ZTE: Banking on the TD-LTE Market

Growth in mobile data traffic has created a new and significant revenue stream for telecom operators across the world. Statistics show that the data revenue of Verizon, AT&T, T-Mobile, Vodafone and other mainstream operators has increased by an average of 30 percent over the past year. Attention is, therefore, being given to data and broadband services, and this has created a huge opportunity for telecom vendors.

Chinese telecom equipment manufacturer, ZTE Corporation, is one such player that has benefited from the surge in demand for high-speed networks. Where players like NSN, Alcatel-Lucent and Motorola are running at losses, the Shenzhen-based vendor has been steadily rising up the ladder, reporting increased margins quarter on quarter. According to a report by research firm Ovum, ZTE clocked up year-on-year revenue growth of 40 percent in the quarter ended December 2010. Over the same period, Juniper’s revenue grew 26 percent, Alcatel-Lucent’s 13 percent, Ericsson’s 11 percent, and NSN’s 0.5 percent.

Despite its late entry into the Indian telecom market, ZTE has taken rapid strides. After establishing fully fledged operations in the country in 2003, ZTE has come a long way to notch up revenues of $1 billion in 2009-10 from its Indian operations. Revenues from its Indian operations increased by 30 percent in 2010-11.

In fact, India is the second largest market for ZTE after China and accounts for about 10 percent of the company’s revenues.

Growth in India

Part of 2009 and the first half of 2010 was a slow growth period for ZTE in the Indian market. This was largely due to network security concerns raised by the Indian government against Chinese vendors.

Citing national security reasons, the Department of Telecommunications required all operators to obtain a security clearance before importing equipment, especially from China. As a result, no telecom equipment orders were placed during this period.

However, in the second half of 2010, the government issued guidelines allowing telecom operators to import equipment from foreign vendors if certain security criteria were met.

With this issue almost settled, ZTE has been aggressively trying to reverse the negative growth trend. It has obtained several orders from telecom operators that are rolling out 3G and broadband wireless access (BWA) networks.

Bharat Sanchar Nigam Limited (BSNL) was the first operator to award a contract to ZTE after the seven-month-long blanket ban on all imports of Chinese telecom equipment. The Rs 3 billion contract requires ZTE to supply WiMAX equipment to BSNL’s designated franchisees. BSNL has signed up with Teracom, Take Solutions, Adishwar India, and Ampoules to launch WiMAX-based broadband services.

ZTE has subsequently won large orders from Aircel, Sistema Shyam TeleServices Limited (SSTL), and Reliance Communications (RCOM).

Meanwhile, with the Indian government firm on providing a fillip to domestic manufacturing, ZTE has been exploring the possibility of setting up its own manufacturing unit in India. This makes good business sense considering that, as part of the National Telecom Policy, 2011, the government is likely to introduce measures to encourage local manufacturing and make it mandatory for India’s mobile operators to source a certain percentage of their network infrastructure from local manufacturing plants.

ZTE India, which currently imports equipment and handsets from China, has a small facility at Manesar, but this unit focuses on repairs and maintenance that support its existing Indian operator customers rather than on manufacturing.

Having a local manufacturing presence will be critical for ZTE to make its mark in India’s emerging BWA market.

The Chinese company is hoping to do better in the TD-LTE market than it did in India’s initial 3G infrastructure market, where it was awarded just nine (of a total of 68) deals during 2010.

In fact, ZTE has already conducted TD-LTE trials for Bharti Airtel and Reliance Industries Limited (RIL), and is set to conduct trials for the other key players that are focusing on LTE in India. “We are also in talks with the major players for commercial deployment of the TD-LTE networks and will soon launch the entire range of TD-LTE offerings including equipment, dongles, and smartphones in the Indian market,” said Isaac Liang, international market director of TDD products, ZTE.

Global Operations

Besides its home market of China, ZTE’s key focus includes Europe, Asia-Pacific, and North America. “The Middle East and Africa are also emerging as key growth centres of telecommunications,” said Ranjan Sharma, director of wireless, ZTE India.

ZTE’s revenue from its international operations grew 27.45 percent to about 38.1 billion yuan in 2010, which accounted for 54.2 percent of its total operating revenue for the year.

In 2010, for the first time in the company’s history, the largest portion of its overseas revenue came from the US and European markets. ZTE’s year-on-year growth in the two markets was 50 percent, which is 21 percent of its total operating revenue.

The company’s sales revenue in the US touched $300 million in 2010, tripling the total in 2009. Sales in the US are expected to reach $600 million in 2011 and $1 billion in 2012.

ZTE is best known for its wide portfolio of carrier equipment, ranging from optical transport to network infrastructure equipment, and is looking to become a household name with a growing portfolio of smartphones and tablets in the global telecom market.

ZTE won its initial market share in the telecom equipment market by adopting a low price point strategy and is now looking to do the same in the device and terminal space as well.

“ZTE is sticking to the lower end of the market to avoid competition from device makers such as HTC and Apple, which are targeting the higher end. If they try to compete up the value chain, they will be forced to raise prices and abandon their primary advantage,” says an industry analyst.

The company aims to increase its contribution of terminals, including tablets, smartphones and personal computers, to half of its total revenue in three years time. In 2010, equipment sales accounted for more than 60 percent of its total revenue, but these sales are expected to slow down. The revenue generated by mobile devices made up 25 percent of ZTE’s total revenue in 2010, and the company plans to increase this to 30 percent in 2011.

ZTE plans to sell 120 million mobile phones and media tablets worldwide this year, up from 90 million in 2010. Among the 120 million devices, 10 percent will be smartphones compared to last year’s 3.33 percent.

ZTE also ventured into the cloud computing business in 2010 and is expecting over $2 billion in revenue in 2011 from enterprise cloud computing products. Its cloud computing portfolio includes data communications products, enterprise networks, servers and storage products for government networks.

All in all, while ZTE has made significant headway in the Indian and global markets, it is now important to sustain the growth momentum. The company’s ability to maintain growth will go a long way towards determining whether it has a strong presence in the telecom equipment sector over the next five years.