Recent legal ructions in Gauteng courts have thrown the spotlight on the African ambitions of two of China's largest technology corporations.
Telecommunications equipment vendors Huawei Technologies and ZTE have captured some of the biggest networking accounts in SA and are aggressively pushing into markets throughout the continent. Huawei lists Telkom, MTN, Vodacom and Cell C among its local customers, while ZTE has clinched contracts with Cell C, MTN and FibreCo (a partnership between Cell C, Convergence Partners and Internet Solutions).
Combative sales pitches, keen prices and access to attractive financing are the hallmarks of the Chinese firms' success. Rivals are quick to point to the mutual courting between the South African and Chinese governments as a possible further advantage in state contracts.
Claims of collusion
Claims that the Chinese companies might be working in concert were raised at the North Gauteng High Court in May. ZTE Mzansi, a joint venture between ZTE and local investment group 8 Mile, argued in papers filed before the court that its supplier had entered into a 'non-compete' agreement with Huawei. Two months earlier, ZTE Mzansi launched legal action against Telkom to stop it proceeding with contracts awarded to Huawei, as well as Alcatel-Lucent, claiming it had been unfairly excluded from the business. ZTE Mzansi's foray into the courts prompted ZTE to cut ties with its local partner. It claims ZTE Mzansi broke the terms of its shareholder agreement by instigating legal action without its consent. ZTE holds a 40% stake in the local firm. ZTE Mzansi points to the alleged 'non-compete' pact with Huawei as ZTE's motive for terminating its distribution rights.
Both Huawei (pronounced 'who-are-we') and ZTE deny suggestions of collusion. They insist they are competitors in SA and elsewhere in the world.
“To suggest there is no competition between ZTE and Huawei is an absolute joke,” says ZTE SA CEO Cris Fuentes. He points out that ZTE is listed on the stock exchanges of Hong Kong and Shenzhen and is bound by strict regulations that govern corporate conduct and shareholder transparency. ZTE Mzansi CEO Tumi Magasa declined to comment on the dispute.
The fallout between ZTE Mzansi and its Chinese supplier is likely to take a long time to settle. ZTE Mzansi hopes to have its relationship with ZTE reinstated. ZTE wants the local distributor liquidated. Both companies are looking to the courts to settle the matter. ZTE plans to appoint another local partner to work alongside its direct sales force. ZTE Mzansi continues to represent the Chinese company pending the outcome of the legal dispute.
China's increasing presence in Africa's telecommunications sector is part of a multidimensional engagement on the continent.
Daouda Cisse, Centre for Chinese Studies
Meanwhile, Telkom has resumed working with Huawei and Alcatel-Lucent to overhaul its broadband infrastructure after the North Gauteng High Court granted it leave to appeal against ZTE Mzansi's interdict that briefly halted the network upgrade. ZTE Mzansi's objections to the Telkom contract will now be judged by the Supreme Court, in Bloemfontein.
The court-room clashes reveal the size of the business at stake and the Chinese companies' eagerness to grab a big slice. ZTE Mzansi, which was formed in 2010 to target opportunities at state companies Telkom, Sentech and Broadband Infraco, claims it could miss out on business worth R30 billion if it loses the rights to supply ZTE products and services. The Telkom upgrade alone is likely to top R12 billion in the next five years.
ZTE and Huawei have already secured a strong foothold throughout most of Africa and operate in most countries on the continent. Business in Africa has helped fuel the dramatic growth of both companies in the past decade and provides huge potential for further expansion.
Huawei Africa CEO Peng Song anticipates substantial growth in the company's African business in the next five years. “There are a lot of opportunities in Africa, particularly in the provision of networks for data services,” he says.
Peng attributes much of Huawei's success in Africa to the company's long-term commitment to the market and high levels of customer support. “For the first six or seven years after we came to South Africa, we did no business but we kept trying. Step by step, we proved ourselves and now all the major cellphone network operators are customers of Huawei,” he says.
Chinese telecommunications companies have radically changed the telecommunications landscape in Africa and are toppling the former dominance of market leader Ericsson and its rivals Alcatel-Lucent and Nokia-Siemens Networks. Daouda Cisse, research fellow at Stellenbosch University's Centre for Chinese Studies, says Africa's lack of adequate fixed-line telecommunications infrastructure, its vast geography and hunger for economic growth offer great opportunities for Chinese telecommunications companies. Both ZTE and Huawei boast broad product portfolios, ranging from inexpensive phones to sophisticated network infrastructure equipment, as well as comprehensive installation and management services well suited to Africa's often far-flung and inhospitable environments.
Finance for Chinese telecommunications contracts in Africa is frequently provided by the China Export-Import Bank, China Development Bank or the China-Africa Development Fund. Cisse, a frequent commentator on Chinese investment in the African telecommunications market, says these deals are often facilitated by Chinese government agencies, such as its Ministry of Commerce, the National Development & Reform Commission and the State Administration of Foreign Exchange.
The push into Africa, says Cisse, is part of an international drive, encouraged by the Chinese government, to find new markets, develop technology and gain foreign expertise. It also forms part of the Chinese government's broader agenda, he adds.
“China's increasing presence in Africa's telecommunications sector is part of a multidimensional engagement on the continent to serve its broader strategy in the new world political and economic order,” claims Cisse.
Unfair competition
The financial and political muscle behind ZTE and Huawei has frequently raised the ire of competitors and regulators in Africa and elsewhere in the world. Claims of unfair competition have been brought before courts in Kenya, Nigeria and Uganda. Algeria banned ZTE and Huawei from government contracts for two years after representatives of the Chinese firms were convicted of corruption in June. The European Union is currently investigating whether ZTE and Huawei breached its regulations by receiving government subsidies it considers illegal and dumping equipment in its markets at below cost. Similar concerns have been raised by the governments of Australia and India.
There are a lot of opportunities in Africa, particularly in the provision of networks for data services.
Peng Song, Huawei
US security consultancy Langley Intelligence Group Network recently revived suspicions, raised a few years ago, that systems supplied by Chinese telecommunications firms might contain 'back doors' that would enable the suppliers to shut down networks and obtain sensitive information from users of the equipment. ZTE and Huawei vigorously rebutted the allegations.
Controversies that frequently surround ZTE and Huawei often mask other reasons for the Chinese companies' success, argues Lyal White, director of the Centre for Dynamic Markets at Pretoria University's Gordon Institute of Business Science. He points out that ZTE and Huawei are now large, well-run multinational corporations that are investing heavily in research and development as well as social and economic upliftment in Africa.
“ZTE and Huawei represent a new style and a new era of Chinese corporations doing business in Africa. They are well-managed and well-funded global competitors,” says White.
African investment
ZTE and Huawei currently pump around 10% of their annual turnover into research and development - a far higher proportion than most well-established technology companies. They are rapidly expanding their product offerings, signing technology and business partnerships with other suppliers, and pushing beyond their traditional domains into the enterprise and consumer markets.
Investment by ZTE and Huawei in technology training, education and development in Africa is substantial. Huawei's South African subsidiary, in which BEE group Nulane Investments owns 31%, has partnered Vodacom to develop 'green' energy technology, runs a software laboratory with Cell C and operates its own network training centre. ZTE SA has teamed up with the University of the Free State and Durban University of Technology to educate and train local engineers and plans to set up a local research centre within three years.
Controversy surrounding ZTE and Huawei in the rush to grab Africa's burgeoning telecommunications business is unlikely to abate. The political and financial clout of the Chinese companies will continue to rile opponents. But China's attraction to Africa and the growing sophistication and strength of technology vendors such as ZTE and Huawei will make them fierce competitors in the years ahead.
First published in the August 2012 issue of ITWeb Brainstorm magazine.
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