Chinese Network Gear Vendor Challenges European Rivals on Quality

Huawei Technologies Co.’s challenge to European rivals has largely focused on its pricing advantage. But industry watchers say the Chinese network-equipment vendor, which last week won a contract from Belgian telecommunications provider Belgacom SA, now has another key selling point: the quality of its technology.

Analysts say Huawei Technologies is increasingly competing on quality, not just prices, especially in Europe. Above, a Huawei convention booth.
As the telecom industry emerges from the global economic slump, European telecommunication-gear companies—global market leader Telefon AB L.M. Ericsson; Nokia Siemens Networks, a joint venture between Finland’s Nokia Corp. and Germany’s Siemens AG; and Paris-based Alcatel-Lucent SA—are likely to face increased pressure from world No. 2 Huawei in their own backyard.

Huawei, which like smaller peer ZTE Corp. is based in the southern Chinese city of Shenzhen, was founded 1988, and revenue and earnings have risen steadily.

Its sales increased to $18.33 billion last year, the latest figure available, from $5.98 billion in 2005, while profit rose to $1.15 billion from $681 million.

While European vendors have, to some extent, been able to keep these low-cost Chinese rivals at bay through superior equipment, Huawei is growing quickly both because it offers lower prices than most rivals and because the quality of its equipment is getting better, said analyst Scott Siegler at research firm Dell’Oro, based in Redwood, Calif. “When we talk to service providers that use Huawei’s equipment, we have been told that it is excellent technology, he said.”

Huawei’s share of the global infrastructure market almost doubled in revenue terms to 20.1% from 10.9% in the third quarter from a year earlier, leaving behind Nokia Siemens and Alcatel-Lucent, according to Dell’Oro.

In the same period, Ericsson’s market share remained largely flat at 31.6%. Nokia Siemens’s share of the market fell to 19.4% from 23.7%, and Alcatel-Lucent’s, to 13.1% from 14.3%. ZTE remained the fifth-largest vendor, but its market share rose to 6.8% from 4.2%.

It is in Europe where the battle is really heating up. Norway’s largest telecom operator, Telenor ASA, this month selected Huawei to supply its new Norwegian wireless network, replacing gear supplied by Ericsson and Nokia Siemens.

The six-year contract, which includes services and maintenance, was handed to Huawei on the basis of several criteria, including price and technical specifications, Telenor Norway Chief Executive Ragnar Karhus said.

The quality of Huawei’s equipment has improved and the company is now “completely in line” with the European vendors in terms of technology and services, Mr. Karhus said.

Last week, Huawei won another European deal, to upgrade Belgacom’s radio-access networks under a long-term agreement. Belgacom is Belgium’s largest telecommunications operator.

Telecom operators typically sign contracts with equipment vendors running for several quarters or even years, and this could slow the entry of new vendors to some extent.

Still, operators across Europe are expected from next year onward to gradually introduce equipment based around a fourth-generation standard known as Long Term Evolution. This should give the Chinese vendors another opportunity.

“We expect the transition to 4G will allow Huawei to gain momentum in Europe,” Goldman Sachs said in a recent note to investors. “Clearly there are rising competitive risks in Western Europe.”

That risk was spelled out clearly by Nokia Chief Financial Officer Rick Simonson, who said recently there is increasing price competition “primarily from the Chinese competitors ZTE and Huawei.”

Telenor’s Mr. Karhus said Huawei supplies particularly effective multibase stations, which support several transmission frequencies and technical standards in the same box, increasing operators’ flexibility.

Nokia Siemens in October posted a 21% drop in third-quarter revenue from a year earlier and said it will lose more market share this year than expected, even as it gave a more positive outlook for the overall market.

As Nokia Siemens is consolidated in Nokia’s balance sheet, it has a significant impact on the handset maker’s financial performance. Nokia reported a worse-than-expected third-quarter loss after it booked a €908 million ($1.36 billion) goodwill impairment on the joint venture because of “challenging competitive factors and market conditions” in the network-infrastructure business.

Huawei has so far had much less success in overseas regions outside Europe, including in the big U.S. and Japanese markets. Last year, the Americas contributed only 12% of the company’s contract sales, compared with 47% from Asia Pacific and 41% from Europe, Middle East and Africa, according to Huawei spokesman Ross Gan.

Due in part to political sensitivity, it has been difficult for Huawei to gain a foothold in North America and Japan, the world’s third-largest telecom-equipment market, after the U.S. and China, said analyst Tina Tian at research firm Gartner Inc.

The U.S. government last year blocked Huawei from buying U.S.-based networking-equipment company 3Com Corp. because it had government contracts to provide security software.

Still, Huawei’s Mr. Gan said the company expects business momentum to continue in North America and Japan, adding that its main competitive strength is still to provide services at a lower total cost of ownership.

In the U.S., it provides telecom equipment and services to Cox Communications Corp. and Clearwire Corp.

Robert Fox, chief branding officer of Huawei’s branding division, said in a recent interview that next year it hopes to add 600 employees to its 900 existing staff in North America. Globally, it has more than 87,500 workers.

Despite its rapid growth, it will still take some time before Huawei approaches the position of market leader Ericsson, which has expanded its presence in North America through the acquisition of Nortel Networks Corp. assets and has won a number of large service contracts with operators including U.S.-based Sprint Nextel Corp.

Ericsson and Alcatel-Lucent earlier this year also won a major contract to supply Verizon Wireless with its fourth-generation wireless network. Vodafone Group PLC has a minority stake in Verizon Wireless, which is majority owned by Verizon Communications Inc.