ZTE Corp. of China, the official version

MANILA, Philippines – As Rodolfo “Jun” Lozada Jr., a key witness in the cancelled national broadband network project of the government, delivered an explosive testimony at the Senate NBN hearing last Friday, the public felt a renewed interest in the deal and those party to it, particularly ZTE Corp. of China.

Zhong Xing Telecommunication Equipment Co. Limited (ZTE), a global provider of telecom equipment and network solutions founded in 1985, bagged the controversial NBN deal.

Despite allegations of bribery and other under-the-table transactions, ZTE has repeatedly stressed that there was complete transparency in the proposal, evaluation and approval of its application for the Philippines’ NBN contract.

ZTE, in particular, cited its standing as a billion-dollar company which is the only publicly listed telecom manufacturer in the Hong Kong and Shenzhen Stock Exchanges. The company also said that it  has a proven track record for turn-key projects such as the NBN.

“We have successfully completed projects in over 120 countries, including the Philippines where we have been doing business since 2002,” ZTE earlier said in a statement.

How ZTE is taking China’s economic ambitions to the developing world was chronicled in the May 2007 issue of CFO Asia, the top magazine in Asia for Chief Financial Officers (CFO), finance directors and treasurers.

The article, titled “National Champion,” narrates how on May 2003, Patrick Wei, head of the financial supervision department for ZTE, was sent as an emissary of ZTE CFO Wei Zaisheng in Algeria, to win a contract to build a mobile phone network under the CMDA standard - Algeria’s first.

At that time, Algeria, the second largest country in the African continent, was in total chaos as it had just been struck by a powerful earthquake, resulting in the collapse of buildings and the death of more than two thousand people.

It was Patrick’s first major assignment overseas and all prospects seemed dim following the temblor. But CFO Wei’s instruction to Patrick was very clear - never to take no for an answer.

Patrick stayed in Algeria for eight months, and did all foreseen and unforeseen sacrifices, including moving out of his damaged hotel to stay with a Chinese medical unit that responded to the disaster, and eating couscous and drinking Algerian tea.

By year-end, his struggles paid off. He landed an innovative US$47-million loan package that combined financing from Societe Generale and the Industrial Commercial Bank of China with a guarantee from the Sinosure, China’s export credit insurer, for a six-and-a-half year tenure, the article says.

Patrick succeeded in convincing the Algerian telecoms ministry that ZTE possessed the standards and equipment to build the network and operate it under a managed contract at low cost.

ZTE’s bid prevailed over its two US rivals, delivering the project for US$32-million, which was a distant reality to that of the US companies considering their higher employee and research and development (R&D) costs.

 ZTE’s project cost was 18 percent and 21 percent lower, respectively, compared to its competitors.

In the succeeding years, ZTE continued its winning streak, bagging larger deals from Ghana to Lesotho. It even cornered a US$200-million equipment contract for wired and mobile access networks for Ethiopia Telecommunications in April 2007.

These victories were principally based on price, which inevitably, has caused people to wonder how ZTE manages to sell its products and services way cheaper than its rivals.

Project financing methods

ZTE, the article says, declines to discuss the financial arrangements of deals since Algerie telecom, but tackles one key advantage.

In meetings with multinational telecom operators and private equity investors, ZTE relates how its “national champion status” can obtain low-cost money that it can lend to its own customers.

In their presentations, CFO Wei and his team draw a picture of a PRC government, flush with a US$1-trillion in foreign exchange reserves.

The money is funneled through lending channels, via preferential loans from the China Ex-Im Bank, through the China Development Bank or commercial banks such as Bank of China or Industrial and Commercial Bank of China.

Loans for African contracts are encouraged through preferential loans (loans in which no interest is payable) from government banks, the article further says.

The lending rate is something ZTE officials are mum about, but analysts say it is way below the 6.39 percent benchmark one-year lending rate in China or the US prime rate (rate that US banks give to their favored customers) of 8.25 percent.

A banker, who worked on the Algerian deal, told CFO Asia that ZTE prefers to manage the loans internally, feeling that they can take the supplier risk themselves, rather than go to an international bank for structured finance.

All major telecoms equipment providers engage in customer financing, analysts say. But ZTE’s methods are allegedly different.

Russell Southwood, Chief Executive Officer (CEO) of Balancing Act, a consulting firm and online publisher specializing in Internet and telecoms in Africa, told CFO Asia: “Cisco might go a similar route, but it would be a combination of donor funding, soft loans and international bank financing. You could actually see when and how a decision was made to put money into the project.”

Cisco Systems Inc. is a multinational corporation that designs and sells networking and communications technology and services.

Southwood added that in ZTE’s case, there is no transparency in customer lending. “Not only are they offering preferential loans, but it’s impossible to tell what add-ons become part of the package. They are undoubtedly the cheapest in the market,” he said.

However, unlike Huawei Technologies, said to be the leading telecom provider in China and which has conquered the more lucrative developed markets of North America and Europe, ZTE’s sights appeared to concentrate on the developing markets of Africa and Asia. In Africa Alone, ZTE sales went up by as much as 90 percent in 2005.

According to BDA China, a telecoms research firm based in Beijing, ZTE posted US$2.1-billion in sales in 2005, while Huawei reported US$6-billion and Alcatel-Lucent, US$25-billion.

CFO Wei, undeniably the force behind ZTE’s strong marketing skills,  urges finance departments to become leaders in their own right. He says that a CFO should be active in three areas — product sales, capital markets and money markets, adding that his job is “to leverage the advantage of being a Chinese homegrown company in a business dominated by established global players.”

“This means competing on cost, not on price,” he says. Of course, lower costs equals lower prices.

China boasts two million annual engineering graduates compared to France’s 300,000 and Germany’s 100,000. Average annual salaries of engineers in China amount to P150,000 renminbi per year (US$19, 000) as opposed to approximately US$110,000 in Germany and France.

Likewise, Chinese laborers work 50 hours on average, while French and German laborers render 38 hours of service.

This, according to the article, illustrates how ZTE engineers and service providers work at higher value and lower cost.

Not to be outdone, ZTE’s global peers are following suit as they have set up manufacturing bases and R&D centers in China in pursuit of lower costs.

While a sizable portion of the public still questions ZTE’s strategies, quite a percentage has also learned to appreciate its presence, together with Huawei, in the telecoms market as they present alternatives to poorer nations who previously had no choice.

CFO Wei, after all, believes that “communication has now joined food, clothing, housing and transportation as a basic human right.”