China and India: An Opportunity, and A Threat
By Steve Wallage, Wed Feb 16 08:30:00 GMT 2005
The mobile industry typically thinks of India and China in terms of opportunity -- but the reality is that they are an increasing threat as well.
With a combined population of up to 3 billion and rapid predicted growth in mobile usage, much of the talk at 3GSM is about the opportunity in India and China. Yes, vendors realize that they are facing increasingly fierce domestic competitors in the two markets. Take the Chinese handset market, where the domestic vendors now claim over 50% of the market. But the threat that is usually ignored is Chinese and Indian vendors entering European and US markets.
The Politics and Background
One of the false assumptions made by many Western commentators is that Chinese and Indian vendors do not need to export, given their huge and often untapped domestic markets. Of course, another is that they do not have the skills or expertise to compete against Western vendors -- something the 80,000-plus software developers that graudate each year or the more than 3 million Java developers in India proves simply isn't true. There are four main reasons why the Indian and Chinese vendors are looking to export.
One, government initiatives exist in both countries to create global players. As is widely known, both China and India have clear long-term IT growth plans. In China, the Ministry of Information Industry is typically looking at least five years ahead, and up to 15 years. Equally, in India, groups such as Nasscom (the National Association for Software and Services Companies) have typically ten-year horizons. A key aim in both countries is to create global titans.
Two, they are using the expertise created in the country, partly by the joint ventures with Western vendors, to create export opportunities. In China, this is known as the "inside-out" strategy: building up a strong domestic player and then moving into international markets. These domestic players have already become strong, as shown by their ability to lead joint ventures -- such as Chinese handset vendor TCL taking a 55% stake in its JV with Alcatel -- or make huge acquisitions, such as Lenovo's purchase of the PC-making arm of IBM for $1.25 billion.
Three, they are looking to escape increasingly intense domestic competition. It is not just Western vendors who have faced margin and market share pressure, particularly in China, over the last several years. Domestic vendors also want to grow and diversify.
Four, the Chinese and Indian vendors see demand from international markets. It is falsely assumed this is always at the low-end and low-cost part of the market, although this is sometimes a starting point. Sometimes it is in similar markets, which are either at comparable stages of development or are close geographically and culturally. In other areas, it can be where the vendors see they could be potential global leaders.
China's Infrastructure Vendors
Moving from the general to the specific, let's take a look at three of China's largest infrastructure players. Huawei, UTStarcom and ZTE earned around 1% of their revenues outside China in 2000; in 2004, the figure is expected to be around 33%.
Chinese researchers Norson Consulting expect this proportion to rise to 70% for Huawei, and 80% for both UTStarcom and ZTE by 2008. The majority of international sales for Huawei and ZTE are in mobile infrastructure.
The Chinese vendors have typically approached price-conscious markets where their domestic experience is helpful, particularly other emerging markets like parts of Asia, Eastern Europe and the Middle East.
Another good example is Africa, where ZTE has sold fixed and/or mobile infrastructure to more than 14 countries. It is a fallacy, too, to think it is only older technology that the Chinese vendors are selling. For example, in September, ZTE sold the first 3G network in Tunisia for commercial launch in 2005. Huawei has just sold a package to Hong Kong mobile operator Sunday that includes all 3G elements, including core and wireless access networks, mobile intelligent network, data service platform and applications.
This latter deal is also interesting for two other reasons. First, the terms of the deal imply something like 150% financing. This may have been helped by the Chinese government policy of providing favorable loans to the vendors it sees as potential global players. Second, the desire from Huawei to get a strong "international" reference customer, taking Sunday away from Nortel.
Chinese Handset Vendors and Applications
From Western vendors dominating the Chinese handset market, domestic vendors now claim over 50% (although this figure is hard to assess). What is clear is that the local vendors have used their domestic knowledge to fight back -- for example, Ningbo Bird by targeting smaller towns and cities, and DBTel competing on price.
Chinese vendor TCL has already joined the major leagues by forming a joint venture with Alcatel. Formed in August 2004, TCL & Alcatel Mobile Phones (TAMP) is 55% owned by TCL, with Alcatel owning the remaining 45%. Other major Western vendors such as Siemens have also partnered with Chinese vendors to reduce their exposure to the market.
A different approach is being taken by Ningbo Bird, which had total handset sales of around 15 million in 2004, with 3 million outside China. In 2003, it established Bird International in Hong Kong, and grew international sales by 500% in 2004 and has plans to sell 20 million handsets outside China a year by 2006. Its key differentiators have been cost and innovative designs.
Luckily for Western mobile application developers, the Chinese market has tended to focus inwards or on other markets using Mandarin. However, the Chinese applications market is huge and innovative. China Mobile and Unicom copied the NTT DoCoMo model by deploying mobile data service platforms like Monternet and UniInfo, respectively. Both operators collect roughly 15% of all mobile data revenue as a flat fee and an additional 5% to 7% as transmission fees, with all remaining revenue going to Chinese WASPs. Although the Chinese WASPs have recently suffered from a crackdown on their content, the market at the developer level is still thriving. Vodafone is rumored to be moving its own development work into China (and India) to take advantage of this base. It is likely that several Chinese application vendors will emerge as global players over the next few years.
India has been behind China in many areas of mobile development and creating global mobile players. One of the signs of its future emergence is all the Western money set to enter the country in 2005 with Nokia, currently the leading handset provider to the country, at the forefront.
There are three specific areas in which Indian vendors are likely to become international and global players. The first is the development of mobile applications and software by Indian software and outsourcing titans such as Wipro, Satyam and Infosys. These companies already have a global presence and will use demand in India as a basis for international expansion.
The second is in specific mobile applications areas where Indian companies believe they an edge. Two examples are gaming and mobile Linux. Vendors on the gaming side include Dhruva Interactive, IndiaGames Ltd, Itfinity and Paradox Studios. IndiaGames was behind a globally released game based on the Hollywood movie Spiderman, and Dhruva has a license with Pat Cash for a mobile tennis game and another for a game based on Charlie Chaplin.
The third area are national and governmental awards and campaigns to foster the development of global players from India. One example is the Dhirubhai Ambani Developer Programme (DADP), which aims to nurture talented software developers in the mobile application space. It supports over 25,000 developers, and is currently running a competition to find the best J2ME applications.
Western vendors still tend to be somewhat arrogant about the potential threat from Chinese and Indian vendors. Looking specifically at the threat from Chinese infrastructure vendors, they assume they will lose only business in emerging markets, where the deal is so cheap that they would not want the business, and where the infrastructure is not critical.
The first assumption is becoming less true -- for example, Huawei has sold mobile infrastructure into Portugal and has trials in the Czech Republic -- and also less relevant, as it is emerging markets where the Western vendors expect to see growth in 2005 and beyond. If you speak to analyst firms, you will also hear about the consulting projects they are now getting from Chinese infrastructure vendors focused on European markets.
The second has sometimes been true and while there is no doubt that the Chinese vendors will always be price-competitive, bottom line for the Western vendors is whether they win or lose the business (particularly given that the Chinese government may subsidize the domestic vendors). The third point is certainly becoming less true, as illustrated by the Sunday deal.
The threat from Chinese and Indian vendors varies by market sector and by region, but it is growing, and will be a major competitive factor in the global mobile sector in many markets within the next several years.