SEPTEMBER 17, 2003
PREVIOUS NEWS ANALYSIS
China Is Red Hot
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China has become a key focal point for telecom suppliers. Despite a range of pitfalls, vendors are pouring money into furthering business with China's leading carriers, even as they continue to cut costs back at their Western headquarters.
Here's a sampling of recent developments:
Yesterday, Nortel Networks Corp. (NYSE/Toronto: NT - message board) announced plans to invest $200 million over the next three years in new and improved R&D facilities in China (see Nortel Beefs Up China R&D ). To put things in perspective, Nortel spent $968 million on worldwide R&D for the first half of 2003. Nortel will start its new push in China with a 55,000-square-meter campus in Beijing, half of which will be completed by the end of 2004.
Nortel plans to double its roster of R&D employees in China to a planned census of 800 by the end of 2003. At the end of 2002, Nortel had 10,000 R&D workers worldwide. Nortel already has three R&D centers and five manufacturing/service-support divisions in China. Nortel CEO Frank Dunn said in a prepared statement that the R&D will apply to "IP-based voice and multimedia services, third-generation {3G) wireless services, next-generation networking, and other leading-edge telecom solutions."
On August 27, Alcatel SA (NYSE: ALA - message board; Paris: CGEP
A) announced it's spending $100 million on R&D in China this year. A "significant" portion of that is going toward developing 3G wireless technology. Alcatel also will increase investment in 3G wireless infrastructure.
Today, Redback Networks Inc. (Nasdaq: RBAK - message board) announced a nonexclusive partnership agreement with ZTE Corp., one of China's biggest integrators. This deal calls for ZTE to market and distribute Redback's SMS edge routers througout Asia, with a particular focus on China. Terms of the deal weren't disclosed (see {doclink 40229}). Redback has other reseller arrangements in China, but this is a step up, says spokesman Steve Schick, because ZTE is not only able to resell and support Redback's gear, it also has its own distribution network to bring into play.
Also today, Infineon Technologies AG (NYSE/Frankfurt: IFX - message board) opened a new headquarters for Infineon China in Shanghai (see Infineon Expands In China ), vowing to double its share of China's semiconductor market from 5 to 10 percent and to make its China subsidiary one of the company's largest. "It is extremely important for the success of Infineon to be involved in this fast-growing market," said CEO Dr. Ulrich Schumacher in a prepared statement.
The news above is just the tip of an iceberg that's been building for the past couple of years. Nortel, for instance, views China as a key area of telecom growth (see Nortel's Summer Abroad ). Its new R&D investment is only the latest of a long string of projects, including a large joint venture company, Guangdong Nortel.
Alcatel, via its subsidiary Alcatel Shanghai Bell, has become one of the four top sellers of telecom gear to carriers in China. According to market research firm iSuppli Corp., Alcatel Shanghai, along with Huawei Technologies Co. Ltd., UTStarcom Inc. (Nasdaq: UTSI - message board), and ZTE, account for 75 percent to 80 percent of carrier equipment sales in China.
China has several big attractions for telecom providers. It's a big market: According to iSuppli, sales of wireline carrier hardware in China will total $3.6 billion in 2003, about 7 percent of the worldwide revenues. China's wireless figures are even more impressive: iSuppli says sales of base stations and switching hardware in China will total $3.1 billion in 2003, almost 13 percent of worldwide revenues.
China's telecom markets, particularly in the areas of wireless and broadband access, are also growing faster than those elsewhere. Even in a down year, when revenues were affected by SARS and a general capex malaise (see Asia/Pac Carriers Pull Back ), leading carriers such as China Telecommunications Corp. (NYSE: CHA - message board) and China Unicom Ltd. have impressive numbers.
China Unicom, which specializes in wireless services, reported more than 80 percent year-over-year growth in operating revenues for the first six months of 2003 on September 10 (see China Unicom: Revenue Uplift ). China Telecom, which does wireline services only, showed growth on a lesser scale, reporting RMB39.536 billion (roughly US$4.7 billion) in operating revenues for the first six months of 2003, up 7.2 percent year over year. China Telecom's EBITDA margin was 58.3 percent; its net profit, RMB9.26 billion (roughly US$1.1 billion). Net profit margin was up 23.4 percent.
Figures like those are drawing attention. And there are other motivators. Analyst Jagdish Rebello of iSuppli says Chinese carriers are pushing vendors to invest in local manufacturing and R&D if they want to keep the flow of contracts coming.
Then there's the issue of lower personnel costs. "There's lots of engineering talent in China that costs about a tenth of what it does in the U.S.," says iSupply principal analyst Steve Rago. In his view, Alcatel, Nortel, and others are looking for labor savings. In addition, workers who trained on jobs in North America and Europe are finding themselves out of work, opting to return to China. These folk present a tempting alternative to paying higher salaries elsewhere.
The vendors don't acknowledge this aspect of their China campaigns -- not openly, anyway. Infineon's press release about its new China HQ even indicates that investing in China will help the rest of the company. It quotes the CEO as saying more development in China "will also help us to safeguard jobs in Germany and at our other locations."
Nortel, which has lost over half its workforce to layoffs in the past couple of years, did not directly respond to queries about how it justifies its China buildout while jobs at home continue to suffer. But the company's most recent quarterly report is clear: "We will continue to manage R&D expense according to the requirements of our business, allocating resources and investment where customer demand dictates, and reducing resources and investment where opportunities for improved efficiencies present themselves."
PREVIOUS NEWS ANALYSIS
China Is Red Hot
--------------------------------------------------------------------------------
China has become a key focal point for telecom suppliers. Despite a range of pitfalls, vendors are pouring money into furthering business with China's leading carriers, even as they continue to cut costs back at their Western headquarters.
Here's a sampling of recent developments:
Yesterday, Nortel Networks Corp. (NYSE/Toronto: NT - message board) announced plans to invest $200 million over the next three years in new and improved R&D facilities in China (see Nortel Beefs Up China R&D ). To put things in perspective, Nortel spent $968 million on worldwide R&D for the first half of 2003. Nortel will start its new push in China with a 55,000-square-meter campus in Beijing, half of which will be completed by the end of 2004.
Nortel plans to double its roster of R&D employees in China to a planned census of 800 by the end of 2003. At the end of 2002, Nortel had 10,000 R&D workers worldwide. Nortel already has three R&D centers and five manufacturing/service-support divisions in China. Nortel CEO Frank Dunn said in a prepared statement that the R&D will apply to "IP-based voice and multimedia services, third-generation {3G) wireless services, next-generation networking, and other leading-edge telecom solutions."
On August 27, Alcatel SA (NYSE: ALA - message board; Paris: CGEP
A) announced it's spending $100 million on R&D in China this year. A "significant" portion of that is going toward developing 3G wireless technology. Alcatel also will increase investment in 3G wireless infrastructure.Today, Redback Networks Inc. (Nasdaq: RBAK - message board) announced a nonexclusive partnership agreement with ZTE Corp., one of China's biggest integrators. This deal calls for ZTE to market and distribute Redback's SMS edge routers througout Asia, with a particular focus on China. Terms of the deal weren't disclosed (see {doclink 40229}). Redback has other reseller arrangements in China, but this is a step up, says spokesman Steve Schick, because ZTE is not only able to resell and support Redback's gear, it also has its own distribution network to bring into play.
Also today, Infineon Technologies AG (NYSE/Frankfurt: IFX - message board) opened a new headquarters for Infineon China in Shanghai (see Infineon Expands In China ), vowing to double its share of China's semiconductor market from 5 to 10 percent and to make its China subsidiary one of the company's largest. "It is extremely important for the success of Infineon to be involved in this fast-growing market," said CEO Dr. Ulrich Schumacher in a prepared statement.
The news above is just the tip of an iceberg that's been building for the past couple of years. Nortel, for instance, views China as a key area of telecom growth (see Nortel's Summer Abroad ). Its new R&D investment is only the latest of a long string of projects, including a large joint venture company, Guangdong Nortel.
Alcatel, via its subsidiary Alcatel Shanghai Bell, has become one of the four top sellers of telecom gear to carriers in China. According to market research firm iSuppli Corp., Alcatel Shanghai, along with Huawei Technologies Co. Ltd., UTStarcom Inc. (Nasdaq: UTSI - message board), and ZTE, account for 75 percent to 80 percent of carrier equipment sales in China.
China has several big attractions for telecom providers. It's a big market: According to iSuppli, sales of wireline carrier hardware in China will total $3.6 billion in 2003, about 7 percent of the worldwide revenues. China's wireless figures are even more impressive: iSuppli says sales of base stations and switching hardware in China will total $3.1 billion in 2003, almost 13 percent of worldwide revenues.
China's telecom markets, particularly in the areas of wireless and broadband access, are also growing faster than those elsewhere. Even in a down year, when revenues were affected by SARS and a general capex malaise (see Asia/Pac Carriers Pull Back ), leading carriers such as China Telecommunications Corp. (NYSE: CHA - message board) and China Unicom Ltd. have impressive numbers.
China Unicom, which specializes in wireless services, reported more than 80 percent year-over-year growth in operating revenues for the first six months of 2003 on September 10 (see China Unicom: Revenue Uplift ). China Telecom, which does wireline services only, showed growth on a lesser scale, reporting RMB39.536 billion (roughly US$4.7 billion) in operating revenues for the first six months of 2003, up 7.2 percent year over year. China Telecom's EBITDA margin was 58.3 percent; its net profit, RMB9.26 billion (roughly US$1.1 billion). Net profit margin was up 23.4 percent.
Figures like those are drawing attention. And there are other motivators. Analyst Jagdish Rebello of iSuppli says Chinese carriers are pushing vendors to invest in local manufacturing and R&D if they want to keep the flow of contracts coming.
Then there's the issue of lower personnel costs. "There's lots of engineering talent in China that costs about a tenth of what it does in the U.S.," says iSupply principal analyst Steve Rago. In his view, Alcatel, Nortel, and others are looking for labor savings. In addition, workers who trained on jobs in North America and Europe are finding themselves out of work, opting to return to China. These folk present a tempting alternative to paying higher salaries elsewhere.
The vendors don't acknowledge this aspect of their China campaigns -- not openly, anyway. Infineon's press release about its new China HQ even indicates that investing in China will help the rest of the company. It quotes the CEO as saying more development in China "will also help us to safeguard jobs in Germany and at our other locations."
Nortel, which has lost over half its workforce to layoffs in the past couple of years, did not directly respond to queries about how it justifies its China buildout while jobs at home continue to suffer. But the company's most recent quarterly report is clear: "We will continue to manage R&D expense according to the requirements of our business, allocating resources and investment where customer demand dictates, and reducing resources and investment where opportunities for improved efficiencies present themselves."
