Chinese telco gearmakers aim to leap U.S. barriers

By @ibtimes on

Chinese telecom equipment makers have their sights set on the United States, a massive market that has so far been largely off limits to them because of fears over the security of key national infrastructure.

Huawei , the world's number three seller of network gear, and ZTE, number five, both told Reuters in interviews at the Mobile World Congress in Barcelona that they wanted to crack the United States.

Our presence in the United States is just getting underway, said Lars Bondelind, Huawei's vice-president for wireless marketing. There should be opportunities for us to grow there.

But unlike in Europe, where the groups have made deep inroads in recent year, they face an uphill battle on the western side of the Atlantic.

U.S. lawmakers have raised security concerns about having Chinese suppliers in telecom networks. The Wall Street Journal reported that the issue led Sprint Nextel to leave Huawei and ZTE out of a recent $5 billion contract for its network modernization.

Huawei also had to give up a bid for 3Com in 2008 due to security concerns, and its recent acquisition of technology firm 3Leaf is under White House review.

Xu Ming, the head of wireless networks at ZTE Corp, said he hoped the U.S. market would eventually open to Chinese vendors much as Europe has done.

I know it is not a technical issue keeping us out of the U.S. operators' networks, said Xu in an interview. We have technology to meet their needs, and we are already present there via our handset sales. Hopefully this will change over time in the interest of fairness and free trade.

In interviews with Reuters, Huawei and ZTE said their equipment met international standards and posed no security risks. Both pointed to their success in selling to major operators such as France Telecom , Vodafone , and BT Group as evidence that their gear was secure and reliable.

ZTE sells handsets in the United States but hasn't made much progress selling network gear.

Huawei has about 1,000 staff at two R&D centres in the U.S. and earns about $400-500 million of its $28 billion in revenue there, the company said. It has yet to sign a contract with a major U.S. operator, though it does work with some small operators like Leap Wireless.

At stake is the roughly $7 billion market for network gear in the United States, which was a bright spot of growth last year in a largely stagnant market.

Telecom operators like AT&T and Verizon are investing heavily in mobile capacity to keep up with the rising flow of data on the networks as more people use smartphones to surf the web on the go.

To date, the absence of the Chinese vendors in the U.S. has benefited Alcatel-Lucent , Ericsson and Nokia Siemens Networks , which enjoy fatter margins on contracts there.

Founded in the 1980s, both Huawei and ZTE were nourished by China's national policy to build out telecom networks, winning huge contracts from China Mobile <0941.HK> to cover the country in wireless. From that base, the companies expanded into emerging markets in Africa and Latin America about a decade ago, and then into developed markets.

The companies also get help in the form of multi-billion dollar loans from Chinese state banks, which they in turn offer to operators as an incentive to buy their gear. Such loans, known as vendor financing, have attracted the ire of rivals.

A Huawei spokesman said such vendor financing was accepted industry practice and applied to only a fraction of its contracts.

I think it's unlikely that the Chinese will crack the U.S. market anytime soon, said a high-level executive of a telecom gear maker, who requested anonymity because of the sensitivity of the issue.

There is a growing concern among governments and telecom operators about the risks related to Chinese equipment both from a security point of view and the economic concerns.

The executive argued that Huawei and ZTE were not competing on a fair playing field with European and U.S. gear makers: Huawei and ZTE are not normal companies. They are China Inc -- part of a long-term strategy by the Chinese government to develop in the technology space, he said.

These companies play by a different set of rules on everything from intellectual property and financial reporting to environmental and labor standards.

Pierre Ferragu, an analyst at Bernstein Research, said U.S. operators wouldn't want to take the risk of delaying their network rollouts over political problems linked to their choice of equipment provider.

Unfortunately for Huawei and ZTE, as long as a handful of Republican senators, who are elegantly lobbied by one of the incumbents, talk in Washington about the risks of a Chinese vendor getting a major network contract, the operators will avoid using these manufacturers as long as they can, he said.

Nevertheless, Huawei believes that it will eventually crack the country, just as it did Europe.

As a newcomer, it takes time to build up the trust and get accepted in any market, and this is the process we are in the U.S., said Bondelind. I don't see it as any different than what we had to do in the other markets.

(Additional reporting by Marie Mawad; Editing by Will Waterman)

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