June 20, 2012 – The Wall Street Journal is reporting that Huawei has joined Alcatel-Lucent in walking away from a BSNL contract bid that the Indian operator pegged at roughly $1 billion USD.
It was first reported yesterday that Alcatel-Lucent was walking away from the BSNL contract because it felt that the competing bid from ZTE of just over $842 million was financially untenable. According to reports, today Huawei joined ALU in acknowledging that it will not pursue the BSNL contract if it means matching ZTE’s bid.
News Analysis
While Alcatel-Lucent’s decision to walk away from the BSNL contract rather than match ZTE’s low-ball bid was news, Huawei’s decision to join the Franco-American vendor is a bit of a bombshell. Although China’s leading telecom infrastructure vendor has indicated an increased focus on contract margins, especially as they relate to telecom infrastructure deals, it has never been shy about aggressively pursuing big deals. A comprehensive network upgrade contract with India’s largest telecom network operator certainly qualifies as a “big deal”.
While one could create a madras tapestry out of the nuance involved in this deal, at its root, the fact that two of the three shortlisted vendors opted out of the bidding process is a clear statement that ZTE’s bid amounts to a cut and dry loss leader strategy. That said, just about any of the large telecom equipment vendors will do a loss leader contract if there is material upside to be gained in other aspects of the deal. Here are two of the more interesting sub-plots that are likely involved in this particular saga:
Ganging up on ZTE – Seeing Huawei cry foul on a low-ball bid goes a bit beyond the children’s tale of the “pot calling the kettle black”. For nearly two decades, low-balling bids to win deals was Huawei’s calling card. However, now as Huawei comes under margin pressures, it is being forced into the operating reality of a large, mature company. As such, it now becomes convenient for Huawei to join ALU in calling out its rival Chinese vendor – and make no mistake, it is a fierce and unfriendly rivalry – for employing a “dumping” price strategy.
Indian Difficulties – It is no secret that doing business in India is a tricky proposition. The government imposes a long list of strict guidelines that must be met in terms of production of local goods, using local resources, etc. That makes the cost of entry into the Indian market substantial. Add to this the recent security threat allegations made by the Indian government against Chinese equipment makers, and Huawei might well have decided that the combination of legal and logistical hoops and a rock-bottom contract value was not worth the effort.
Why It Makes Sense for ZTE
At the end of the day, ZTE will have to deal with the same government scrutiny as Huawei if it ultimately wins the BSNL contract. So, then, why is it worth it for ZTE and not Huawei? ZTE is trying aggressively to establish itself as more than just a low cost “box dropper.” So, while using a low-ball bid to overcome that perception might seem counterintuitive, it might not be. Here are some reasons why:
- ZTE needs a high profile stage to demonstrate its product and services capabilities. By its own admission, ZTE is known as a low-cost, somewhat low-tech vendor compared to its key rivals. Winning the BSNL contract gives ZTE the stage that it needs to make its case to the world that it has the capabilities to be a partner in upgrading one of the largest wireless networks in the world under some of the most demanding physical challenges to be found anywhere.
- Indian operators are willing to consider creative managed services contract arrangements. If ZTE can use this contract to help demonstrate its professional services capabilities, it could well be a launching pad for more pervasive and lucrative managed services arrangements down the road.
- ZTE can distance itself from Huawei on the “security” issue. Right or wrong, Huawei’s historic ties to the Chinese military put a lot of fear, uncertainty and doubt in the minds of governments throughout the world. In turn, this has served as an impediment for not only Huawei, but all Chinese equipment vendors. By signing up for what will almost certainly be a demanding trust building exercise with BSNL and the Indian government on a project of this scope, ZTE has the chance to demonstrate to the world that it is willing to do whatever it takes to assuage any fears of malintent that governments might have with respect to Chinese equipment vendors.
The original story as published yesterday can be viewed below.
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June 19, 2012 – Winning a major contract can often boost a company’s stock price, but today turning away from a contract has sent Alcatel-Lucent’s shares (ALU) soaring. The stock is up on news that the French company is opting out of a $1 billion dollar contract order. Dow Jones reported today that Alcatel-Lucent told India’s BSNL that it did not want to try to match ZTE’s bid for the telecom operator’s business.
ZTE reportedly bid $842.06 million for BSNL’s entire contract, which is valued at $1.0 – $1.2 billion, according to BSNL. The Indian company is growing its network in an effort to add more than 14 million mobile telephone connections.
Other bidders for the contract included Ericsson, Huawei, and Nokia Siemens Networks. Earlier this year, BSNL reportedly said that ZTE and Huawei each had the low bid for a different part of the contract. BSNL’s readiness to work with ZTE and Huawei surprised some analysts, because last year India’s Department of Telecom heard allegations that network gear from China posed a security threat to India.
News Analysis
While fellow equipment vendors around the globe might be giving Alcatel-Lucent the proverbial golf clap for publicly calling out ZTE’s willingness to low ball a contract bid, the ultimate outcome of this exercise will likely be a short-lived “Huzzah” from the Euro and US stock markets.
The fact of the matter is that ZTE unapologetically competes on price. They view it as one of the most effective ways for them to build market share, and more importantly, customer relationships that will eventually allow it to start charging higher margin rates for its products and services. This strategy has worked, in some cases, since the dawn of capitalism. Whether it will work for ZTE in this case has yet to be seen. Apparently, it has taken Alcatel-Lucent out of the running. However, assuming ZTE does get the contract, the Chinese vendor will be signing up for a long-term relationship with BSNL, which has proven over time to be a very demanding mistress. There is no guarantee that this ends up aces for ZTE.
From Alcatel-Lucent’s perspective, the shot-in-the-arm stock price jump is a welcome sign that the market respects ALU’s business decision. Too often, public companies feel compelled to do less-than-stellar deals simply for the sake of making quarterly numbers or adding a new logo to the customer page in their Annual Report. Additionally, with no indication of how the market would react, this indicates that Alcatel-Lucent is sticking to its guns in terms of its promise to walk away from business that doesn’t make business sense, regardless of the market’s fickle opinions.
In fairness, however, while it makes for an interesting headline, stuff like this happens all the time. Sometimes it is made public, like when Tellabs walked away from a long-standing broadband access contract with Verizon because of the American carrier’s draconian terms. More often, however, it is done quietly as part the routine cost-benefit analysis that companies do as part of any bid process. It will be interesting to see how Huawei reacts to the news of ZTE’s overall bid being made public. Recently, China’s largest telecom equipment maker has been echoing the West’s cries of financial foul play by ZTE. If Huawei chooses to join ALU in refusing to match ZTE’s bid, then that will be big news.
At the end of the day, however, it will be up to BSNL in this case, and other carriers around the world in future deals, to tell the market whether Alcatel-Lucent made the right decision, or if it is merely falling on its own sword.
