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Graphic: Yogesh Kumar / Mint

Graphic: Yogesh Kumar / Mint

Running scared of Huawei

Running scared of Huawei

Bangalore: On 14 December, when Nordic phone company TeliaSonera AB launched a fourth generation (4G) telecom network—the world’s first—in Stockholm, Sweden, the celebrations echoed in Shenzen, China, home to Huawei Technologies Co. Ltd.

Until recently an upstart in the telecom business, Huawei had part-supplied the equipment to TeliaSonera.

Graphic: Yogesh Kumar / Mint

The 22-year-old Huawei is now the world’s second largest telecommunication equipment and services provider, after 133-year-old Ericsson AB, which, ironically, is based in Sweden.

Huawei’s president Ren Zhengfei wasn’t in Shenzen that day. He was on a low-profile visit to India, meeting customers, employees and government officials while on a firefighting mission—state-owned telco Bharat Sanchar Nigam Ltd (BSNL) had cancelled a $2 billion (Rs9,240 crore) order.

While BSNL was tight-lipped about the reasons, India’s ties with China—which swing between economic bonhomie and mutual suspicion—may have had played a role. A few days before Ren’s visit, India had announced anti-dumping duties on telecom equipment vendors including Alcatel-Lucent ADR and two Chinese companies—Huawei and ZTE Co. Ltd.

Huawei’s cheaper equipment has been partly responsible for the lowest tariffs in the world: 1 paisa per second.

With new entrants trying to carve out a niche, low tariffs have led to an escalating price war in the world’s second largest mobile phone market.

Reason for concern

In his December meetings with home minister P. Chidambaram and home secretary G.K. Pillai, Ren reiterated that Huawei was committed to the country for the long term and operated as a commercial entity, according to a spokesperson of Huawei Technologies India Pvt. Ltd, who also pointed to the company’s decade-old existence in India, having set up a research and development (R&D) lab in Bangalore in 1999.

He argued that its success in India had upset US and European rivals, who were using security as a bogey.

Huawei is a privately held company that Ren started in 1988 with a capital of $3,000, and some say the growth indicates the might of the Chinese state is behind it. Early in his career, Ren worked as a military technologist with a research institute associated with the Chinese People’s Liberation Army.

The company ended 2009 with a revenue of $2.3 billion from India, according to Justin Chen, chief operating officer of Huawei Technologies India, compared with $1.3 billion in 2008. (The company expects to end this year with $30 billion in global revenue). Its customers include Bharti Airtel Ltd, Vodafone Essar Ltd, Reliance Communications Ltd, Tata Teleservices Ltd, Uninor, BSNL and another state-owned telco, Mahanagar Telephone Nigam Ltd. That’s no mean achievement in a market that is a focus area for all equipment vendors—Ericsson, NokiaSiemens Network BV, Alcatel-Lucent, Motorola Inc., Nortel Networks Corp. and ZTE.

India is one of the fastest growing mobile phone markets in the world. In December, telcos added 19 million subscribers, taking the number of mobile phone connections in India to 525 million. Two other characteristics mark the Indian market—price and competition.

New price benchmarks

Even as telcos have been adding customers, tariffs and average revenue per user have declined sharply. Telecom executives claim that with tariffs as low as 1 paisa per second, and 12 telcos in every circle (or area in which a company is given a licence to operate), India is among the most fiercely competitive markets in the world.

Chen said such low tariffs have been possible because of players like Huawei, although he insists that it isn’t always the “lowest priced supplier".

There is a price difference between Huawei’s equipment and those of its rivals, admits Sanjay Kapoor, chief executive of Bharti Airtel (India and South Asia), the country’s largest operator by revenue and subscribers.

At the same time, “Bharti never buys any equipment based on price but more on the quality of equipment and the total cost of ownership," he added.

Airtel brought 2G (second-generation) and 3G (third-generation) equipment worth $200 million from Huawei when it launched operations in Sri Lanka. Kamlesh Bhatia, principal research analyst at research and consulting firm Gartner Inc., said Huawei has set new benchmarks in pricing, while maintaining quality. “The fact that they are making steady headway even in mainland Europe, the bastion of established players like Ericsson and Nokia Siemens Networks, is proof enough that quality of their products is beyond question," he said.

The might of the state

Rivals say Huawei’s growing share of the Indian market is also because of sweetheart financing deals it arranges for buyers.

“Huawei arranges for a seven-year loan from China Development Bank for equipment, where for the first three years operators make no upfront payment, but the company gets paid by the bank immediately," said the marketing director of a European competitor, who did not want either himself or his firm identified.

Another attempt: Justin Chen, COO of Huawei Technologies India, says the firm intends to seek government permission to start manufacturing equipment in India. An application it filed in 2004-05 was rejected. Hemant Mishra / Mint

“Huawei and other Chinese companies operate on non-commercial terms backed by the Chinese government, which is looking to get a greater market share," he said. “Unlike them, we have shareholders and regulators to respond to."

India should back its own companies, said Sanjay Nayak, CEO and managing director of Tejas Networks Ltd, one of India’s largest domestic telecom equipment firms. “While Huawei has grown both in quality and is very competitive as far as price is concerned, I wish the government provides as much support to Indian telecom companies as the Chinese government does to its players," he said.

“You cannot compete with the deep pockets of the Chinese government," said the country head of another of Huawei’s multinational competitors, who didn’t want either himself or his firm to be identified.

Huawei doesn’t see things the same way.

“While it is true that some customers might have availed finance arrangements with China Development Bank, it is done at the discretion of both the customer and the bank. Our sales are not tied to the finance arrangements," said a Huawei India spokesperson.

While Bharti Airtel’s Kapoor refuses to discuss whether his company availed such a loan, an executive at another large telco who did not want to be identified admitted that one reason his firm chose Huawei was because of “the competitive finance package they offered". In a market such as India’s, an arrangement where the vendor offers a three-year moratorium on loans translates into a competitive advantage, he added.

An executive at a consulting firm said there are other factors that cannot be ignored. “They have been investing in technology innovation, both in new emerging standards and in more power-efficient tech, just like others," said Kunal Bajaj, managing director, BDA Connect (India) Pvt. Ltd. “At the same time, on the managed services side, they have become more professional."

Some of the lobbying may lose its sting if Huawei starts manufacturing equipment in India. That could help it tackle the perception that the company dumps products in India.

Making it in India

Tejas’ Nayak said the price of equipment and services in the Chinese domestic market is higher, “which is why they have been slapped with an anti-dumping tariff". India spends more foreign exchange on importing telecom equipment than on anything else, barring crude petroleum, Nayak added, making a case for domestic manufacturing.

“We are the largest market in the world today, with teledensity still at 50% of the population," he said. “Policies should be drafted to encourage manufacturing in India by homegrown players."

Huawei did apply to the government in 2004-05 for permission to start manufacturing equipment, but this application was rejected for reasons never made clear to the company, said a spokesperson for its sales and marketing operations. He said the company intends to try its luck again.

Meanwhile, realizing that it needs to mollify local sensitivities about dumping, Huawei has announced a plan to invest $500 million over the next five years, including $200 million in a 1 million sq. ft campus for its India R&D centre, which currently operates out of Hotel Leela in Bangalore.

“We have already brought 20 acres near Whitefield (a Bangalore suburb)," said Chen. “We are awaiting clearances from local planning authorities to go ahead."

The services push

The challenge for Huawei is to offer the same kind of services that rivals do, said Gartner’s Bhatia.

“They do recognize the need to not just sell equipment, but be able to offer services like maintaining the networks," he said. “More so as carriers are increasingly leaning towards giving those two out as a single bundled contract."

While Chen doesn’t have the exact equipment sales-to-services break-up ratio for 2009 as the “figures are still being audited", services is a key contributor, he said, adding that one objective of the Indian R&D division is to address whatever gaps the company may have in this area. Huawei’s India operations employs 4,000, half of them in R&D. In India, the R&D centre focuses on software services and works with local companies.

“India is strong in software, China is strong in manufacturing and hardware," Chen said. “Together we can harness our strength to become a global player."

Lison Joseph and Shauvik Ghosh contributed to this story.


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