ones too, no less). That will also make it tougher for Beijing to smooth things out behind closed doors.

“We’re going to see more of this in this industry and others,” David Wolf, a technology consultant in Beijing, told AP.

“The government will find, wow, we’ve got these national champions but now they’re trying to kill each other.”

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