Thursday, April 03, 2008

On ZTE

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As I mentioned in some previous posts, I spent most of last week at an analysts' conference in Shenzhen, China, sponsored by ZTE Corporation. To folks like myself in the U.S., ZTE has been a fairly "invisible" company; this conference was an attempt to make the company, and its products, more visible.

ZTE is one of the largest telecommunications equipment manufacturers in China. Its largest local competitors are Huawei and UTStarcom. The Western companies that I'd compare ZTE to most closely are Ericsson, Alcatel-Lucent, Nokia Siemens Networks, and to a lesser extent, Cisco. ZTE is a wireless powerhouse; it has product lines covering GSM, CDMA, WiMAX, and the Chinese standard TD-SCDMA (where it's the market leader). It's also a large supplier of wireline access equipment (IP DSLAMs and xPONs) and routers.

In IPTV, ZTE supplies all the key system components except live encoders. Everything else--Video-on-Demand systems, Set-Top Boxes, Middleware and Content Protection--ZTE can provide itself, or integrate other companies' products into a turnkey system. ZTE's approach is closest to that of UTStarcom, a U.S.-based company with a huge presence in China, but the companies have two different strategies: UTStarcom prefers to sell complete, turnkey systems using its components, while ZTE will sell complete systems or individual components. This enables ZTE to sell to service providers that want "best-of-breed" products, as well as those who want everything from one company.

What both ZTE and UTStarcom have in common is that they're both focusing on China, India, and developing markets. In my opinion, this is a very smart approach for ZTE. While the company has some advanced technology, such as software-defined base station radios for mobile applications, it can best be thought of as a "fast follower." ZTE is unlikely to be the company to bring technology to market first, but when its products do come to market, they tend to be less expensive than their Western counterparts. This is very important for service providers in developing countries with very low ARPUs (Average Monthly Revenues Per User).

Even though ZTE isn't much of a market factor in Western Europe or North America, it doesn't mean that the Western equipment vendors can breath easy. I see ZTE, Huawei and UTStarcom much as Toyota, Honda and Nissan were when they entered the U.S. automobile market in the early 1960s. The first Japanese cars to reach U.S. shores were tiny, underpowered and not terribly reliable, which made it easy for both American and European manufacturers to ignore them. However, the Japanese manufacturers learned what American consumers wanted, and gave it to them with high quality and low prices, eventually driving American manufacturers out of the small car market. Even after Japanese manufacturers went upmarket and raised their prices, U.S. consumers still preferred their products.

I think that ZTE is going to be one of the world leaders in mobile, and possibly wireline, communications by the middle of the next decade. In fact, it may not take that long.

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