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Four Telecom Firms Deny Merger Rumor

China Business News, 8/23/05

Four telecom companies, China Putian, Datang Telecom, Alcatel Shanghai Bell and FiberHome Technologies have all denied rumors that the State-owned Assets Supervision and Administration Commission (SASAC) may require them to merge into one. FiberHome Technologies president, He Shuping, although stating he had no knowledge of plans for such a merger, added, "This rumor may not be completely false, but the possibility is uncertain."

LENS: While this rumor is not yet confirmed, it would fit in well with a growing trend towards consolidation among Chinese telecoms and IT firms. As China's WTO commitments continue to phase in, the government and enterprises are looking to create large-scale corporations that can readily compete with foreign heavyweights both at home and abroad. Already this year we've seen billion dollar M&A deals between Lenovo and IBM and Alibaba and Yahoo!, and also electronics conglomerate, CEC's, acquisition of 7 domestic electronics firms, including Great Wall Computer Group and Nanjing Panda Group. Rumors that China Unicom might be split up and merged with China Telecom, China Netcom, or China Mobile, and that ZTE or Huawei may be considering a purchase of Marconi also continue to simmer.

Among the four companies mentioned above, China Putian, which lost RMB899 mln in 2004, is probably the one that most needs this rumor to become reality. Included among its subsidiaries are handset manufacturers Ningbo Bird, Eastcom, and Capitel, all of which have had financial difficulties recently. For Putian, it may have been a good sign when Cao Bin, its vice president, was appointed acting president of Datang Telecom in late June this year. This sort of shifting of high-level executives among State-owned firms often indicates a coming merger.

ZTE Wins Telefonica Brazil Deal

p5w.net, 08/22/05

ZTE has announced a contract with Telefonica to provide the carrier's Brazilian subsidiary with DSL customer premises equipment. ZTE has been providing Telefonica with various types of equipment since 2004, and, for this current project, won approximately 50% of the supply contract. Other major international carriers with which ZTE has cooperated include Greece Telecom, Portugal Telecom, and France Telecom.
ZTE's DSL products have been used in broadband networks in almost all major Chinese cities and over 40 other countries and regions, including Romania, Greece, Egypt, India, and Pakistan.

LENS: ZTE, along with domestic rival Huawei, continues to pursue an aggressive overseas expansion strategy, which, so far, has focused most heavily on price-sensitive emerging markets. The long-term goal for both companies, however, is to further penetrate developed markets in Western Europe, North America, and Japan. ZTE's cooperation with Greece Telecom, Portugal Telecom, and France Telecom, and the contracts it has won from Telefonica, the world's third largest operator, help give it a track record and greater legitimacy in these more sophisticated markets.

ZTE, which in February this year announced a partnership to supply CDMA base stations to French equipment vendor Alcatel, is also rumored to be one among several telecoms firms considering an acquisition of ailing British equipment vendor Marconi. Purchasing Marconi would provide ZTE with an established European sales-and-distribution network, but a high price tag, Marconi's pension plan liabilities, and potential government and public opposition to the sale may diminish the likelihood of a deal.

ZTE H1 Profits Drop 8.8%

NBD.com.cn, 8/24/05

According to its semi-annual financial report, ZTE's H1 2005 profit dropped 8.8% year-on-year. ZTE president, Yin Yimin, explained that while the company has made considerable investments in overseas markets, it will take some time before these begin to yield returns. Earlier reports also point out that ZTE has over RMB10 bln in unexecuted overseas contracts, 70% of which were signed last year.

ZTE's published data shows that the majority of its overseas contracts are in developing countries in Asia, Africa, and South America, smaller markets where contract execution is more challenging and fierce competition is the norm.

Mr. Yin pointed out that in the past 3 to 4 years, ZTE's annual overseas revenues have increased by an average of over 100%, and H1 2005 overseas revenues jumped over 130%, comprising 30.5% of total revenue for the period. The company plans to invest more in R&D over the next 2 to 3 years to ensure greater profitability, and will earmark approximately 10% of its profits for this purpose.

LENS: ZTE, even more than Huawei, has a reputation as the low-price vendor. Reportedly its bids, particularly those to customers in price-sensitive markets, have undercut those of western and Japanese competitors by between 20-40%. Certainly, to some degree, a strong domestic supply of low-cost engineering talent and factory labor have helped make this possible. China graduates over 350,000 new engineers each year, with starting monthly salaries for new engineers ranging between USD 480-540, and, at roughly USD0.60 per hour, even cheaper factory wages. The company has also enjoyed generous government-sponsored export credit facilities, including USD500 mln from the China Export-Import bank in February last year. However, even with these cost advantages and government support, sustaining such low prices over the long haul may be difficult.

At the same time, the company's rapid overseas expansion has been driving up operating costs. In 2004, as total sales rose roughly 25% to RMB21.2 bln and sales outside China more than doubled to RMB4.56 bln, ZTE's selling expenses spiked 41% to RMB2.8 bln.

The 8.8% drop in profit is probably not indicative of any major change in prospects, but should profits continue to decline in the next several quarters, the company may need to retrench and slow its expansion drive.

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