Foreign switch

Until recently, it would have been hard to imagine that China would become an important exporter of telecommunications equipment so early in its economic reform process. Yet China already supplies telephone exchanges to more than 20 countries, including whole turnkey projects. Amid intensifying competition at home, the country's leading telecoms suppliers are now looking to the world market and evaluating the acquisition of stakes in foreign counterparts.

First digital exchange
Twenty years ago, China was only capable of manufacturing outdated cross-bar exchanges. In 1980 the first modern digital exchange imported from Fujitsu was installed in Fujian province. Three years later, the Ministry of Posts and Telecommunications signed a joint venture agreement with Bell Telephone of Belgium (back then a subsidiary of ITT, later to become part of Alcatel) to manufacture digital exchanges in Shanghai. Other multinational telecoms suppliers such as NEC, Siemens and Ericsson were later to set up their own joint ventures.

Shanghai Bell, established in 1983, is a joint venture between Alcatel Bell of Belgium, the Belgian government and the China Postal and Telecommunications Industry Corporation. The company clinched China's first telecoms export contracts, producing software tapes bought back by Alcatel subsidiaries in Europe. Countries that either did not have the money or the inclination to buy on the international market, such as North Korea, Cuba and Vietnam, turned to Shanghai Bell for the supply of telephone exchanges.

Since then, Sino-foreign joint ventures have felt strong competitive pressure from state-owned telecoms enterprises set up to win back a substantial part of the domestic switching market.

Before 1995, only two Chinese companies were actually exporting telecoms equipment – Shanghai Bell and Great Dragon – and the value of their foreign contracts was small. In 1996 exports started to pick up, totalling 270,000 lines worth US$63m. By the following year, Chinese companies were exporting mobile telephone base stations in addition to switching and transmission equipment. In 1998 they were exporting complete sets of equipment and turnkey projects as well as setting up Sino-foreign joint ventures. Today, ten Chinese companies have become active in the telecoms export business.

In 1998, around 98 percent of telephone exchange capacity added was made in China, but that proportion includes products from joint ventures. China has four major telecoms equipment manufacturers that are not joint ventures with foreign companies – Huawei, Great Dragon, Datang and Zhongxing. Competition in the domestic market is intensifying between these four and the joint ventures involving multinational telecoms suppliers such as Alcatel, Ericsson, Siemens, Motorola and Northern Telecom.

There have been a flurry of large export orders in recent months. In late October 1999, Datang Telecom signed an agreement with Burma's Ministry of Posts and Telecommunications to set up an experimental exchange using Datang's switch equipment and optical transmission and fibre optic cable. Early in November, Zhongxing Telecom clinched a US$225m contract with the Yugoslav BK-Group to supply GSM mobile telecoms equipment. This export deal also includes a turnkey project and involves the supply of switching equipment, base stations, an operations and maintenance centre, antennas and training.

Shanghai Bell signed a US$215m export order in October, involving the supply of an entire telecoms network to Bangladesh. The equipment includes 12 telephone switches with a total capacity of 216,000 lines, 54 optical transmission systems, 1,000km of optical fibre, 5,800km of copper cable and 100,000 telephone sets. Shanghai Bell will work with subcontractors to implement this turnkey project.

The network, linking 58 provincial capitals, is Bangladesh's biggest ever engineering contract. Bangladesh has one of the world's lowest telephone densities of one phone per 400 inhabitants. The country has a population of 125 million but only 370,000 telephone lines, of which 270,000 are digital. Shanghai Bell previously received export orders from Iraq, Cuba, Russia, North Korea and Vietnam.

Export promotion seminar
During the first eight months of 1999 China exported some 330,000 telecoms lines valued at US$112m, forecasted to reach 1m lines worth US$600m by the year-end. Exports of optical fibre equipment reached US$46m and mobile base stations netted US$68m. Cumulative exports up to the end of August 1999 amounted to 2.03m lines and US$640m.

Recognising the growing importance of the export market, the Ministry of Information Industry convened a telecoms equipment export seminar in November to share experiences among Chinese exporters and further encourage their push in foreign markets.

Huawei looks to Africa
Shenzhen's Nanshan Science and Technology Park is home to Shenzhen Huawei Technologies, one of China's largest and fastest-growing manufacturers of fixed-line telecoms switching equipment. Huawei was established in 1988 with registered capital of Yn24,000 by a retired officer of the People's Liberation Army, Ren Zhengfei. Ten years later, Huawei had grown into a corporation with sales income totalling U$639m, more than double its total in the previous year. The Shenzhen-based firm forecast its sales in 1999 would more than double again to US$2bn.

The company, privately owned by Ren and his employees, signed contracts for 6.9m lines of switching equipment in 1998, which gave it 30 percent of the domestic market. Huawei also claims to control impressive shares in other related markets – 70 percent of access network equipment and 20 percent of SDH (Synchronous Digital Hierarchy) optical transmission systems. In 1999 the company introduced its first GSM mobile telecoms switch.

Huawei also proudly claims that it develops its own products and technologies independently. It commits 10 percent of its annual revenues and 40 percent of its staff to research and development. The company's research budget in 1999 rose to Yn l.5bn, from Yn880m in 1998.

More than 11,000 people work for Huawei, with an average age of only 27, and 85 percent of them are holders of at least a bachelor's degree. They are paid well by the company, only 20 percent less than their counterparts in foreign-invested manufacturing firms, and they are also offered stock options. The company's management philosophy – known as Huawei Basic Law – rewards staff according to their performance.

Ren worked for a PLA research institute before leaving the army and moving to Shenzhen in 1984. Four years later he established Huawei with a few friends and imported telecoms equipment through Hong Kong, without knowing that the market would grow so fast. Huawei built up sales by targeting neglected rural markets.

Now the company has 33 sales offices and 35 service centres throughout China, along with research institutes in Beijing and Shanghai. It has established seven product development joint ventures with provincial and municipal telecoms bureaux, and an investment bank in Hong Kong. In addition, Huawei has a research facility in Silicon Valley, a manufacturing joint venture in Moscow, and a string of representative offices in Europe, South America, the Middle East, India and Africa.

Huawei's big break came in 1992 when the company developed its own application-specific integrated circuit. Use of this chip allowed the ability to offer high quality products and lower costs of production. Today, through aggressive management and commitment to research and development, Huawei is one of the top two switching manufacturers in China and has diversified its product line to sell a wide range of wireline, wireless and data communication and power supply products. The company has recently ventured into producing switching equipment for dual-band GSM networks. But while China will continue to be its biggest market, Huawei is looking at other markets, especially Africa, where it intends to pursue its aggressive marketing strategy.

"The telecoms industry in China in 1990 was very similar to the current market in Africa, with telecom coverage of only 1 percent or so," says Mr. Theo Bosch, Technical Manager, Huawei Technologies Southern Africa. "Overall telecoms coverage in China has now soared to 13 percent, making it the second largest telecoms network in the world. Huawei, as the largest telecom equipment supplier and manufacturer in China played a critical role in his giant leap. It is now Huawei's wish to play a similar role in Africa."

The company has developed integrated solutions that are modern, reasonably priced and compatible with the African market. Within two years, Huawei has set up eight offices in Africa – in South Africa, Egypt, Kenya, Nigeria, Algeria, Zimbabwe, Angola and Ethiopia – providing operators with turnkey solutions that include technology, engineering, financing, and research and development. It is planning to open 12 more offices before the end of 2000.

Huawei developed products include switches, access networks, SDH and Wire-less Local Loop solutions. Its power supply units are in service all over Africa. For example, in October 1999 Huawei was awarded a major contract with the Kenyan Post and Telecommunications Corporation to build a nationwide intelligent network platform.

"Chinese companies may not yet have built a strong reputation outside China, but this will change," says Bosch. "Companies like Huawei are determined to prove how successful expansion in new ventures in Africa can lead to greater economic growth and development of the continent, and challenge other telecoms companies to do likewise."