Nortel sees breaks in China

The Asian market is key to the networking gear maker's future, company executives told press and analysts on Wednesday at its annual investor conference here.

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"For Nortel to be successful in the long term, we have to be successful in Asia," said Frank Dunn, chief executive of Nortel Networks. "China and India are very important, and those regions need to be a focus for us."

The two technology areas that will fuel growth in China are voice over Internet Protocol (VoIP) and third-generation (3G wireless, Nortel executives said.

Robert Mao, CEO of Nortel's Chinese unit, said VoIP is still in its early days in that country but that 3G wireless installments should pick up dramatically in the second half of 2004, when the Chinese government plans to issue spectrum licenses to four telecommunications providers.

The licenses have been delayed more than a year, while China finalizes its own standard version of the 3G technology known as Time Division Synchronous Code Division Multiple Access. It rivals Europe's Wideband Code Division Multiple Access (W-CDMA) standard and Qualcomm's CDMA2000. Two of the licenses are expected to go to incumbents, while the other two will be awarded to new players.

Nortel is no newcomer to the Chinese market. It has been delivering telecom infrastructure equipment there for the past 30 years.

"Ten years ago, when Nortel was first deploying fiber and optical gear, people thought they were crazy," said Chris Nicoll, a telecom infrastructure analyst at research firm Current Analysis. "There was no real market demand then. Now, everyone wants to get into the Chinese market."

Eastern promise
With a population of nearly 1.3 billion, China presents a big opportunity for growth. Deregulation of the telecommunications market there and China's entrance into the World Trade Organization has spurred hopes of a massive spending spree. The country has been a bright spot for telecommunications gear makers in the past few years, as sales in North America and Europe have slumped.

In 1998, China accounted for about 10 percent of the worldwide wireline and wireless subscriber base, according to Mao. By the end of 2003, that had risen to roughly 20 percent.

"The market is here today," he said. "We've already seen tremendous growth, and we expect it to continue for the next several years."

There are about 260 million wireline data and telephony subscribers in China and about 280 wireless users. Wireless subscriptions are growing at about 4 million per month, Mao said.

Nortel isn't the only company vying for business in China. It not only faces its usual rivals Alcatel, Cisco Systems, Lucent Technologies and Siemens--which all have entrenched businesses in China--but also has to battle local providers such as Huawei Technologies and ZTE.

"Some business will go to local competitors," Mao said. "The government encourages this, but they are in the mind-set of trading market share for technology. If you don't have new and innovative technology, you won't get the business."

Foreign companies will need to prove that their technology is being used in significant networks around the world, Mao added. He said Chinese carriers have been looking closely at Nortel's recent contract wins with AT&T Wireless and Verizon Communications.

"No foreign supplier will win new technology deals in China, if they don't show an ability to win in other markets," he said. "They are a conservative, in that respect. They want to know that others are using your technology."

Kevin Mitchell, a directing analyst with Infonetics Research, said he expects North American companies to do well in China over the next couple years, especially when it comes to sales of new technology, such as VoIP and 3G wireless.

"The bulk of North American company sales of new technologies like VoIP are not in North America; they're in Asia," he said. "There will likely continue to be a faster uptake for emerging technologies in Asia, especially China."

In addition, China is on the cusp of even bigger growth, spurred by the planned move of 25 percent of its population--nearly 300 million people--to urban areas, according to Mao.

"China is in a unique position to create their own end user demand," said Nicoll from Current Analysis, who nevertheless was skeptical about the effect of the urban development.

"These cities won't be built overnight. I see these build-outs playing a big role in Nortel's growth over the next 10 years," but it will be at the end of the period rather than at the beginning, he said.