When Tele Norte Leste Participacoes SA (TNLP3), Brazil’s biggest land-line company, was shopping for network equipment last year, Huawei Technologies Co.’s offer had an edge: access to China Development Bank’s $30 billion credit line.
A two-year grace period on payments and an interest rate of 2 percentage points over the London interbank offered rate created an unbeatable deal, Tele Norte Chief Financial Officer Alex Zornig, 52, says.
“The Chinese are filling the space left empty by Americans and Europeans,” Zornig said in an interview. “They are very aggressive and they have a lot of money.”
China Development Bank’s support for Huawei and other Chinese companies is the cornerstone of the country’s “going out” policy, meant to nurture companies in telecommunications, alternative energy and oil. The bank’s low-interest loans dwarf those offered by U.S. and European development agencies, helping Shenzhen-based Huawei and crosstown rival ZTE Corp. (763) increase market share.
“Our support for Huawei, ZTE and other high-technology companies has opened up the overseas market,” China Development Bank Chairman Chen Yuan, 66, wrote in the January issue of China Reform magazine. “We have become the principal source of finance of our country’s overseas investments.”
The terms of Tele Norte Leste’s seven-year credit agreement give the company an interest rate of about 4 percent, Zornig said. Brazilian companies are paying an average borrowing cost for dollar debt of about 5.99 percent, according to JPMorgan Chase & Co.
In 2009, Mexico City-based America Movil SAB, Latin America’s largest mobile-phone carrier, was also seeking $1 billion to upgrade its mobile network, and Chief Financial Officer Carlos Garcia Moreno reached the same conclusion as Zornig.
“People who were going to the market were often taking on very high interest rates,” Garcia Moreno, 54, said in an interview. “The rates that many blue chips paid were very high. In that situation, we got very good financing.”
Huawei spokesman Ross Gan said there’s much “distortion” about the significance of the credit line from China Development Bank, and what it means for the company’s relationship with the government. Huawei is an employee-owned, private company and the government doesn’t hold any shares, he said.
The financing’s helped. Huawei held about 15.7 percent of the $78.6 billion global market for carrier network infrastructure last year, second to Ericsson AB’s 19.6 percent share, according to estimates from research firm Gartner Inc. on April 11.
Huawei, which didn’t win its first contract outside China until 1997, generated international sales of more than $100 million by 2000. Overseas business exceeded contracts in China for the first time in 2005, according to the company’s website.
Winning over customers like America Movil’s Garcia Moreno helped Huawei’s Mexico unit more than double sales to $440 million last year, from about $200 million in 2009, says Oscar Toulet, director of government affairs and public relations for Huawei in Mexico.
EU, U.S. Investigation
The extent of vendor financing by Chinese companies has raised concern with European and U.S. government agencies. In September, the European Union opened a probe into unfair trade practices that threatened curbs on imports of wireless modems from Chinese suppliers such as Huawei.
The EU dropped the probe in January after Huawei reached a 27-million-euro ($39.4 million) licensing agreement with Option NV (OPTI), the Belgian company that filed the original complaint, which alleged that China Development Bank had supplied Huawei’s customers with below-market rates on loans.
While vendor-financing in itself isn’t unusual, the extent of the financial backing sets Huawei and ZTE apart, according to the Chinese companies’ competitors.
$30 Billion Credit Line
In 2004, China Development Bank agreed to offer a $10 billion credit line to Huawei’s customers and the amount was later tripled to $30 billion in 2009, Ken Hu, chairman of Huawei’s U.S. operations, wrote in a letter posted on the company website in February.
As of February, China Development Bank had loaned a total of $10 billion to Huawei’s customers, Hu said in the letter. The bank didn’t respond to requests to comment about its relationship with Huawei and ZTE.
Vendor financing is “standard industry practice” and the amount received by Huawei’s customers isn’t out of line with what rivals such as Ericsson can offer through Sweden’s export financing agency, Gan said. Huawei is a private company that makes decisions based on market principles, he said.
The practice of lending to customers backfired for Ericsson in 2002, when provisions for vendor financing bloated to 7.9 billion kronor ($1.3 billion) by the third quarter.
Johan Winlund, a spokesman for the state-run Swedish Export Credit Corp., the country’s sole provider of export credit at subsidized rates, said banking secrecy laws prohibited him from providing details on individual customers. The corporation’s annual report showed in 2009 it signed a loan agreement valued at $1.07 billion with Russia’s OAO Mobile TeleSystems to buy equipment from Ericsson that was one of the agency’s largest export loans that year.
Those terms aren’t going deter customers such as America Movil’s Garcia Moreno from becoming believers in Huawei.
“Huawei is a very good company, very solid, and I would say that they have created a very good relationship with the China Development Bank,” he said.