Huawei, ZTE In Latest PR Offensive With US Spending Spree 华为、中兴签订美国大单恐醉翁之意不在酒

By newsdoug on February 21, 2012

China’s telecoms manufacturing stars Huawei and ZTE (HKEx: 763; Shenzhen: 000063) are turning up their PR offensives in the US with announcements of major new purchasing deals, in what also looks like an intensifying rivalry that could ultimately result in a bruising war as each vies for new dominance in the low-cost smartphone space. It what looks almost like a case of deja vu, both companies have just announced new deals that look almost identical to purchase billions of dollars worth of chips from leading US design houses Qualcomm (Nasdaq: QCOM) and Broadcom (Nasdaq: BRCM). Perhaps not coincidentally, both deals come just days after a visit by Chinese Vice President Xi Jinping to Southern California, where both Qualcomm and Broadcom are based, and I suspect all 4 companies were working hard to finalize their deals to announce during that visit but probably couldn’t meet the deadline. Still both deals mark relatively major formal commitments to US purchasing by both Huawei and ZTE, which are both trying to prove that they can be strong partners in the lucrative but competitive US market, where suspicions run high that both companies, especially Huawei, are spying arms of Beijiing. Let’s look at ZTE’s deal first, which will see it invest $4 billion over the next 4 years to buy chips from Qualcomm, and another $1 billion to buy chips from Broadcom over the same period. (company announcement) In a separate announcement ZTE also said it will launch 2 new 4G smartphones at the world’s biggest telecoms show coming up next month in Spain, reflecting its recent big push into cellphones and indicating that a big portion of the purchasing for chips from Qualcomm and Broadcom over the next 4 years will be for use in cellphones. Meantime, Huawei has also announced it will buy $6 billion worth of chips over the next 3 years from 3 California companies, including Qualcomm, Broadcom and a third company called Avago Technologies. (English article) From a business perspective, both of these chip-buying deals look more like public relations exercises than anything else, though they also reflect the growing rivalry between Huawei and ZTE as each tries to develop its cellphone business, which tends to be less cyclical and less politically sensitive than their older networking equipment businesses. Both Huawei, ZTE, and nearly any telecoms equipment and handset maker for that matter, have both been clients for a long time already for Qualcomm and Broadcom, which are 2 of the world’s leading makers of both networking equipment and cellphone chips. My ZTE sources tell me that ZTE purchased more than $3.5 billion worth of chips and other telecoms components from US firms in the first 10 months of last year alone, although that list also included names like IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and Texas Instruments (NYSE: TXN) in addition to Qualcomm and Broadcom. I suspect this latest agreement probably doesn’t represent a huge increase in purchasing from Qualcomm and Broadcom, but is rather designed to highlight how both companies support the US economy and local jobs through their big purchasing. That’s important as both Huawei and ZTE work hard to penetrate the tough but potentially lucrative US market, with Huawei in particular embarking on aggressive PR campaign over the last year that included hiring more foreigners and making some goodwill investments in the US. At the same time, these big purchasing commitments also reflect both companies’ growing interest in cellphones, especially low-cost smartphones, with both recently stating their goals of becoming top 5 global players in the next few years. (previous post) These latest announcements indicate the rivalry on the low-cost smartphone front is heating up, which has already begun to take a toll on ZTE’s margins and bottom line and will likely erode profits at both companies in what could turn into a bruising battle over the next few years.

Bottom line: New mutlibillion-dollar purchasing announcements by Huawei and ZTE look largely like PR moves aimed at US politicians, but also reflect a growing cellphone rivalry between the pair.

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