In Boeing’s bitter rivalry with Airbus, it always seems that when one manufacturer is up, the other is down. The recent grounding of Boeing’s Dreamliner on safety concerns marks the latest twist in this competitive dynamic. At stake? A reputational hit that could damage Dreamliner sales and spark a migration of orders back to Airbus. Of course, not so long ago the roles were reversed when it was the European manufacturer experiencing technical problems with its own flagship, the A380.
The rivalry between Huawei and ZTE is not an exact parallel but it has some broad similarities. The two Shenzhen-based telecom equipment companies are fierce competitors around the globe. In many instances they bid head-to-head for contracts: success for one often means disappointment for the other.
But there’s at least one key difference: where Boeing and Airbus have each enjoyed periods of pre-eminence over recent years, in the telecoms rivalry Huawei seems to have led ZTE far more consistently.
And recently, Huawei has been enjoying much more than just an edge, with announcements about the prospective earnings of the two companies last month suggesting a widening gap between the two firms.
Huawei’s forecast was that its revenues for 2012 would go up 8% to Rmb220.2 billion, with net income rising 33% to Rmb15.4 billion ($2.5 billion).
But in its own preliminary forecast last month, ZTE warned investors to expect its biggest annual loss since going public in Hong Kong in 2004 – spilling red ink of about Rmb2.9 billion for the whole year. ZTE attributed its dire performance to lower revenues and declining margins, blaming the weak economic climate for lower contract fees and project delays.
Huawei also acknowledged the tough conditions, accepting too that its revenue had grown well below it own earlier target.
“Things change, when we made the prediction we didn’t know where the global economy would go for the rest of the year,” a company spokesman told media.
As if to rub it in the face of its embattled rival, Huawei also announced that it will be paying out Rmb12.5 billion in staff bonuses – news of which had envious employees from ZTE complaining to China National Radio that they “just don’t see a future” with their employer.
Huawei surpassed Sweden’s Ericsson last year to become the largest telecoms equipment maker by revenues (ZTE ranked fifth). Pole position is useful. “Industry rankings are important, especially when the telecoms industry is in a downturn, as many mobile carriers choose to work with the first or second largest equipment supplier. The lower the ranking the less advantage there is,” Xiang Ligang from CCTime, an IT portal, told China Business News.
The main reason for Huawei’s lead is that it is more competitive outside China. Since 2005, it has accelerated its expansion, including going to markets that rivals like Ericsson and Nokia Siemens had traditionally shunned. By 2006, Huawei’s sales in Africa were already exceeding $2 billion, for instance. Much of this initial sales push was based around a reputation for lower cost products. But since then Huawei’s reputation has grown. It has advanced more confidently into more developed markets too, including Europe, where it is involved in supplying more than half of the 4G telecoms networks announced so far. Two-thirds of its sales now come from markets outside China.
ZTE was slower to expand internationally. And to close the gap on Huawei, it then offered steeper discounts to lure mobile operators. It has enjoyed success in winning contracts in Asia and Africa too, but often at lower margins, which have hurt the bottom line.
“Two years ago ZTE’s market expansion was very aggressive, signing contracts despite very harsh terms and huge credit risk,” Yu Bin from Analysys told China Business Journal. “At the time, we predicted that ZTE would run into trouble. It’s like training without any strength but only relying on steroids. It’s just not sustainable.”
Also a challenge for ZTE, its arch rival has extended its lead in the mobile handset business, a segment in which ZTE has historically outperformed. In the fourth quarter of last year, Huawei shipped 10.8 million units of (mostly low-end) smartphones, or 4.9% of global market share, behind only Samsung and Apple, says research firm IDC.
In comparison ZTE ranks fifth, controlling a 4.3% share (Sony is number four).
“Huawei has a better long-term outlook (than ZTE) because it has the telecom equipment, enterprise and handsets business,” Jessie Yu, an analyst with Frost & Sullivan, told Bloomberg. “Its handsets are doing quite well and it has maintained its telecom equipment share… Overall, its revenue channels are wider than ZTE’s.”
Still, Huawei has faced obstacles of its own. In the US, it has made little headway in network sales due to Washington’s suspicions about its alleged links to the Chinese military. Despite an extensive lobbying and PR campaign, it failed to convince a Senate committee in October that the allegations are unfounded. In the latest move to quell concerns, the company’s CFO Cathy Meng (also the daughter of founder Ren Zhengfei) has vowed to be “more open and transparent with stakeholders”, announcing that Huawei will disclose more information about its shareholding structure.
Back in China, Huawei says it is excited about China’s migration to 4G technology, an upgrade that will require billions of dollars of investment.
China Mobile is currently trialling its homegrown 4G standard TD-LTE before a national rollout, although the government is yet to issue 4G licences. Still, the prospects for Huawei look good. This year alone, the telco is forecast to spend as much as Rmb40 billion on preparations for the new network.
ZTE has also been lobbying hard for 4G business and it beat bidders including Ericsson and Huawei to construct China Mobile’s 4G trial networks in Beijing and Shanghai. Liu Peng, vice president at ZTE, hopes that early entry into the TD-LTE sector will lead to greater market share in the future. Indeed China’s 4G spend will be so big, it should return ZTE to the black.
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