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ZTE: Banking on the TD-LTE market

June 30, 2011
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Growth in mobile data traffic has created a new and significant revenue stream for telecom operators across the world. Statistics show that the data revenue of Verizon, AT&T, T-Mobile, Vodafone and other mainstream operators has increased by an average of 30 per cent over the past year. Attention is, therefore, being given to data and broadband services, thereby creating a huge opportunity for telecom vendors.

Chinese telecom equipment manufacturer ZTE Corporation is one such player that has benefited from the surge in demand for high speed networks. Where players like Nokia Siemens Networks (NSN), Alcatel-Lucent and Motorola are running losses, the Shenzhen-based vendor has been steadily rising up the ladder, reporting increased margins quarter on quarter. According to a report by research firm Ovum, ZTE clocked a year-on-year revenue growth of 40 per cent in the quarter ended December 2010, while Juniper’s revenue grew 26 per cent, Alcatel-Lucent’s 13 per cent, Ericsson’s 11 per cent and NSN’s 0.5 per cent.

Despite its late entry, ZTE has taken rapid strides in the Indian telecom market. After establishing full-fledged operations in the country in 2003, the China-based telecom vendor has come a long way to notch up revenues of $1 billion in 2009-10 from its Indian operations. Its revenues from its Indian operations reportedly increased by 30 per cent in 2010-11.

In fact, India is the second largest market for ZTE after China, and accounts for about 10 per cent of the company’s revenues.

Growth in India 

For ZTE, part of 2009 and the first half of 2010 was a slow growth period as far as the Indian market was concerned. This was largely on account of increasing network security concerns raised by the government against Chinese vendors.

Citing national security reasons, the Department of Telecommunications had asked all operators to obtain security clearance from the government before importing equipment, especially from China. As a result, no telecom equipment orders were placed during this period.

However, in the second half of 2010, the government issued guidelines allowing telecom operators to import equipment from foreign vendors after meeting certain security criteria.

With this issue almost settled, ZTE has been aggressively trying to reverse the negative growth trend. It has bagged several orders from telecom operators that are rolling out 3G and broadband wireless access (BWA) networks.

Bharat Sanchar Nigam Limited (BSNL) was the first operator to award a contract to ZTE after a seven-month-long virtual blanket ban on all Chinese telecom equipment imports. The Rs 3 billion contract requires ZTE to supply Wi-Max equipment to BSNL’s designated franchisees. BSNL has signed up with Teracom, Take Solutions, Adishwar India and Ampoules to launch Wi-Max-based broadband services.

ZTE has subsequently won large orders from Aircel, Sistema Shyam TeleServices Limited (SSTL) and Reliance Communications (RCOM).

Meanwhile, with the Indian government firm on providing a fillip to domestic manufacturing, ZTE has been exploring the possibility of setting up its own manufacturing unit in India. It makes good business sense considering that, as part of the National Telecom Policy, 2011, the government is likely to introduce  measures to encourage local manufacturing and make it mandatory for India’s mobile operators to source a certain percentage of their network infrastructure from local manufacturing plants.

ZTE India, which currently imports equipment and handsets from China, has a small facility at Manesar, but this unit focuses on repairs and maintenance that support its existing Indian operator customers rather than on manufacturing.

Having a local manufacturing presence will be critical for ZTE if it is to make its mark in India’s emerging BWA market.

The Chinese company is hoping to do better in the TD-LTE market than it did in India’s initial 3G infrastructure market, where it was awarded just nine (of a total of 68) deals during 2010.

In fact, ZTE has already conducted TD-LTE trials for Bharti airtel and Reliance Industries Limited (RIL), and is set to conduct trials for the other key players that are focusing on LTE in India. “We are also in talks with the major players for commercial deployment of the TD-LTE networks and will soon launch the entire range of TD-LTE offerings including equipment, dongles and smartphones in the Indian market,” says Isaac Liang, international market director, TDD products, ZTE.

Global operations 

Besides China, its home market, ZTE’s key focus markets include Europe, the Asia-Pacific region and North America. “The Middle East and Africa are also emerging as key growth centres of telecommunications,” says Ranjan Sharma, director, wireless, ZTE India.

ZTE’s revenue from its international operations grew 27.45 per cent to about 38.1 billion yuan in 2010, which accounted for 54.2 per cent of its total operating revenue for the year.

In 2010, for the first time in the company’s history, the largest portion of its overseas revenue came from the US and European markets. ZTE’s year-on-year growth in the two markets was 50 per cent, which is 21 per cent of its total operating revenue.

The company’s sales revenue in the US touched $300 million in 2010, tripling the total in 2009. Sales in the US are expected to reach $600 million in 2011 and $1 billion in 2012.

While ZTE is best known for its wide portfolio of carrier equipment ranging from optical transport to network infrastructure equipment, it is looking to become a household name with a growing portfolio of smartphones and tablets in the global telecom market.

ZTE had won its initial market share in the telecom equipment market by adopting a low pricepoint strategy, and is now looking to do the same in the device and terminal space as well.

“ZTE is sticking to the lower end of the market to avoid competition from device makers like HTC Corporation and Apple, which are targeting the higher end. If they try to compete up the value chain, they will be forced to raise prices and abandon their primary advantage,” says an industry analyst.

The company aims to increase the contribution of terminals, including tablets, smartphones and personal computers, to half of its total revenue in three years’ time. In 2010, equipment sales accounted for more than 60 per cent of its total revenue, but these sales are expected to slow down. The revenue generated by mobile devices made up 25 per cent of ZTE’s total revenue in 2010, and the company plans to increase this to 30 per cent in 2011.

ZTE plans to sell 120 million mobile phones and media tablets worldwide this year, up from 90 million in 2010. Among the 120 million devices, 10 per cent will be smartphones as compared to last year’s 3.33 per cent.

ZTE also ventured into the cloud computing business in 2010 and is expecting over $2 billion in revenue in 2011 from enterprise cloud computing products. Its cloud computing portfolio includes data communications products, enterprise networks, servers and storage products for government networks. 

All in all, while ZTE has made significant headway in the Indian and global markets, what is important now is to sustain the growth momentum. The company’s ability to do so will go a long way towards determining whether it establishes a strong presence in the telecom equipment sector over the next five years.

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