A Global Telecom Titan Called...ZTE?

China's No. 2 cellular-gear maker has launched a campaign to break into the ranks of Nokia and Motorola

The ambition of just about everybody in the telecom world is to make phones that are smaller, faster, and more capable. So the industry has grown accustomed to announcements of groundbreaking handsets from the likes of Motorola (MOT ), Nokia (NOK ), and Samsung. But at the art deco Majestic Hotel in the French city of Cannes on Feb. 14, those stalwarts weren't the ones wowing the crowds with the world's tiniest 3G cell phone, featuring video calling and other multimedia functions. Instead, it was a Chinese challenger, ZTE Corp.

ZT-who? The company, based just north of Hong Kong in Shenzhen, is little known in the West. But it's already China's second-biggest telecom-equipment vendor, after crosstown rival Huawei Technologies Co. Sales of its handsets, base stations, switches, software, and broadband networking gear grew 35%, to $4.1 billion, last year. Profits jumped 50%, to an estimated $186 million, according to brokerage DBS Vickers Securities. And exports soared 170%, to $1.6 billion. Now, ZTE President Yin Yimin says he wants overseas sales to account for more than half of revenues as soon as next year. Nokia, Samsung, and Motorola have bigger brand names, Yin concedes, but "we don't think we're inferior to them. We don't think there's a big difference."


ZTE just has to let the world know. The Cannes presentation, for the annual 3GSM World Congress trade show, kicked off a five-month campaign to court telecom operators from Portugal to Turkey. Even better, ZTE also used the conference to announce a deal that may prove far more important than the 104-gram handset introduced that day: a partnership to supply French giant Alcatel (ALA ) with base stations for cellular networks using the CDMA standard. "ZTE has proven technology and expertise in CDMA radio, so we are pleased that the two companies will work together," says Marc Rouanne, chief of Alcatel's mobile communications unit.

To boost its name recognition, ZTE must emerge from the shadow of its better-known adversary, Huawei. The $5.6 billion rival also manufactures wireless equipment and cellular handsets and has been making a big push into overseas markets. But the two aren't always direct competitors. Unlike ZTE, Huawei has a big business selling routers -- used to direct data traffic on the Internet -- rather than the more-conventional telecom switching gear that is ZTE's focus. Huawei has built an international name for itself by taking on the likes of Cisco Systems Inc. (CSCO ) and Juniper Networks Inc. (JNPR ), both at home and abroad. When it came to expanding outside of China, Huawei "was more aggressive," says Hsueh Sung, vice-chairman of Goldman Sachs & Co. (GS ) in Hong Kong. "ZTE was a couple of years late."

ZTE does have some advantages in the battle to become China's top telecom dog. ZTE has been publicly listed in Shenzhen since 1997, and in December it raised $400 million by also offering its shares in Hong Kong, where foreigners can buy them. As a listed company, it wins credit from analysts and customers alike for being more transparent than the privately held Huawei. "Big carriers need to know what's under the hood," says William Bao Bean, an analyst with Deutsche Bank (DB ) in Hong Kong. "That's why Huawei needs to go public." Industry watchers say Huawei is preparing an offering, though the company has made no official announcement. Huawei is also dogged by controversy. In 2003, Cisco filed a lawsuit against Huawei in the U.S., alleging that the Chinese company illegally copied its equipment. The two companies have since settled, but the negative publicity damaged Huawei's image, says Henry H. Wong, managing director of Diamond TechVentures, a Silicon Valley venture capital firm specializing in China. In contrast, "ZTE has a good name," he says. "People like to do business with them."

Despite its relatively low profile, ZTE is no upstart. The company was founded in 1985 by a handful of state-owned companies affiliated with the Ministry of Aerospace Industry and has grown along with China's big phone companies, which are ZTE's top customers. ZTE also has had success abroad, largely with operators in countries in Asia and Africa. Last May it signed a $100 million contract to supply CDMA handsets to Vivo, the largest mobile carrier in Brazil. In April, ZTE inked a CDMA deal with Telecom Egypt and has sold equipment to operators in Algeria, Mongolia, Pakistan, India, Russia, and Romania. ZTE's Yin says the company is able to prevail over bigger competitors in such markets because its home base in China gives it a better understanding of how to operate in developing countries. To really grow, though, Yin knows he must transfer that success to more developed markets. ZTE plans to use the proceeds of the Hong Kong listing to expand its international sales network, establish production overseas, and beef up its research and development spending.

As ZTE picks up the pace, both it and Huawei are shaking up the telecom industry worldwide. With their low-cost manufacturing, vast pools of engineering talent, and abundant supply of customer-service technicians, the Shenzhen pair "really could change the structure of the industry,"says Andrew Chetham, an analyst with Gartner Inc. in Hong Kong. "In five years' time, Western companies [won't be able to] keep up with their research and development spending because of their low-cost advantage."

ZTE faces some major challenges. Building the ZTE brand from scratch in Europe will take time and piles of cash. In China the company has done well selling handsets and equipment based on PHS, a low-end cellular-like technology that is now becoming obsolete as operators focus on more-advanced 2.5G and 3G services. PHS accounted for 27% of revenue last year but is likely to drop to just 11% in 2005, according to Deutsche Bank research. And ZTE's CDMA handset business may be threatened as the Chinese government loosens restrictions on the number of companies allowed to make phones. Last year the three dozen players made 240 million handsets, but some experts say production could double this year as dozens more companies jump in -- which could take a big bite out of ZTE's profits.

Given that sort of competition at home, it's no wonder that Yin vows to push beyond China's borders. Expanding overseas "is not just a development issue," he says. "It's a survival issue." ZTE may not be the biggest player in China or even in its hometown. But clearly, this newcomer on the international scene won't be content to play second fiddle for long. zz

By Bruce Einhorn in Shenzhen with Andy Reinhardt in Cannes

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