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Huawei on a roll with 3G
(China Business Weekly)
Updated: 2005-01-09 10:32

Liu Chuanzhi was the media darling on December 8, 2004, when the founder of China's top PC maker Lenovo Group signed a deal in Beijing to buy IBM's PC-making business.

But on the same day, Ren Zhengfei, founder of Huawei Technologies, China's top telecoms equipment manufacturer, also signed a landmark deal in the Netherlands to build a nationwide 3G WCDMA network in the European country.

The signing of the two deals highlights China's transformation from a technological backwater, proving that Chinese firms are not only a factory floor in the global high-tech industry.

Yet, the value of the two deals are still not comparable: the Lenovo-IBM deal is worth US$1.75 billion, while the Huawei deal is estimated at around 400 million euros.

But Huawei's deal may have a greater impact on China's technology sector.

While Lenovo remains a low-cost manufacturer, this is no longer the case for Huawei.

"Huawei's strengths are its high-quality solutions, delivered at reasonable prices, and its very aggressive approach to selling itself offshore," said Robert Clark, a principal at Hong Kong-based Protocol Research.

The deal with Dutch mobile operator Telfort BV is the first of its kind won by a Chinese firm in Europe, the birthplace of 3G telephony and a marketplace dominated by global giants such as Ericsson, Nokia, Siemens, Alcatel and Nortel Networks.

And Huawei beat foreign giants including Ericsson to win the deal.

Before that Huawei won four 3G WCDMA deals, but all were in developing countries and regions.

Also on December 8, 2004, Huawei and its North American subsidiary FutureWei, announced that US mobile operator NTCH Inc has commercially launched Huawei's next-generation CDMA 1X system in California and Arizona.

The launch represents Huawei's first commercial deployment in the United States, following successful CDMA deployments in nearly 40 countries around the world.

"The shift to developed markets is a result of Huawei's success in developing markets. Carriers everywhere are familiar with Huawei and they are less reluctant to buy Chinese-branded products," Clark said.

The Dutch deal is expected to serve as a foothold for Huawei in the European market, which could give an even bigger boost to its overseas sales.

"The European market is listed as the most significant market in the internationalization strategy of Huawei," said Deng Tao, president of Huawei's Europe branch.

Huawei's total annual revenues in 2004 are expected to be more than US$5 billion. The firm said its overseas sales in 2004 exceeded US$2 billion, almost double that in 2003.

Lea Cai, an analyst with Norson Telecom Consulting, forecast Huawei's overseas sales will grow at an average annual rate of 30 per cent from 2001 to 2008.

"We expect Huawei's overseas sales to peak in 2006 and reach US$6 billion in 2008," the analyst said.

"Basically Huawei is at the same starting point as its peers like Ericsson and Nokia in terms of their strength in 3G technology."

Unlike most other Chinese firms, privately-held Huawei is not tight-fisted about research and development (R&D) expenditure.

It spends no less than 10 per cent of its annual revenue on R&D. Its annul sales revenue in 2003 stood at 31.7 billion yuan (US$3.82 billion).

According to China's Ministry of Science and Technology, the country's total R&D spending in 2002 was just 128.76 billion yuan (US$15.5 billion).

And about 33.4 per cent of this investment were made by the government.

Huawei said it has applied for the largest number of patents among Chinese firms.

By June, 2004, Huawei had applied for 4,628 patents and obtained 1,127.

Huawei currently has a 22,000-strong global workforce, with about 46 per cent of employees working on R&D, while 33 per cent work on sales and support services, and only 12 per cent work in manufacturing.

Smart bets on R&D and a clear focus on offshore sales have helped Huawei gain on its foreign peers.

"Importantly, while foreign rivals such as Nortel, Ericsson and Lucent were distracted as they went through massive restructuring in the early part of the decade, Huawei was able to focus on the market and build new solutions," Clark said.

Unlike Lenovo, Huawei has "done a pretty good job in the internationalization of its talents," said Norson's Cai.

The firm now has more than 50 branches overseas and has established R&D facilities in the United States, Sweden, India, Moscow, Beijing and Shanghai.

Its products are now being used in more than 70 countries.

As part of its contract with Dutch operator Telfort, Huawei also agreed to set up an R&D centre in Amsterdam to focus on end-user services.

In March 2004, Huawei launched a subsidiary in Britain, which is reported to be the largest investment made by a Chinese firm in the country by then.

In contrast, Lenovo has been planning for overseas expansion for years and has suffered setbacks.

After Lenovo bought IBM's PC-making business, the firm is being hit by a lack of capable people operating its overseas business, analysts have said.

Even though previous employees at IBM's PC division will be transferred to Lenovo, that will not significantly ease the difficulties from merging two different corporate cultures, they said.

However, "Huawei has built a strong expertise and talent base" for overseas expansion, Cai said.

Zhang Ying, an analyst with Beijing-based research house Analysys International, said the 3G business will be a major opportunity for Huawei to make headway in the global market.

"The large-scale deployment of commercial 3G networks will help Huawei significantly grow its capabilities in network planning and support," Zhang said.

If Huawei can crack more European 3G markets, that would help Huawei stake out a significant share of the future 3G market at home.

Huawei's "main obstacle is still its lack of a track record in Tier One carriers and in the most advanced markets. Cracking those markets must be its priority in its offshore business now," said Clark.

The Wall Street Journal said in a report last November that Vodafone Group, Europe's largest mobile phone operator, is testing several network systems from Chinese manufacturers with the intention of purchasing equipment within the next few years.

Analysts said Huawei and its nearest domestic rival ZTE Corp are the most likely candidates.

"Sure, Huawei is certain to win some 3G contracts once licences are issued (in China): it knows the clients, it knows the market, it knows the technologies very well," Clark said.

Vodafone said it might also buy 3G handsets from Chinese manufacturers.

In November, Huawei launched two 3G WCDMA mobile phone models, the first 3G handsets made by a Chinese company.

The firm said it expects the WCDMA phones to be put into production in February.

Huawei is not licensed to make or sell mobile phones in China. But it has started selling phones overseas.

Company executives had expected sales from mobile phones in 2004 to hit US$400 million. Huawei recently filed an application with regulators to sell phones in China.

Despite its aggressive expansion into the overseas 3G market, Huawei is facing a major challenge to turn into a public firm in order to further enhance its competitiveness.

ZTE has got itself listed in Shanghai and Hong Kong, but it seems that Huawei's reportedly planned overseas listings have not gained much speed.

Huawei has been financing itself with bank loans.

On December 27, Huawei signed a financing agreement with China Development Bank (CDB) through which CDB will support Huawei's international expansion with a credit facility of US$10 billion for both Huawei and its customers abroad in the next five years.

That is just one of a slew of financing arrangement between Huawei and banks.

Huawei on November 12 secured a loan worth US$360 million from 29 overseas banks including the Bank of China (Hong Kong).

Although banks are quite interested in providing loans to Huawei, public listings should be the eventual option, analysts said.

But a complicated shareholding structure may thwart its listing plans.

Huawei used to keep quite a low-profile about its shareholding structure.

"Huawei's listing, should it choose to do one, will be very strongly subscribed. I have no doubt that the Huawei board continues to receive a lot of offers from investment bankers wanting to handle an IPO (initial public offering)," Clark said.

"Huawei has kept to itself details of its existing share ownership and structure. Certainly those will have to be clarified before it can go ahead with an IPO."

Observers said Huawei need to buy up all the shareholdings scattered in the hands of company employees to pave the way for listings.

In Huawei, every employee must buy its options.

Such an arrangement has spurred Huawei's earlier rapid rise but now it seems to have become a headache for Ren Zhengfen and his team ahead of its planned overseas listings.

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