The Huawei Factor

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.