Gravy train from China slows

Market no longer a respite from North America for telecom equipment vendors.

Who knows how these things get started?

Was it the slowdown in demand for telecom equipment in other markets that made China seem so hot? Maybe it was that magic number: a largely untapped market of 1.3 billion potential customers. Or perhaps it was the rented police motorcades with their flashing lights and sirens, which whisked wide-eyed executives from their hotel suites to meetings with senior government officials that made the difference.

However it happened, telecom equipment makers have been betting on China to deliver bullish growth in the years ahead, especially with the sluggish markets in North America and the rest of the world because of sharply reduced carrier spending and shrinking economies. But there are signs that equipment vendors could be headed for a rude awakening if they expect the high rates of growth seen in recent years to continue.

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Who knows how these things get started?

Was it the slowdown in demand for telecom equipment in other markets that made China seem so hot? Maybe it was that magic number: a largely untapped market of 1.3 billion potential customers. Or perhaps it was the rented police motorcades with their flashing lights and sirens, which whisked wide-eyed executives from their hotel suites to meetings with senior government officials that made the difference.

However it happened, telecom equipment makers have been betting on China to deliver bullish growth in the years ahead, especially with the sluggish markets in North America and the rest of the world because of sharply reduced carrier spending and shrinking economies. But there are signs that equipment vendors could be headed for a rude awakening if they expect the high rates of growth seen in recent years to continue.

These days, the growth of China's telecom equipment market is slowing as capital expenditures have fallen by nearly one-third, and analysts see no sign of a bonanza for foreign equipment makers.

"This year there is a decline in the equipment market in China, that is very clear," says Bertrand Bidaud, vice president of telecommunications, Asia-Pacific, at Gartner.

But how can a market often described as one of the world's fastest growing telecom equipment markets be experiencing a slowdown in growth? The slowdown is the result of several factors. On one hand, the Chinese market is not as large as some might think and competition has grown fiercer, both from overseas and domestic equipment vendors. In the midst of growing competition, the country's dominant fixed-line carrier was restructured earlier this year and slowed its capital-expenditure spending. Together, these factors have helped put the screws on equipment vendors already faced with tight profit margins from sales in China.

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In addition, signs of slowing growth have begun to emerge in some parts of China's telecom market. Rural areas in the country, where the overwhelming majority of Chinese live, saw a dramatic slowdown in demand for fixed-line services earlier this year, with growth dropping by 41% compared with the previous year, according to China's Ministry of Information Industry (MII).

Perhaps the greatest effect on equipment spending has come from dominant fixed-line carrier China Telecom, which in May split into two separate entities: China Telecom and China Netcom.

The new China Telecom operates services in 21 provinces in southern and northwestern China and holds 70% of the national trunk transmission network assets owned by the former China Telecom. China Netcom combines the former operations of China Netcom, Jitong Communications and former China Telecom operations in 10 northern provinces.

This restructuring has occupied the attention of both companies and has helped put the breaks on growing Chinese telecommunications equipment spending. By the end of September, capital-expenditure spending by Chinese telecom companies reached $11.6 billion, a drop of 31% compared with the same period last year, according to MII.