- Buyers Guide
Africa: a promising land
Chinese-based vendors turn to emerging markets
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.
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.
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 firstname.lastname@example.org.