Huawei's Ever-Expansion Strategy May Hit a Wall, or Not

With their price advantage, and the conservative strategy of their rivals, ZTE and Huawei are confidently accelerating their expansion into European and US markets. Huawei's competitors, however, are wondering whether the expansion can continue.

Huawei management recently predicted 45% sales growth this year, totaling $23 billion (about 157 billion yuan). Ericsson, a major European telecoms firm, had a 2007 revenue of 188 billion Swedish krona (about 180 billion yuan).

Huawei and ZTE are depending on their absolute advantage of CDMA market share in Asia, Africa and South America to contribute to the maintenance of good performance in the economic downturn.

Ericsson CEO Carl-Henric Svanberg has noted Huawei’s "incredible financial advantage." At present, Huawei is regarded by Ericsson as its largest competitor. Svanberg has admitted on many occasions that Huawei has put competitive pressure on Ericsson, in particular with its "low-pricing" strategy.

However, Ericsson believes it has a stronger ability to resist the current economic environment. According to Svanberg, Ericsson has a cash flow of 30.2 billion Swedish krona (about $3.75 billion) to deal with any winter in the global telecoms industry. It holds cash, cash equivalents and short-term investments of 65.6 billion Swedish krona (about $ 8.15 billion).

According to Huawei’s 2007 performance report, , at the end of the year it had nearly $1.7 billion in cash and equivalent investments, up from $1 billion by the end of 2006.

Svanberg said that the measures taken by "new star" Huawei to ensure its rapid growth are logical, including maximum borrowing, paying stock dividends to employees, and so on, but that "it will not be so easy for them to maintain continuous growth in the future."

It is thought that the billions of dollars Huawei has borrowed from China Development Bank through the mortgage of its overseas cash receivables may become troublesome because of the financial crisis, resulting in a break in the capital chain.

Huawei's operating profit margin has fallen from 19% in 2003 to 7% in 2007 and its net profit rate has also fallen from 14% to 5%. At the same time, its relatively low asset-liability ratio, below 50% before 2005, reached 67% in 2007.

As a result of the economic situation, Huawei has had to "suspend" the sale of its stake in terminal operations. Insiders point out that this failure will have long-term affect on Huawei’s "price war", the premise of which is ample cash flow.

But Huawei’s expansion never seems to stop. On October 20, the company announced that Bell and Telus, the first and the second largest integrated telecoms operators in Canada, jointly gave their UMTS/HSPA network contract to Huawei. Ericsson, Nokia, Siemens, Nortel, Lucent Alcatel, and ZTE had all participated in the tender.

On October 15, many of ZTE’s independently developed WiMAX 16e terminals hit the U.S. market, a result of ZTE becoming a core strategic partner of Sprint, the third largest telecommunications operator in the U.S.

Chinese equipment manufacturers focus on the huge demonstration effect brought about by signing contracts with the world's top 50 operators. At the end of 2005, Huawei signed a purchasing contract with British Telecom and Vodafone, and with "the most stringent certification in Europe," Huawei earned $2 billion in the European market in 2007, a big jump from the $770 million it took in 2006.

ZTE and Huawei have also taken measures for the most difficult North American market. Huawei achieved a sales income of only $100 million in 2007 in the U.S. market. Compared to Motorola, Alcatel-Lucent, Nortel, Ericsson, Chinese operators are too small to mention. However, the current economic recession in Europe and America helps them in shifting the conditions.

In the face of the recession, telecoms operators in Europe and the United States, under the eyes of their shareholders, will be forced to reduce investment and procurement and adopt a conservative strategy. From this point of view, it is clear that unlisted Huawei has potential. With market share at this time more important than profit, operators may pay more attention to low-end products, and in this field Chinese operators�price advantage is clear.

Ten days before Huawei announced the contract signing with the two Canadian operators, Charles Martin, CTO of Huawei in North America, said now was a golden opportunity for Huawei to break into the mature North American market.

Against the backdrop of their competitors unfavorable situation in those markets, the Chinese equipment manufacturers actually do have confidence. Huawei and ZTE make most of their overseas profits in markets in Asia-Pacific and Africa, especially in the CDMA field where the European and US giants have withdrawn. According to EJL Wireless Research, a market research firm, of all the global mobile base stations contracts signed in the first three quarters in 2008, Huawei won 43% and ZTE 25%.

A considerable number of these are CDMA contracts from the African and Asia-Pacific markets. 90% of CDMA2000 contracts in the third quarter are in the hands of Chinese equipment manufacturers. Only the international telecom equipment giant Alcatel-Lucent has the strength to compete. Insiders in Huawei said, "Most of these contracts are framework ones, and the implementation cycle may be three to five years." The sales turnover will be reflected gradually in the revenue of company.

In addition to CDMA, Huawei and ZTE have chosen WiMax, seldom adopted by mainstream operators, to avoid patents of Ericsson in the field of WCDMA and LTE as well as Qualcomm in CDMA. Yuan Wei, global market director of WiMAX products for ZTE, said that in 3 years ZTE's WiMAX revenue will reach that of its current CDMA products.