ZTE Zips into U.S. Market

ZTE has consolidated its three lines of business in the United States under one company, ZTE USA, as it seeks a wider global role.

Ask someone in the domestic U.S. wireless telecommunications business who the largest telecom manufacturer is in China and they ll likely answer Huawei Technologies. Huawei has gained a lot of visibility outside China, but at home it takes a back seat to ZTE, which is actually the largest in China.

Now, ZTE has started to spread it wings in the United States. It has had research and development centers in New Jersey, Dallas and San Diego since 1998, but this year opened a new U.S. headquarters and sales office in Dallas. On the wireless side, ZTE s ZiMAX Technologies subsidiary, based in San Diego, also struck a key deal with Intel to develop WiMAX gear.

The U.S. corporate headquarters will market products domestically as well as in developing nations in the Western Hemisphere, says George Sun, the CEO of ZTE USA.

Like Huawei, ZTE was founded in Shenzhen, China, where its headquarters remains. It started in 1984 as an electronics company but after accepting a contract to develop a small PBX system, ZTE headed into telecommunications. Its early competition came from western companies such as Ericsson, Motorola and Nokia. Now, ZTE s three main businesses are wireless telecommunications infrastructure, handsets, and wireline switch and access systems. Optical and data communications is a growing sector.

Last year, ZTE, whose stock is traded on the Hong Kong Stock Exchange, reported revenue of about $2.6 billion, an increase of 24.6 percent from the previous year. Sales outside China rose 133.5 percent as ZTE broadened its sales into 60 countries. Seventy percent of its revenues came from wireless telecom.

ZTE s wireless strengths lie in PHS, TD-SCDMA and CDMA and it expects to become a leader in WiMAX, CEO Sun says. He acknowledges the company will have difficulty selling CDMA products in the United States and Canada because of the relationships that established vendors have, but that it can offer some competition with its low-cost solutions. ZTE sees greater opportunities for its CDMA products in developing countries outside of North America.

In the United States, ZTE will instead focus on new technologies, such as WiMAX, and it will seek to partner with established companies, Sun says. The CEO says ZTE knows it has much to learn about the U.S. market and one of the ways it can learn is by going to market with partners.

"We don t want to break the existing business model here," he says.

One thing ZTE has done to better get to know the U.S. market is to hire people locally. Sun is one of the few ZTE USA employees from China, although he has been traveling to the United States for years. Sun also is a director of ZTE s technology center in China.

WiMAX may offer the best opportunity for ZTE in the United States, he says. The company partnered with Intel earlier this year to develop WiMAX technology and markets. ZTE will buy WiMAX chips from both Intel and Fujitsu. Part of the ZTE-Intel partnership will involve working with government regulatory agencies around the world to set aside spectrum for WiMAX.

Sun says ZTE has several trials with operators using its pre-WiMAX equipment.

Another partnership ZTE has developed, although it initially is just for the Chinese market, is with Ericsson. The Swedish company will integrate ZTE s TD-SCDMA Node B into Ericsson s radio access network and plans to jointly hold trials of the technology in China. TD-SCDMA has an opportunity both in China and globally as a 3G solution, Sun says.

ZTE invests about 10 percent of its spending into R&D, and is not only developing WiMAX and TD-SCDMA, but also HSDPA, HSUPA and Enhanced 3G (also called Long Term Evolution), according to Sun. About 60 of ZTE s 80 U.S. employees work in R&D, with the remainder in sales.

In the North American market, just what are ZTE s chances of gaining some market share? Junmei He, a China-based analyst with ABI Research, notes ZTE got 21.5 percent of its revenues from overseas markets in 2004 and is aiming for a bigger share based on its low-cost solutions. But ZTE received just 2.8 percent of its revenues from foreign markets outside of Asia and Africa.

The analyst also warns that ZTE s base in China could be in danger because the 3G license delay is slowing capital spending by carriers and because once the licenses are granted, ZTE s strength in PHS will dissipate.

It will be difficult for ZTE to penetrate North America with its CDMA products, but it does have an opportunity in developing countries, he says. "Currently, ZTE is still taking a price-cutting strategy to win the contracts from overseas markets," the analyst says. "In the domestic market, it is the largest PHS and CDMA equipment provider, and we are expecting it to be one of the largest TD-SCDMA equipment suppliers."