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Interview: Wei Zaisheng of ZTE

01 July 2008

Strategic cooperation and orderly competition is the way ahead as the industry faces challenges of price erosion and credit crunch, says Wei Zaisheng, the CFO of ZTE

Read more: ZTE finance CFO China

Wei Zaisheng

Wei Zaisheng: fierce price competition leads to negative effect on the market

After the crisis of the dotcom era at the beginning of the decade, carriers appear now to be more stable and successful. Is that true from your viewpoint?
Wei Zaisheng:
The global telecommunications industry has maintained growth for three consecutive years following financial disciplines carried out by the operators themselves. This has included merger and acquisition activity, network sharing, operating efficiencies and orderly competition.
As a result there has been an increase in their value, protection of investors and customers in the long-term.
The telecommunications industry is a high value-added industry. Competition leads to increased value for the end user, and therefore it is not a zero-sum game.
E-commerce and other new applications such as value-added services create a seamless platform for business cooperation. This necessitates that equipment manufacturers maintain stability of operations, and operators and end users develop new business together.

But how far can the industry continue to grow?
Wei:
The industry has enormous room for growth. It is forecast that total global mobile subscribers will increase from 4.059 billion in 2008 to 4.521 billion in 2012. Of this, WCDMA users are expected to rise from 334 million in 2008 to 1.346 billion in 2012, a compound annual growth rate 42%. This is the fastest growing segment of telecommunications technology.

Are all 3G operations growing fast?
Wei:
WCDMA is representative. CDMA EVDO already has a relatively mature market to support data services. According to the CDMA Development Group, CDMA2000 users have surpassed 426 million and EV-DO users more than 90 million at the end of 2007.
CDMA in Africa has developed rapidly. The UMTS Forum reports that at the end of 2007 WCDMA users exceeded 234 million, of which HSPA accounts for over 32 million users, up 10 times compared to that of the beginning of 2007.
TD-SCDMA is a continuously evolving standard; TDD will be the trend for data services technology.
WiMax has greatly promoted the development of wireless broadband data services. New mobile devices will be an important platform for internet applications, and provide the telecommunications industry with a new round of large-scale innovation.

But when there's all this good news, there are questions about the global economy. How will that affect telecoms?
Wei:
The US sub-prime crisis is forecast to have an adverse impact on global economic growth. As a result manufacturers are facing cost pressures. With the industry's need to speed up the process of the evolution in the telecommunications market, price competition will be even harsher.
However, excessive price competition could lead to an adverse selection of vendors by operators and will ultimately harm the interests of consumers, lead to market failure and slow overall growth of the industry.
Therefore, when choosing a vendor, a telecom operator needs to carry out careful due diligence. That includes the vendor's business segments, structural stability, long-term cooperation capacity, business development ability, innovation capability and strategic choice.
As growth potential is different in regional markets, operators are more and more concerned about vendors' ability to deliver products, innovation and services in local markets.

You believe in what you call an orderly competition strategy and a harmonious development concept?
Wei:
The global telecommunications market has diversified and consumers in different jurisdictions demand different services. In the vast African region and other developing regions, voice and narrowband data services are the main demand. In Western Europe and other developed countries, wireless broadband data services have developed rapidly. Therefore, equipment manufacturers can compete on many levels of the value chain.

How much should operators consider a vendor's research and development strategy?
Wei:
An operator should choose its vendors based on long term R&D capability and sustainability. If there is short-term competitive pressure and too much emphasis on current prices it could lead to the wrong choice. This may lead to equipment manufacturers lowering R&D spending to reduce their costs in the short-term.
As a result of this process, in the long term such operators may be put at a competitive disadvantage. At the same time, asymmetric information could lead to the withdrawal of high-quality products and technologies from the market, and consumers in this market will be unable to distinguish between high and low quality of goods.
This results in the eventual shrinking of market growth potential, and market failure.
At present, some equipment manufacturers continue to lower R&D expenditures as a proportion of their total revenue and the human resource allocated to R&D.
This is a bad sign for the development of the industry as well as for operators, as it reduces their strategic choices.
As innovation is curtailed, then new revenue-generating services are also affected. This leads indirectly to a low valuation for telecom vendors — especially in Europe. Indirectly, the operators are also affected.

But how important is price in all this?
Wei:
Excessive price competition will lead to neglect and inadequate training of human resources. The future of telecom operators depends on continuity of service and the availability of a technological choice.
New technology — from a business perspective — is the application of existing technology rather than the evolution of new, so a variety of technologies will coexist for a long time. This requires operators and equipment manufacturers to continuously invest in a variety of technologies and applications.
In addition, they should also have the capability to provide services rather than just hardware. It is impossible to become a monopoly just using a single technology or an unrealistic price advantage.
Consumers of high-speed data services still need a lot of guidance and development. So operators and equipment manufacturers need to cooperate to ensure common long-term research and development.
Therefore, in a mature market as Western Europe, if long-term relationships are simply replaced by short-term solutions, it will cause difficulties to established vendors. This could jeopardise the smooth development of the industry and consumers' long-term interests.

But you're not saying you disagree with the idea of competition, are you?
Wei:
Of course, appropriate competition will encourage the pace of innovation, and poorly performing enterprises will become the target of M&A activity. In a global industry, this sort of consolidation is normal and to be expected.
A vendor needs to provide good quality equipment and services to the buyer. It needs to take the initiative to ensure that other competitors cannot exceed its offer. The establishment of long-term partnerships and investment of resources into R&D are some of the most effective means to ensure success.
And long-term cooperation requires the long term stability of the vendor's business segments, especially in mobile infrastructure, handsets, optical communications and network businesses.
It is difficult to imagine that a company that is preparing for the sale of a key business or product line will have the capacity to become a long-term partner.
At the same time, operators also need to take the initiative to avoid adverse selection and undertake the necessary due diligence, because public information of listed companies will greatly reduce their time and transaction costs.

How are you in ZTE applying these principles?
Wei:
Our main business and technological offering meets the requirements of operators in western Europe and other developed countries. Our products are strongly complementary to those of western vendors such as Ericsson.
In 2007, Ericsson asked ZTE to take over its entire CDMA network in China — thus, reducing maintenance costs for Ericsson.
We have expanded the size of the market, protected the interests of operators and consumers and has formed a mutually beneficial outcome for all parties.
Our investments in R&D make us more focused on new product development. The earlier that operators work with us, then the more resources that can be allocated by both sides.
In developed countries, we offer operators more choice, it also helps other vendors improve services and innovation. At the same time, compared with other equipment manufacturers, our cost structure, market network and research and development characteristics are its unique competitive advantages that can be shared with partners.

But ZTE is also active in emerging markets. How do your ideas apply there?
Wei:
In Africa and Asia we have an influence on the developing market, which can assist operators as they expand into high-growth markets.
According to Gartner's forecasts, Africa, the Middle East and the Asia-Pacific telecommunications market from the period 2006 to 2011 is expected to grow at a compound annual growth rate of 13% and 6.9% respectively.
That's the highest and second highest in the world, and far higher than in western Europe, which is forecast to grow at 2.5%.
All communication is conducive to narrowing the digital divide. In Africa, India and other regions, our products help enhance the telecommunications penetration rate, improving the local living standards and basic human rights, and also promoting the demand for telecommunications services.
Africa and the Asia-Pacific region are our major international markets. Our significant presence in the high growth areas in Africa, our ability to market products and our adaptability should make us the choice for worldwide expansion.

On the basis of these policies, is ZTE still growing?
Wei:
In 2007 ours revenue reached 34.78 billion yuan. According to IDC this makes us the fastest growing vendor, with a 49.8% increase in revenue compared with 2006. In the first quarter of 2008, revenues grew 43.8%, and profits were up 96%.
As the telecommunications equipment industry's new star, ZTE's performance reflects the strength of Chinese innovation.
We are China's largest listed telecommunications equipment company and we have a strategy of strong sustainability. In the capital markets, belief and confidence in ZTE and our future growth opportunities is reflected in the high valuation of the company.
Our strategy is the harmonious development of the industry by implementing long-term strategic cooperation, orderly competition and improvement of customer value.

But how can you afford the huge cost of innovation in this fast-moving industry?
Wei:
In this industry, innovation for operators and end consumers can add value. This is also where we can leverage its human resources advantage. Our cost per engineer is $27,000 a year, compared to $210,000 for western competitors. That means we can put more resources into R&D.
We had close to 20,000 R&D engineers in May 2008 — out of a total workforce of 50,000.

Is China's education system keeping up the supply?
Wei:
There were 4.13 million graduates in 2006, 4.95 million in 2007 and there will be 5.5 million in 2008. This provides the top quality human capital resources to enable us to offer our customers the necessary services and products.

Back to the credit crunch. How do you think economic uncertainty will affect ZTE and other companies in the industry?
Wei:
Use of telecommunications is less affected by the economic crisis as a whole, but changes in the structure of consumption are still very rapid. As the consumer demand for voice is proportionately replaced by data spend, so narrow-band data consumption will be replaced by consumer broadband data, and the result will be a new round of large-scale innovation.
In order to develop new business more effectively, we are looking for strategic partners to secure resources, strengthen cooperation and develop new products so that we can provide competitiveness to our partners. This is different from newly emerging companies with their willingness to enter the market with a low price only led strategy, in order to achieve short term business targets.
This fierce price competition easily leads to adverse selection — and the industry's long-term development and the effect on the local job market is negative.

How does a Chinese company like ZTE adapt to doing business in the wider world?
Wei:
Our globalisation strategy has a policy of local integration and corporate and social responsibility. As China's first certified lead-free company, this helps our products to break into the European market.
We were the first Chinese company to receive the award for best employer in China by the Chartered Institute of Management Accountants.
The ratio of local staff in overseas offices exceeds 50% and a lot of procurement of services is done locally. This contributes to economic development and employment locally.
In 2008, our products won Best Green Innovation Award, awarded by the International Engineering Consortium and Convergence World. This was in recognition of our efforts in energy-saving and environmental protection and continuous efforts in innovation.
We believe in large-scale expansion and localisation of services, so that our partners can enjoy long-term services. These measures are bound to bring our customers long-term value.
Looking to the future, we will be a company that leverages our global network and resources to provide quality services, enhance the value of long-term partnerships, and promote the innovation and development of the telecom industry. GTB




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