How ZTE, Huawei are hitting European rivals hard in India

The blue and yellow wires hanging from servers in a corner of the cramped conference room look like a colourful web. This unpretentious office in the heart of New Delhi belongs to Huawei, maker of telecommunication devices and software. Its India headquarters in Gurgaon, near Delhi, are also nondescript. Nothing in either location suggests that in the past year, the $32-billion (Rs 1.7 trillion; a trillion equals 100 crore) Chinese behemoth pipped Ericsson to become the world's largest telecom equipment maker.

Huawei's offices may reflect the conservatism of Chinese corporate culture, but the company's growth in India has been far from conservative. In 2011/12, Huawei was ahead of Ericsson and Nokia Siemens Network (NSN), the European telecom equipment makers which have long held the top two spots in the country by revenues. But the first few years were full of hurdles for both Huawei and ZTE, also a Chinese telecom equipment maker. European companies such as NSN, Ericsson and Alcatel Lucent had been operating in India for decades and were trusted. There was a widespread perception that Chinese products would be of inferior quality.

Huawei could not get contracts from older telecom operators. A spokesperson of a relatively new telecom operator (whose licences stand cancelled) which uses Huawei equipment, describes the Chinese company as hungry for success. He says its service delivery is superior to that of European rivals. Huawei, founded by retired military officer Ren Zhengfei, enjoys the support of the Chinese government. It has beaten the competition in most of the 100 countries where it has customers. It entered India in 2000 with a research and development centre in Bangalore, but won its first deal only in 2005 - a Bharat Sanchar Nigam Ltd tender for optical fibres. The R&D centre is now its biggest outside China.

Together, ZTE (revenues of Rs 3,049 crore) and Huawei (Rs 6,976 crore) are hitting European rivals hard in India. For example, in wireless infrastructure - a Rs 10,930 crore business in India - they jointly held a 35 per cent share in 2011/12, according to Voice and Data, a telecom industry publication.

To build relationships, Chinese managers have adapted culturally. For instance, Yao Weimin, Huawei's Vice President for Corporate Affairs, goes by the name Rajiv.

In early 2010, it was a struggle for Chinese companies to get security clearance for their equipment in India. For nine months, not a single contract was passed. But today, the Chinese companies have their hands full. A sales executive at NSN, who sees Chinese vendors as a threat, says European companies still get contracts because they are coasting along on old ties rather than matching Chinese pricing.

But now, Chinese companies may be forcing their rivals' hands. In a recent bid for a BSNL contract, ZTE is said to have undercut European companies' pricing by two-thirds. Over the past couple of years, European companies have lowered prices and started focusing on aftersales, as the Chinese do.

Zhang Wen Cheng, ZTE India's Chief Technology Officer, argues that pricing is not everything, as private operators do not base contracts only on low prices. "You need to get the technology approved," he says.

Until around 2009, the incumbents - Airtel, Vodafone and Idea - stayed away from Chinese vendors. Then Reliance Communications and Tata Teleservices tied up with Huawei and ZTE for network rollouts and devices for CDMA handsets and dongles. (CDMA is code division multiple access, a wireless protocol rivalling the popular GSM, or global system for mobile communication.)

After that, almost every new telecom operator partnered with one of the two. In 2009/10, Huawei's revenues shot up to Rs 11,000 crore, propelling it ahead of NSN and Ericsson and to the top spot.

Now, Huawei and ZTE are trying to increase market share. They won 42 per cent of the 71 circles for 3G (third generation) telecom services. Huawei's breakthrough came when it got two circles with Airtel and three with Idea. "This is a good opportunity to break into the top operators," says Cai Liquin, CEO of Huawei India.

Huawei and ZTE may have won new 3G and broadband wireless access networks in 2011, but the big challenge is to grab market share in the 2G licences to be awarded soon. Huawei was hit hardest when 122 2G licences were cancelled, as it provided about 45 per cent of the deployed base stations. ZTE accounted for another 17 per cent.

Base stations are hard to redeploy to new operators for technical and regulatory reasons. Some $1 billion worth of equipment is deployed in the country, according to some estimates. But base stations are not the whole story. For ZTE, mobile phones and dongles have helped improve market perception and operator loyalty. Both ZTE and Huawei are aiming to be end-to-end solutions providers, not just manufacturers.

Huawei calls itself a software company, and has ventured into the enterprise business with products and services such as telepresence. A bigger concern is whether Huawei's and ZTE's growth is profitable. Many, including NSN and Ericsson, say the Chinese manufacturers are bearing huge losses to gain market share. "A lot of vendors are taking hits on their balance sheets," says Mritunjay Kapur, Country Managing Director at Protiviti Consultancy. But executives at Huawei and ZTE say cheap loans from Chinese banks enable them to cut prices and grab market share.

Kapur points out that a lot of old telecom equipment is nearing upgrade time, which means more business for Huawei and ZTE. But rival companies say they do not feel threatened. "In terms of subscribers per base station, our market share is much higher," says Sandeep Girotra, head of NSN India.

But NSN's global CEO Rajeev Suri says business has become less profitable because of Chinese rivals: "Since the advent of these players, margins have come down from 40 per cent to 30 per cent."

The climb to top may have got harder, with fewer players left after licences were cancelled. But the Chinese companies are knocking on every operator's door. They are shaking off the image of poor quality products. "With the advancement of technology and the growing economy, our quality is improving," says Chinese ambassador Zhang Yan. Some market watchers concur.

Kaustav Ghosh, advisor at PwC, says: "Huawei to a great extent has been able to shed the old image."