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NewsGlobe: Commentary
Africa: a promising land
Chinese-based vendors turn to emerging markets
by Lin Sun
In mid-January 2008, ZTE announced sale of WiMAX equipment to Libya
Telecom & Technology, the first commercial WiMAX network in Africa.
The future network will cover eight cities in Libya including Tripoli. The
sale was more symbolic than dollar value, the Chinese telecom equipment
maker hopes it will open a new window in Africa after years of
cultivation. This was the second “first;” two years ago, ZTE sold a
WCDMA network to Nigeria, first 3G technology in the continent.
According to World Bank, Africa is expected to see a wave of rapid
growth in telecommunications in the next few years with spending to top
$3.2 billion by 2009. The growth is driven by two fundamental forces:
first, the economy will continue to grow at an aggregate 3.5% a year
which will fuel demand for telecom infrastructure and services; second,
in a land of nearly 900 million people, cell phone density is below 10%. In
countries south of Sahara Desert, only 50% of land mass is covered by
mobile networks.
Many African countries have realized the importance of telecom in
economic development and shifted gears to accelerate mobile
communications which is more cost effective to build than traditional
fixed access. And this spells opportunity for Chinese equipment
companies like Huawei and ZTE that offer turnkey solutions for a wide
range of customer requirements. As equipment sales at home is slowing
down, Chinese companies are turning their eyes to overseas markets,
especially emerging markets like Africa where wireless and mobile
communications is just taking off. After years of hard work,
perseverance, even loss of human life, the Chinese now begin to reap
rewards.
Strong foothold
Huawei Technologies, the largest telecom equipment manufacturer in
China, began to plod its way into Africa in 1998 when the market was
heavily dominated by big names like Ericsson, Nokia and Alcatel. Because
of low sales volume and little competition, local customers had no choice
but to pay a hefty price for Western technology and products. Huawei
saw opportunity in Africa by selling its equipment at a discount despite
the fact the company was an unknown player then. The strategy worked
in breaking the barrier and bringing Huawei in the foray. Although sales
were mostly small, margins remained high. As many rivals had a tendency
to overlook Africa but focus on “primary” markets like Europe, North
America and Asia-Pacific, the Chinese companies were able to benefit
from a “virtual vacuum” in the region.
Today, Huawei is the largest supplier of CDMA equipment and third in
GSM in Sub-Saharan countries; it is also the largest supplier for NGN
solutions and transmission products in the region. Total sales exceeded
$1 billion in 2006 (US$2.1 billion in contract value) or about 13% of total
revenue. In 2007, share of international sales surged to 72% of total
revenue with $11.5 billion, from just 10% in 2000. To localize operations,
Huawei has set up 32 rep offices and service centers from Cairo to
Johannesburg serving some 40 countries in Africa. Huawei also has
training centers in Nigeria, Kenya, Egypt and Tunisia to assist local
engineers and customers. Huawei is a major partner of MTN, the largest
carrier in the region. Together, Huawei maintains a team of 2,500
employees in Africa, 60% of them are local hires.
Africa is also a target market for ZTE, another leading equipment
manufacturer. ZTE reported overseas sales more than doubled in 2007
thanks to aggressive expansion in overseas operations. Although ZTE is
smaller than Huawei in terms of revenue, its sales in Africa weigh 12% of
annual revenue (as of June 2007), after 40% increase in 2006. Overall
share of international sales stood at 54% of overall revenue, mainly from
mobile networks such as CDMA and 3G. The company predicts overseas
sales will increase 40% a year in the next three years especially in 3G
equipment. ZTE has another advantage over Huawei. It is one of the
largest handset manufacturers in the world. In 2007, the company
shipped more than 30 million handsets worldwide, most low-end models
for emerging markets. As the company has established itself as a major
mobilecom equipment supplier, it expects to sell more handsets either
through local or Western carriers that have a presence in the region.
When you talk about handsets, China produced about 500 million
handsets in 2007. About 75% of these handsets were exported to almost
every country in the world, most bundled with service by local carriers.
Export is the only way for Chinese handset makers to absorb large
production capacity, and to take advantage of booming demand for
mobile communications. Although Africa is not a major destination for
handset export, total volume has risen to about 5 million due to strong
demand. Like telecom equipment, the key attribute for Chinese handset
export is competitive price for low-end and mid-range models and rely on
high volumes for profit.
So far, the “bare-bone” pricing has worked in Africa for Chinese
companies. Typically, Chinese companies bid their price at 30-40% below
rivals in order to win projects. It is no longer a secret: costs for product
development, including R&D, manufacturing, distribution and sales are
generally lower at Chinese companies than their Western counterparts.
Average cost of labor in China, for instance, is about one-tenth of that
in the West, not to mention associated costs in job safety, medical and
other benefits mandatory for Western workers. Fair or not, the Chinese
companies are able to transfer savings in labor and other resources to
low price and use it as leverage in emerging markets like Africa. A
government official in Nigeria overseeing telecom projects admits nearly
half of the projects are snatched up by Huawei and ZTE; the reason:
competitive pricing and persistent marketing.
Challenges ahead
While Africa presents a new frontier for Chinese companies, the road to
success has been arduous and difficult. For one, living conditions in most
locales where projects take place can be extremely harsh. In many
cases, Chinese employees have to endure extreme temperatures, fatigue
from long hours and nonstop travel, and suffer from endemic malaise.
People who have spent time in Africa remember scarcity of basic supply,
like food, water and medicine, many of them had to rely on instant
noodles for weeks at a time. In some cases, projects were postponed or
suspended due to treacherous weather, natural disaster or political
turmoil. At least one Chinese employee died in 2007 while working in
Kenya.
Harsh conditions and loneliness are not the only problems facing Chinese
companies. They often run into miscommunication and trust problems
with local staff and customers. Historically Chinese products had limited
exposure in Africa than familiar names like Ericsson and Alcatel. It
requires a lot of time and patience to answer questions about product
quality and specs, and dispel any misgivings and concerns. The Chinese
companies make more effort than their competitors to create name
recognition and establish trust with local customers and suppliers. All this
would inevitably add to total cost, but Huawei and ZTE insist sales in
Africa still ring in “very good” margins.
While a combination of persistence, hard work and right strategy has
helped Chinese telecom equipment manufacturers grab a significant
chunk of sales in Africa from Western domination, maintaining local
operations in a different culture is a serious challenge to the Chinese.
Different from other markets where Chinese companies typically use local
managers to run operations, in Africa, most local people do not speak
English, and they lack basic knowledge of telecom technology and
products. To ensure smooth operations, Chinese companies have to
rotate a large number of employees to work in Africa, sometimes for
months in a row to see through installation and testing. This adds strain
to employee morale as they have to stay away from family for a long
period of time.
Low price, which has led Chinese companies in the door of many
countries, can also tarnish the image of a technology leader and have
negative impression on the product. In many countries, low pricing is
often associated with poor quality and rush to make quick sales. The
Chinese companies have learned that low price alone does not always
land them on the deal; other issues like on-schedule delivery, installation
and customer support are equally as important. To reverse it, the
Chinese companies begin to take the lead in what they believe the
future trend of telecom networks. Huawei, for instance, has launched a
campaign to promote IP replacing TDM as the core for all future telecom
networks, including 3G. ZTE is also playing a leadership role in NGN-
softswitch for long-haul transmission.
After ten years of hard work, Chinese companies have begun to enjoy
benefits in Africa. Although Africa contributes to a relatively small portion
of revenue compared to other markets like Europe and Asia-Pacific, the
growth potential is evident given the region’s lack of telecom
infrastructure and basic service. This is why companies like Huawei and
ZTE put strong emphasis on Africa even when sales in other parts of the
world generate higher revenue. Africa has become an indispensable part
of Chinese companies as they try to become a true international player.
Perhaps Africa is a good match for the Chinese ambition as they tend to
be modest and friendly to local customers, but in the end, it is
technology, strong R&D and long-term commitment that turn great
potential to business success.
Lin Sun is a Beijing-based consultant. He has over 20 years of
experience with Chinese telecom industry. Contact him at
lsun@chinanex.com.
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