Next year is set to become the year of 4G in China, with the nation expected to spend well over 100 billion yuan ($16.4 billion) on new mobile networks that offer lightning-fast data speeds for mobile subscribers. The spending bonanza marks an excellent chance for China to show its commitment to free trade, after many were disappointed when foreign companies received only a small fraction of the business in a major series of contracts back in August.
There's no denying that Chinese telecoms equipment makers, most notably Huawei and ZTE (OTCPK:ZTCOY) (HKEx: 763; Shenzhen: 000063), have faced a tough time in the west over the last 2 years. Washington banned the sale of Chinese networking equipment to US telcos in 2012 over security concerns, and the Europe Union this year opened an anti-dumping investigation into Huawei and ZTE over allegations of unfair state support.
China has yet to make any similar formal complaints against major global equipment makers like Ericsson (ERIC) and Alcatel-Lucent (ALU) of Europe, or Cisco (CSCO) of the US. And yet early signs are showing that these multinationals could become the big losers in China's 2014 spending extravaganza, in what would look like politically-motivated retaliatory action by Beijing.
The new spending spree will officially begin when the nation's telecoms regulator, the Ministry of Industry and Information Technology (MIIT), formally awards 4G licenses, a long-anticipated move expected sometime later this month.
Leading telco China Mobile (CHL) (HKEx: 941) will lead the charge with plans to spend 50 billion yuan on more than 400,000 base stations and other infrastructure for its fledgling 4G network. (English article) The nation's 2 smaller telcos are also expected to spend heavily, with China Telecom (CHA) (HKEx: 728) expected to spend 40 billion yuan and China Unicom (CHU) (HKEx: 762) likely to allocate similar funds.
With so much money being spent, there should be plenty of room for contracts for all of the world's major equipment suppliers, both domestic and international, as all fight aggressively for a piece of the new business. But despite their heavy lobbying, the early signs are ominous for the foreign equipment suppliers, who look set to receive awards far smaller than their share of the global market.
The first of those signs came in August when China Mobile gave out 20 billion yuan in new 4G contracts, its largest award to date as it aggressively builds up its network ahead of its rivals. More than half of the contracts went to Chinese firms, with Huawei and ZTE each reportedly receiving about a quarter of the business. Ericsson, Alcatel-Lucent and Nokia Solutions Networks (NOK) each received about 10 percent, giving the trio a modest one-third of the total awards.
That breakdown is far from representative of the global marketplace, where Ericsson and Huawei now lead with about a quarter of the market each, and ZTE is in fifth place behind Nokia Solutions and Alcatel-Lucent. The Chinese carriers don't reveal the reasons for their contract awards, which is relatively common practice for businesses worldwide. But unlike other global carriers, the government-controlled Chinese telcos often take many of their cues from Beijing and thus politics can play a major role in their buying decisions.
More recent signs have also appeared to show the foreign suppliers won't get a fair chance at the 2014 contracts, even though Beijing hasn't announced any major formal objections such as security concerns or unfair state subsidies. In their latest quarterly reports, major multinationals in the telecoms hardware space including Cisco, IBM (NYSE: IBM) and Qualcomm (Nasdaq: QCOM) have all said their China sales have suffered in recent months, with analysts citing fallout from the Edward Snowden spying scandal as a specific cause.
If Beijing is genuinely concerned that equipment from the foreign companies poses a security risk or receives unfair state subsidies, it should openly say so and give evidence to support its suspicions. But if it has no such concerns, it should stand back and let the foreign equipment suppliers compete equally with their Chinese competitors on a level playing field for 4G contracts.
Awards that are more consistent with equipment makers' global market share would show Beijing's commitment to fair trade, even when Chinese companies suffer setbacks overseas. By comparison, more awards of 4G contracts that give disproportionate business to Chinese companies would show that Beijing continues to let politics play a major role in what should otherwise be purely commercial decisions.
Bottom line: The award of 4G contracts in 2014 will test Beijing's commitment to fair trade, with Chinese firms likely to win a majority of the business.
Disclosure: Author has holdings in QCOM and CSCO.