India, China Telecom Equipment Mistrust Boils Over

The result has been billions of dollars of lost revenue for telecom vendors.

Over the past six months, India’s simmering mistrust of China has come to a boil in the telecom equipment market, iSuppli Corp. believes.

According to Chinese equipment vendors Huawei Technologies and ZTE, the Indian government started blocking purchase orders placed with them in mid-February, kicking off a sequence of events that resulted in billions of dollars of lost revenue for global telecom market vendors and significant project delays for India’s telecom service providers. India’s concern stems from suspicions that foreign-made equipment—particularly Chinese gear—represented a significant security risk given the possibility that sensitive information could be transmitted to foreign governments through firmware back doors.

As pieced together from accounts given by numerous service providers and equipment vendors, India started requiring all equipment purchase orders to be reviewed by the government for approval before allowing authorization. While western vendors experienced severe delays in the approval process, purchase orders with Chinese vendors were rejected outright. Nonetheless, India has never acknowledged that a ban existed, and says simply that orders were put on “indefinite hold” while being investigated.

By the end of June, a total of 450 orders amounting to more than $2 billion had been put on hold due to the security clearance process, said India’s Economic Times Of these, 27 had been approved—all with Western vendors such as Alcatel-Lucent, Ericsson and Nokia Siemens Networks.

Excluded from Bidding
In May, India’s state-run telephone company BSNL announced that Huawei and ZTE would be excluded from bidding on a $500 million GSM expansion project, most likely to avoid delays because of the security clearance process. The decision came despite the fact that BSNL had chosen Huawei as a GSM vendor for a project earlier in the year that had since then been cancelled, telecom market research from iSuppli indicated.

In July, both Nokia Siemens and Ericsson reported that their second-quarter revenues had been significantly diminished by clearance delays in India; Nokia Siemens put the figure at $257 million. For its part, Ericsson did not assign a specific value to the loss, but the company’s revenues in India were down 63 percent year-on-year, equivalent to a total of $312 million.



New Security Regulations
On July 27, India announced that it was repealing the security clearance process in favor of a new regime of security regulations. While the government will no longer interject itself in the PO process, it will push more of the security burden onto the service providers themselves. The new rules will require operators to use the services of approved independent security consulting firms to audit new imported equipment. A security breach could result in an operator being fined $11 million per purchase order plus the value of the order, potentially increasing the fine to many tens or even hundreds of millions of dollars. In addition, the vendor could be banned from further business in India.

While the new regulations seem to level the playing field for China electronics vendors, they could still suffer from the common perception of having close ties to the Chinese government. Operators, faced with crippling fines, are likely to show preferential treatment to public, more transparent Western vendors with long track records.

Fair or not, Huawei’s opaque ownership and structure, as well as its CEO’s well-known ties to the People’s Liberation Army and the Communist party, are likely to handicap the company in India and other countries—at least until Huawei becomes considerably more transparent and consciously distances itself from Beijing.

Security Concerns Plague Chinese Vendors
While the market in India is enormous, India is not the only country that has been hostile to Chinese telecom vendors. Huawei and ZTE rank among the top telecom equipment vendors globally, but neither has been able to crack the U.S. market despite more than a decade of effort. Lingering concerns over security have reportedly led the U.S. government to ban transmission of its sensitive data over networks using Chinese equipment. A 2008 Pentagon report to Congress highlighted Huawei’s links to the Chinese government, furthering concerns. Huawei’s efforts to buy its way into the U.S. market through acquisitions of 3COM, 2Wire, and Motorola’s wireless unit have all been scuttled due to concerns of a U.S. government veto.

The key elements that have made Chinese vendors successful—inexpensive labor, a home-field advantage in China’s hot telecom market, and access to an almost unlimited line of credit though government banks—are unlikely to disappear any time soon. However, the vendors face serious opposition in several of the largest markets left to penetrate. Having already picked the low-hanging fruit, these companies may find it more difficult to grow in the future than they have in the past. And each pause on the way to growth for the Chinese companies is an opportunity instead for Western vendors to get back on their feet and adjust to the new competition.

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