China brings cheer to gloomy kit vendors

By Mike Roberts

The long-awaited 3G capex boom in China is like a warm fire on a cold night for mobile networks vendors, many of which are struggling with everything from slack sales and falling margins to lingering integration problems.

Network vendor first quarter results and subsequent announcements show that China’s three mobile operators are starting to make good on their plans to spend a whopping US$29 billion this year to roll out 3G services across many parts of the country. But it is also clear that China’s mobile operators are taking advantage of their strong bargaining position in a down mobile networks market, leading some vendors to take a hit on margins for the initial 3G rollouts in China, in the hope that margins will increase with future network expansions and upgrades.

ZTE, Huawei claim pole position

China’s networks vendors are particularly happy, of course, given that they’re already growing faster than their rivals and look set to take the lion’s share of China’s 3G business. For example ZTE recently declared itself the top 3G vendor in China, claiming it had won a 34% share of the TD-SCDMA projects awarded by China Mobile, 28% of CDMA2000 deals from China Telecom and 21% of WCDMA business from China Unicom.

ZTE says its first-quarter 2009 net profits increased 29% to RMB 78.7 million on revenues up 35% to RMB11.7 billion. Revenues were up 47% in the carrier networks business, 22% in handsets and 4% software systems, services and other products. Much of the increase in carrier networks was “driven by 3G construction projects in China,” ZTE says.

ZTE’s 2008 results show the importance of its domestic market, with China accounting for 39% of 2008 revenues, Asia apart from China 25% of revenues, Africa 21% and other regions 16%. ZTE says 2008 net profit increased 33% to RMB1.7 billion on sales up 27% to RMB44.3 billion. Carrier networks saw sales increase 28% to RMB29 billion, while handset revenues increased 27% to RMB9.7 billion and software and services increased 23% to RMB5.6 billion.

Huawei says in 2008 it “ranked No. 1 in shipments in China’s 3G market.” One milestone was China Telecom’s launch of the first commercial 3G services in China in April 2009, after Huawei helped upgrade its CDMA2000 1xRTT network to support EV-DO in 52 cities, including eight of the ten largest cities such as Beijing and Tianjin.

But China is only part of the story for Huawei, which says its domestic market accounted for less than 25% of sales in 2008. Notable networks achievements outside its domestic market include landing arguably the first commercial LTE/SAE networks contract, alongside Ericsson, although it is for a relatively modest deployment planned by TeliaSonera.

In addition, like ZTE and unlike most Western networks vendors, Huawei reported very strong 2008 results, with net income up 20% to US$1.2 billion on sales up 43% to US$18.3 billion. However the much stronger increase in sales compared to net income suggest Huawei was still using low prices to gain market share, although the vendor says its operating profit margin did increase from 10% in 2007 to 13% in 2008.

Western vendors also win contracts

Most major western vendors have also landed key contracts in China, and say the deals are already generating significant revenues. Ericsson says in 1Q09 its networks operating margin increased 1% to 10% on sales that were up 12% to SEK33.5 billion, with “especially strong performance in China, India and the US.”

However its gross margin excluding restructuring charges declined to 36.3% in 1Q09 compared to 38.6% in 1Q08, with the decline “mainly due to large initial rollouts of 3G in China, higher sales in India, higher proportion of services sales and the transfer of Ericsson Mobile Platforms.” China Unicom awarded Ericsson a contract to deploy WCDMA services in 15 provinces.

Asia Pacific was the vendor’s top region in the first quarter, seeing sales increase 26% from 1Q08 to SEK16.3 billion in 1Q09. Its second-largest region was Central & Eastern Europe, Middle East and Africa, which saw sales increase 12% to SEK12.5 billion. In Western Europe the vendor saw sales decline 4% to SEK11.2 billion, largely due to the divestiture of Ericsson Mobile Platforms and a PBX business.

Ericsson overall results in 1Q09 were mixed, with net income down 30% to SEK1.8 billion on sales up 12% to SEK49.6 billion. But as the vendor was at pains to point out, its plummeting net income was largely due to its joint ventures Sony Ericsson and ST-Ericsson. Sony Ericsson saw a net loss of SEK293 million in 1Q09, while ST-Ericsson, which formed on 2 February 2009, saw losses of SEK89 million in February and March 2009. With the two joint ventures excluded, Ericsson says its operating income in 1Q09 increased 40% to SEK4.7 billion compared to SEK3.4 billion in 1Q08.

For Nokia Siemens Networks (NSN) China was one of the few bright spots in 1Q09, with sales in the region up 6% to Euro 284 million compared to Euro 269 million in 1Q08. NSN won a WCDMA deal with China Unicom that will see the vendor deploy services in 11 provinces, and a TD-SCDMA and GSM contract with China Mobile. NSN says the deals with the two operators could be worth some Euro880 million.

NSN’s sales may have been up in China in 1Q09 but they were down in all other regions, leading global sales to decline 12% to Euro3 billion in 1Q09 compared to Euro3.4 billion in 1Q08. The sales decline was the main reason NSN’s operating loss jumped to Euro 361 million in 1Q09 compared to a loss of Euro74 million in 1Q08, the vendor says. To make matters worse, it says it now expects the global telecoms networks market-including mobile and fixed networks and related services-to decline around 10% in 2009 in Euro terms, compared to its previous view that the market would decline 5% or more. But at least NSN says it expects its market share to remain steady in 2009 compared to 2008.

Alcatel Lucent (ALU) does not announce first-quarter results until May 5, but in late April it unveiled that it had signed two framework agreements with China Mobile and China Telecom worth a total of US$1.7 billion in 2009. ALU also recently won a deal with China Unicom to deploy WCDMA networks in 14 Chinese provinces. The three deals make ALU the only Western vendor to have 3G contracts with all three of China’s major mobile operators, and are could make it the top Western 3G vendor in China, although it would still trail far behind ZTE and Huawei.

ALU says its contract with China Mobile is worth near US$1 billion, and will see it provide radio equipment for TD-SCDMA and GSM/EDGE networks, as well as optical, microwave and IP transmission solutions, IP routers, application platforms and related services. Its framework agreement with China Telecom is worth US$700 million and covers CDMA and EV-DO radio equipment, application platforms, optical and IP transmission platforms, IP routers and network maintenance services.

Among other networks vendors, Motorola recently announced a deal to deploy WCDMA networks for China Unicom in the first half of 2009, but it is not clear if the deal had a significant impact on its gloomy 1Q09 networks results. Motorola says operating earnings in its Home and Networks Mobility unit dropped 25% to US$115 million in 1Q09 compared to US$153 million in 1Q08, on sales that fell 16% to US$2 billion in 1Q09 compared to US$2.4 billion in 1Q08.

Both Motorola and Nortel have existing CDMA deals with China Telecom, but have not announced 3G EV-DO deals with the operator. Nortel’s filing for bankruptcy protection may have taken it out of the running for China’s 3G contracts, with rumours swirling that the only way forward for the vendor is to sell its business units to rivals.