After a year of relative peace and growth, the wireless and wireline equipment business might be headed right into some heavy weather, thanks to Chinese equipment giant, Huawei. In my most recent column for Business 2.0, I had pointed out that a rapid consolidation in the […]

After a year of relative peace and growth, the wireless and wireline equipment business might be headed right into some heavy weather, thanks to Chinese equipment giant, Huawei. In my most recent column for Business 2.0, I had pointed out that a rapid consolidation in the number of wireless carriers was going to put pressure on the big three – Ericsson, Nortel and Lucent. In addition, Huawei is getting quite serious about the US market.

A recent report in China Daily says that the company might actually try and partner with Nortel and Lucent instead of trying to fight on its own. (Light Reading reports that now the company is backtracking from the statements made in the China Daily report.)

I am not sure what is the obvious benefit for LU or Nortel, given that they will be giving up their own market opportunities instead. I think it is a polite way of Huawei letting the rivals know – work with us, or else. Huawei executive vice president Zheng Baoyong told China Daily, “venturing into developed markets like the United States and Europe will become a significant part for our growth in the years to come.”

Muayyad Al-Chalabi who is a very knowledgable man in the ways of telecom and toils as a VP for RHK feels that in the near term, Huawei will see limited success in North America, but will take growth away from established players. He draws the parallels with auto industry and home appliances. It took a little while before prices became a determining factor and shifted growth away from North American vendors. Telecom will go through the same curve he points. I think the speed with which the price-destruction will happen will be much faster than either of the two markets. Look at the price-driven success they are having in Asia, especially in hot-telecom market of India and China. (It is planning to start a new $100 million telecom plant in India.)

According to estimates by brokerage firm Friedman Billings Ramsey, Huawei’s wireless infrastructure products are as much as 35 percent cheaper than comparable products from other, more established players. The price points being offered by the Chinese vendor are enough for even biggies like Nextel to consider it as a supplier.

Huawei is curently selling EVDO phones for about $130 and WCDMA phones about $250 which is about 30% than everyone else on the market. In addition, the company has received a $10 billion loan from Chinese government to offer vendor financing. Huawei’s agenda is pretty clear – get business and sales at any cost. We saw this happen in late 2000: vendor financing by Lucent (and Carly Fiorina) resulted in others jumping into the fray including Nortel and Cisco, leading to what I like to describe as “Self mutilation” of North American telecom industry.

The implications of Huawei are quite clear – at the risk of being early, I still think the good times are over.

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  1. Otis Wildflower Sunday, April 3, 2005

    The good times are just beginning…

    .. For consumers, that is.

    Still, where’s my 3G P910 replacement?

  2. I do not believe we should be supporting Communists!

    Down with Mao!

  3. Who’s communist?

  4. Price is not everything (because Huawei products are far inferior to those of established European and U.S. manufacturers).

    Two points:

    1. cheap stuff is fine but if that gives users technical problems they might end up with higher costs and service interuptions. As wired and wireless connectivity becomes a comodity – end users will demand reliability and that comes down to quality infrastructure. Huawei makes infrastructure equipment (blatant rip-off of Cisco and Nortel) for much lower price but with no tech support. Cash-strapped and short sighted telco operators will go down the road paved with Huawei hardware but I doubt that will be a winning strategy in the long run.

    2. If Huawei makes bad rip-offs of Ericsson phones that does not mean that many people would want to havce them. Mobile phone (in Europe) is a higly fashionable item and having the latest and the greatest phone is a matter of personal pride – I doubt that anyone would want to be seen using those phones. Samsung has started this way and it is now nr.3 manufacturer of mobile phones in Europe – still none of people I know would be caught dead with Samsung phone. They are considered to be cheap, of inferior quality and not a phone style concious user would use. in short: third world stuff. And Huawei has a very very long way to go to even come close to Samsung.

    My take: Huawei is great place for Nokia to outsource manufacturing of their phones. But Huawei own phone? No, not in this 5-year plan-period, comrades.

  5. sasha

    most people forget that honda started out as a cheap car maker and sony started out making transistors. these guys are pretty serious. they are using price to take away opportunities for western equipment makers in some of the growth markets. if they win a little in the west and take share in big growth markets like china and india, well that spells trouble

  6. The Huawei story is a great one (new company from an explosive emerging market shakes up the existing order.) But here are my questions in regards to their fabled price advantage:
    1) Everyone manufactures in China (or other low cost areas) so why is it assumed that Huawei has some sort of lock on low-cost manufacturing?

    2) In Europe and North America, they will have to pay western prices for staff, integrators etc., the same western prices everyone pays. No price advantage there!

    So how do they offer such great prices? Excellent question, shame they are not a publicly listed company. Would love to examine their financial records.

  7. Huawei is not a cell phone maker. It is a high-tech backbone equipment manufacture. And Huawei is not a state-run red company. They lost quite a few landslide bids in China to another Telecom Giant Zhongxing, now they need to make it up in the rather low-tech less competitive US.

  8. penguin, i agree it would be nice to get a look at their financials and one has to say that the model makes sense. they are leveraging their domestic market and scale for competing agressively in the overseas markets. i don’t think it is all clear with them. secondly, someone said they are not a cell phone maker. they are making handsets and everything else – which is interesting because i am not sure if that strategy is really going to work in the long run

  9. Jesse Kopelman Monday, April 4, 2005

    Sasha, Huawei may rip off Nortel and Cisco on the wireline side but their wireless equipment seems to be more advanced than offerings I have seen from Ericsson and Nokia. As for reliability, I can’t say. Om, if making handsets and network equipment is a bad strategy, what do you say about Motorola, Ericsson, Samsung, and Nokia?

  10. Jesse Kopelman Monday, April 4, 2005

    Penguin, if you knew how much markup there was in the network equipment side . . . The more established players could cut their prices in half and still make a nice profit, if they were efficiently run companies (big if). That’s not to say Huawei isn’t up to hanky-panky. Isn’t everybody these days?

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