China's Telecom-Gear Titans Invade U.S.

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From Bussinessweek

Spurred by a downturn at home, ZTE and Huawei are challenging Cisco and Nortel for wireless and broadband equipment contracts in the U.S.
For China's high-flying manufacturers of telecom equipment, the U.S. market has always been a no-go zone. The Chinese government wants its companies to go global, but for Huawei Technologies and ZTE, that has meant heading to the developing world.
Customers in Southeast Asia, the Middle East, sub-Saharan Africa, and Latin America have all been receptive to Chinese-made equipment that performs almost as well and costs far less than comparable gear from Cisco (CSCO), Nortel (NT), and Alcatel-Lucent (ALU). And while the Chinese made some forays into Western Europe they stayed clear of the U.S. after an embarrassing legal challenge by Cisco in 2002 cast an unflattering light on Huawei for alleged copying.
That timidity is now starting to fade. Both Huawei and ZTE have been boosting their sales and marketing teams in the U.S. and becoming more aggressive in trying to land deals with American carriers. Huawei last month inked a deal with Cricket Communications, a subsidiary of Nasdaq-listed Leap Wireless International (LEAP), to supply its latest-generation CDMA multiplexing technology to the San Diego wireless carrier.
A Flurry of Deals for ZTE
The agreement, signed July 11, was the second in the past 12 months for Huawei with Leap. On Aug. 15 last year, Huawei announced that it had won a contract to launch 3G networks for Leap's Cricket subsidiaries in Boise, Idaho, Reno, Nev., and Spokane, Wash.
ZTE, headquartered in the southern Chinese city of Shenzhen along with Huawei, is used to playing second fiddle to its larger cross-town rival. But it has scored the highest-profile win to date in the U.S. On July 17, the Chinese company and Sprint Nextel (S) announced an agreement for ZTE to provide the U.S. carrier with an undisclosed amount of wireless broadband, or WiMAX, equipment.
ZTE has made some smaller deals, too, and George Sun, chief executive of ZTE's American subsidiary, says that the company is also in the final stages of negotiations on a deal to provide ZTE cellular phones to an American customer. After years as a U.S. also-ran, "we have successfully penetrated this market," boasts Sun.
Drop in Domestic Demand
Making headway in the U.S. is just the latest sign that the Big Two Chinese telecom equipment makers are now formidable challengers to the big Western equipment makers. After the bursting of the telecom bubble in 2000, the Chinese largely avoided the U.S. and stuck to easier markets. What the Chinese did have in the U.S. was largely research and development facilities. ZTE operates R&D centers in San Diego, Dallas, and New Jersey, and Huawei has them in Dallas and Silicon Valley.
Instead, the two Chinese companies focused on their domestic market as well as elsewhere in the developing world, where competition was less fierce. That strategy worked nicely for a while but last year started to create some problems for ZTE as demand from China's telecom operators fell because of delays in the launch of 3G cellular networks in the country. ZTE, which is traded on the Hong Kong Stock Exchange, suffered a 41% fall in profits last year, to $100 million, on a 7.7% drop in sales, to $3 billion.
Privately held Huawei reported a big drop in earnings, too, with profits falling from $681 million in 2005 to $512 million in 2006, even as sales rose 42%, to $8.5 billion.
Quality Essential for U.S. Acceptance
Hence the need for more business in the U.S.