China Deals Bolster Troubled Telecom Vendors

Communists brandishing cold hard yuan might just lift North America's largest telecom equipment vendors out of their deep malaise.

Communists brandishing cold hard yuan might just lift North Americas largest telecom equipment vendors out of their deep malaise.

Its the year of the bull market in China, where 1 billion people await telephones and 1.2 billion await the Internet.

In the eight weeks since the U.S. spy plane crisis, North American telecom vendors have written deals with China worth some $2 billion on their way to a likely record-breaking year.

The deals take a little longer, and there are more strings attached, but when theyre finally consummated, they have the backing of cash-rich Chinese banks that arent about to go bankrupt or cancel deals. The banks finance the deals themselves, with the central governments approval, so foreign equipment makers dont have to engage in risky vendor financing.

"China today is a cash-rich market," said David Ho, a senior vice president at Nortel Networks China, which last week signed a deal worth $270 million to supply wireless equipment to China Unicom. "The governments priority is to get people to put less money in the bank and to spend more. The banks are full of money. We havent provided any vendor financing in the Chinese market so far."

For Lucent Technologies, expected to lay off 10,000 workers, "China is our most important market," said Henry T. Kung, spokesman for Lucents China operations. "The situation is getting better and better. China very much wants to join the World Trade Organization, and thats why they understand the need to open up their markets."

This year, Nortel has written deals with China worth more than $1 billion, and so has Motorola. Lucents deals with China total in the hundreds of millions of dollars. Last week, Lucent, Motorola and Nortel all held signing ceremonies featuring the best of Chinese and Western liquid refreshments, and cultural touches from both countries.

For those vendors and for the likes of Alcatel, Ericsson and Riverstone Networks, the spy plane incident at Hainan Island in April was nary a blip on the radar screen.

Not all the recent deals with Chinese companies will count as completed sales by the end of December. Still, its likely that total American telecom exports to China will exceed 2000s $767 million, which itself was a 37 percent jump from 1999, according to Telecommunications Industry Association (TIA) figures.

China plans to inject its telecommunications infrastructure with $500 billion between now and 2005. It is the fastest-growing market in the world and already has the second-most wireless subscribers. Chinese officials forecast 20 percent annual growth in telecom through 2005.

The deals keep getting easier — which is not to say easy.

Telecom opportunities in China are almost as promising as they are maddening, said Ashley Heineman, manager of Asia-Pacific Programs at the TIA. Foreign carriers and service providers are barred from competing with the homegrown China Mobile, China Netcom, China Telecom and China Unicom.

But China needs the foreign equipment vendors, and has established a balkanized set of rules on technology transfer, domestic production, joint ventures and equity stakes.

China tries to force foreign firms to do much of their manufacturing in China by imposing steep tariffs on imported goods. Lucent and Nortel bring in components from North America and assemble systems there.

And changes in the past year have made it easier for the big equipment dealers to enter into joint ventures with local Chinese telecom operators and still maintain controlling equity interest in the hybrid companies. Lucent, for example, has eight joint ventures in China, and has majority interest in most of them.

For Motorola, with 10,000 employees in China, the hurdles are worth it. "Its a very fast-moving country with 1.2 billion consumers," said Motorola spokesman Roderick Kelly. "There is an eagerness."

The TIA wants the World Trade Organization to insist that China adopt its pro-competitive regulatory principles as a condition of admittance into that body later this year. China still makes it almost impossible for foreign carriers to enter the market. While opportunity for equipment vendors is a bright spot, "theres still a lot of room for improvement," Heineman said.

As China moves from a controlled to a market economy, it knows it must deal with foreign companies and adapt their best management and technology-transfer practices, said Partha Ghosh, who heads the global practice at consulting firm Adventis.

The next step for foreign companies is to act like insiders — a quantum leap that will mean hiring not only Chinese nationals, but people from the very provinces in which they wish to do business, Ghosh said.

As more Chinese telecoms take their companies public in the U.S., theyll have to adopt open trade practices because theyll be beholden to shareholders, Nortels Ho said. "Then, decisions made in the business market will be very close to international standards. Theyll have to meet earnings. They wont be doing crazy things."