Explaining the capex disconnect in Chinese vendors’ results
For 2010, service provider capex in China was $39.4bn, 16.9% less than 2009. SP revenues grew 8.3% in 2010. These two factors combined to push down capital intensity (capex/revenues) in China to 26.6%, the lowest since 2006. Despite the drop, three local vendors increased their domestic revenues substantially in 2010:
· Huawei: up 10.7% to $9.55 billion
· ZTE: up 6.8% to $4.75 billion
· FiberHome: up 17.0% to $769 million
FiberHome benefits from high exposure to China’s FTTx market. FTTx began to take off in China by mid-2010, and helped drive global FTTx revenues to reach the $1bn per-quarter mark in 4Q10, for the first time ever. FTTx is one of several segments dominated by local vendors in China; local vendors held 93% collective share of China’s 2010 optical transmission market, and 67% of service provider switching and routing.
Explaining 2010 revenue trends for Huawei and ZTE in China is trickier. These two also benefited from Chinese FTTx growth, but their drop in domestic mobile revenues was likely much larger.
The more likely driver is non-carrier spending on carrier equipment. Like the US, Australia, Europe, Japan, and other regions, China is ramping up spending on carrier infrastructure by non-carrier entities. These do include large private enterprises, but in China the most active non-carrier verticals are government, energy, transport, and cable/media/broadcasting.
Non-Chinese vendors have gotten small slices of some of these projects. For instance, NSN, Juniper, Force10, Acme Packet, Brocade, and Commscope have all announced deals in the last year in China’s non-carrier sector. However, they are fighting an uphill battle. Most of these non-carrier entities have an incentive to buy local, just as many similar entities do in countries like the US.
Some of that comes from government policy, but also from the mix of local vendors’ technical, pricing, and support options. The latter is key, as non-carrier entities have greater need than service providers for local technical support and systems integration. As their spending has scaled in China, local vendors are winning.