Global vendors have for years fretted about Chinese rivals stealing their business. The recession is making their task even tougher.
As the industry heavyweights wilt under the impact of the global slump, the latest results from the two Shenzhen-based vendors show they\'ve barely missed a beat.
Privately-held Huawei lifted net profit 20% last year to $1.15 billion as revenue shot up 43%. It even managed to increase its net margin three points to 13% (Huawei did not disclose its gross margins), according to the KPMG-audited accounts.
With total sales of $18.3 billion, it\'s closing in on the leaders. Huawei doesn\'t issue guidance, but expects to sign $30 billion in contracts this year, up from $23 billion in 2008.
ZTE isn\'t quite in the same league, but earnings are ballooning just the same - up 21% in Q1 to $11.5 million, with sales up 35% to $1.71 billion. For the full year, revenue rose 27% to $6.39 billion, with a gross operating margin of 32.5%.
With a market cap of just under $6 billion, compared with Alcatel-Lucent\'s $5.6 billion, ZTE certainly has the confidence of investors. Alcatel-Lucent notched up nearly four times as much in sales - E16.98 billion ($22.6 billion) - and made a E1.597 billion loss.
Ericsson, the healthiest telecom vendor, posted $24.4 billion sales in 2008, up 11.3%. Net income was $1.36 billon, with an operating margin of 8% excluding its Sony Ericsson handset business.
Whereas the Chinese companies are extremely bullish, foreign players are hesitant.
The recession is one factor. As Ericsson CEO Carl-Henric Svanberg put it, \'It remains difficult to more precisely predict how operators will act in the current environment.\'
The other - and this is what really keeps CEOs lying awake at night - is that a good deal of their income comes from a small number of carriers. Alcatel-Lucent, for example, derives 40% of its sales from its ten largest customers. In the current environment, no operator will turn away from a supplier that can deliver savings direct to the bottom line.
The one area where the established vendors have a clear advantage is in providing professional and managed services. Whereas manufacturing is about scale and cost, the services segment goes to the strengths of the foreign players in their skilled and diverse workforces.
Services accounted for 23% of Ericsson\'s sales and increased 17% last year. A fifth of Alcatel-Lucent\'s revenue comes from services. For both suppliers carrier networks represented 68% of revenue.
Neither Huawei nor ZTE break out these figures, presumably because the numbers are not significant, although ZTE says 13% of topline revenue from telecom software, services and other products.
Credit available
The one area of intrigue around the Chinese vendors today is their use of vendor financing. Ericsson\'s Svanberg recently said he\'d seen a rise in demand for vendor financing, but firmly ruled out Ericsson from taking part.
However, ZTE has just obtained a $15 billion, five-year line of credit from the China Development Bank that it said was to finance its customers\' purchases.
Huawei recently told the Financial Times that it would make use of vendor financing to help customers buy its equipment. It described itself as 'acting as a bridge' between telcos and Chinese banks. That maybe the case, but last year Huawei's finance charges rose fivefold to $971 million.
Huawei declined to speak to Telecom Asia to clarify the charges, but a spokesman told the FT.com that the company followed 'standard international industry practices' in obtaining financing solutions "&brkbar; The credit line would be determined by the bank.'
Would that be the international practice that foreign suppliers followed during the tech boom‾ Lucent incurred an estimated $1.6 billion in debts, Nortel $1.4 billion and Cisco $625 million, according to one estimate. These were the kinds of miscalculation that helped push Nortel, Alcatel and Lucent into declines from which they haven't recovered.
There's no sense that the Chinese vendors have been infected with that kind of madness. But their foreign rivals can only hope.