Chinese handcuffs

There are signs equipment vendors could be headed for a rude awakening if they expect the high rates of growth seen in China in recent years to continue.

Telecommunications 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 due to sharply reduced carrier spending and shrinking economies.

But as IDG News Service correspondent Sumner Lemon reports, there are signs equipment vendors could be headed for a rude awakening if they expect the high rates of growth seen in China in recent years to continue. These days, the growth of China’s telecommunications 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.

The slowdown is the result of several factors, Lemon reports. On the one hand, the actual 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 capex spending. Together, these factors have helped put the screws on equipment vendors already faced with tight profit margins from sales in China.

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 impact on equipment spending has come from dominant fixed-line carrier China Telecom, which split in May 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, capex spending by Chinese telecom companies reached $11.6 billion, a drop of 31% compared to the same period last year, according to MII.

Capex spending in 2001 totaled $31.8 billion, up 15.3% from 2000, it said. Nevertheless, the outlook for equipment spending and subscriber growth in some sectors of China’s telecom industry remains healthy, even if expected growth rates will be slower than in previous years. But questions remain as explosive subscriber growth in recent years has given way to maturing markets and more complex challenges, such as growing market segmentation. Mobile telecommunications is one area in which equipment vendors continue to win large deals from Chinese carriers. In October, Motorola, Ericsson, Lucent and Nortel, among others, signed deals with China United Telecommunications (Unicom) to upgrade its Code Division Multiple Access network to the CDMA2000 1X standard. The announcement of the latest CDMA equipment deals, which are valued together at more than $1.2 billion, will see Unicom expand the capacity of its national CDMA network from 15.2 million subscribers to 30 million subscribers.

The deal represents one of the largest single packages of telecom equipment deals awarded by Chinese carriers this year.