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
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
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
But when there's all this good news, there are
questions about the global economy. How will that affect
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.