The boom in sales that telecom equipment makers are expecting from doing business in China may not materialize, according to the Wall St. Journal. With $10-billion to $30-million of 3G wireless sales poised to happen over the next four to five years, the business may go to Chinese suppliers such as ZTE and Huawei rather than Nortel, Lucent, Motorola or Ericsson. Here’s the story:
Bad news may be in store for Western telecommunications-equipment makers hoping to cash in on China’s expected $10 billion to $30 billion investment in new third-generation wireless networks over the next four to five years.
Manufacturers, including Motorola Inc., Lucent Technologies Inc., Nortel Networks Corp. and Sweden-based Telefon AB L.M. Ericsson, that have long dominated the Chinese market for wireless network equipment are faced with the possibility of losing sizable market share.
China is expected to try to give its own equipment makers a boost by launching its third-generation, or 3G, networks with its own technology standard, called TD-SCDMA, along with other standards. In the past 10 years, Chinese companies Huawei Technologies Co. and ZTE Corp. have been expanding aggressively in the global market and are ready to compete for 3G equipment contracts at home.
With 3G networks, already available in the U.S. and some Asian and European countries, consumers can surf the Internet, stream live television broadcasting and download songs on their cellphones. China was expected to have made a decision by now on licenses for carriers to upgrade to 3G. That hasn’t happened yet, in part because tests of the TD-SCDMA technology are taking longer than expected.
“When China starts building 3G networks, it will probably have a negative impact on Western vendors,” says Ping Zhao, an analyst at CreditSights. “Especially if they have hyped up their 3G expectations for China.”
Already, China’s delay of its 3G rollout has cost large Western telecom companies revenue. A few weeks ago, Lucent attributed much of a $500 million decline in non-U.S. revenue in its fiscal year ended Sept. 30 to China’s delay in issuing 3G licenses. When Motorola reported that its network business earned almost $100 million less in the first quarter of 2006 compared with a year earlier, Chief Executive Ed Zander told analysts that the shortfall “was largely due to delayed capital expenditures for some of our largest customers in China caused by a delay in 3G awards,” among other things. In the third-quarter conference call with analysts, Mr. Zander said the situation hadn’t improved.
Although China accounts for just a small portion of their business, it represents an important opportunity for growth, and the companies’ stock prices could take a hit. Nortel shares already are down close to 30% so far this year at $2.15 yesterday in 4 p.m. composite trading on the New York Stock Exchange, and Lucent is off about 5% at $2.53. Motorola stock is down more than 3% this year at $21.84 on the NYSE, while Ericsson’s American depositary shares are up about 13% to $38.76 on the Nasdaq Stock Market.
Market valuations for these companies vary widely. Lucent is currently trading at about 23 times per-share earnings for its fiscal year, while Nortel doesn’t have a price-to-earnings ratio because after reporting a net loss for two of the first three quarters of this year, it isn’t expected to report a full-year profit. Motorola is trading at about 13 times this year’s expected per-share earnings and Ericsson at about 16 times. That compares with about 17 for the broad Standard & Poor’s-500 stock index.
A decision on the 3G licenses may come as soon as early next year, according to people familiar with the situation. The Chinese carriers are pressuring the government to issue 3G licenses soon so they will have time to build up next-generation wireless services for the 2008 Olympic Games in Beijing, including streaming live sports events on cellphones.
Initial optimism among Western equipment-makers stems from prior experience. When China built its current wireless networks, or so-called 2G, a decade ago, they received almost all the contracts and remained the dominant suppliers of network equipment. China accounted for close to 20% of Motorola’s wireless infrastructure revenue in 2005, 12% of Lucent’s and 9% of Nortel’s, according to Lehman Brothers Global Equity Research.
This time, analysts and executives expect the first 3G license to go to a carrier willing to use China’s technology standard. “It’s sort of a symbol of national pride,” says Ms. Zhao of CreditSights.
Beijing is eager to showcase China’s technological sophistication at the Olympic Games. The other two main 3G standards, the so-called WCDMA and CDMA2000, were developed in Europe and the U.S. Although China is expected to use those technologies in its networks, the Western companies could lose market share to Huawei and ZTE, which are already selling that equipment overseas at lower prices than their Western competitors.
“If China were to successfully deploy TD-SCDMA, it would be a lost opportunity for Western vendors. Most of the equipment is likely to be supplied by the Chinese vendors, though the success of TD-SCDMA remains questionable” says Manish Goyal, an analyst at TIAA-CREF, which holds about $13.1 billion in telecom-equipment stocks, including Lucent and Motorola. Ironically, none of the Chinese carriers wants the TD-SCDMA license because it will cut them off from the rest of the world of equipment, and the technology has never been commercially deployed.
Although vendors based in North America would be likely to miss out if China opts for a home-grown standard, European vendors, including Siemens AG of Germany, Nokia Corp. of Finland and Alcatel SA of France, may win some business through their joint ventures with Chinese partners.
Some say it is still far from clear which technologies the Chinese will choose, when they will start building their 3G networks and the extent of the buildout. “It is unclear to what extent the large Western wireless equipment vendors will benefit,” says Nelson Shing, a fund manager at Nicholas-Applegate Capital Management in San Diego. “We are looking at smaller vendors that are technology agnostic and can benefit regardless of the choices made in China.” Among the big telecom-equipment vendors, Nicholas-Applegate only holds stocks of 3Com Corp. and Alcatel.
How much China will invest in 3G also remains a question. Some say that overall 3G capital investments are likely to be limited. Even though China is adding 5.5 million cellphone subscribers each month, few cellphone users outside coastal cities such as Beijing and Shanghai can afford more expensive 3G services like Web browsing and video streaming.