Huawei up, ZTE down, NSN turns a corner

A busy day for vendors: Huawei expects a profit, ZTE a loss, and the bloom could be returning to Nokia Siemens.

Huawei has defied the tough telecom gear market to report expected 33% higher income of 15.4bn yuan ($2.48bn), with sales up 8% to 220.2bn yuan ($35bn).

It has forecast revenue to rise 10-12% in 2013.

The non-core divisions maintained their contributions. While the telco business accounted for 72.8% in sales (up 6.8% over 2011), the consumer division - which includes handsets and modems – made up 22.0% (up 9.3%) and the enterprise group 5.2% (up 25%).

Offshore sales accounted for 66% of total sales, down from 67.9% in 2011.

CFO Cathy Meng said the company had had kept general expenses under control, allowing it to “allocate more resources to bolster the front line and ensure continuous improvements on customer delivery and service quality.”

ZTE‘s expected loss wasn’t such a huge surprise, given its trying year, although investors still marked its stock down 1.63%.

ZTE said it expects a full-year loss of 2.5bn-2.9bn yuan ($379m-$439m). Operating revenue fell 18% in the last quarter and margin shrank by 11 points as a result of it chasing low-margin contracts in Africa, South America, Asia, and China.

As in previous quarters ZTE attributes the loss to an array of factors, “including postponed execution of systems contracts, decrease in revenue from terminals in the domestic market, and delayed progress of international projects.”

Meanwhile, Nokia Siemens is planning a bond issue in the next quarter – its first ever foray into the public finance markets, FT.com reports.

It aims to raise as much as €700m ($932m) with high-yield bonds to pay down bank debt and fund future investment, paper says.

The move is significant given the potential for a future flotation of the business, which has been recently rejuvenated by its parents. Nokia and Siemens talked to private equity groups about a sale of NSN last year but failed to strike a deal, forcing the groups to bolster its balance sheet with a further €1bn of equity.

Helped by that equity injection, steep cost cuts and asset sales, NSN has tallied “three consecutive quarters of underlying profitability for the first time in its history. That has led to renewed talk among financiers about a potential flotation or sale next year.”

HKBN dives into Wi-Fi

Ground-breaking broadband player Hong Kong Broadband Network (HKBN) has moved into wireless, promising to make “low-cost or no-cost” Wi-Fi ubiquitous following its acquisition of the city's s biggest Wi-Fi wholesaler, Y5Zone.

It's planning a HK$200m ($26m) upgrade in the next 12 to 18 months to more than double the number of hotspots to 15,000 and boost bandwidth speeds from 100Mbps to 1Gbps. 

While the city is already heavily-connected via 3G, 4G and broadband, Billy Yeung, the head of HKBN Wi-Fi, says the Wi-Fi market is still in its infancy. He sees opportunity in the rising data demand, the number of Wi-Fi devices and the massive influx of mainland tourists.

Hong Kong has 13m mobile connections, or an ownership rate of around 185%, and mobile data use is expected to increase 53 times between 2010 and 2020. Around 70% of phones in use are Wi-Fi-enabled smartphones. 

The number of mainland Chinese visitors has doubled in the past four years and is likely to have topped 32m in 2012. 

HKBN hasn’t announced pricing, but CFO NiQ Lai said the aim would be to offer at “low-cost or no-cost – maybe it will be free for the first 20 minutes.” The idea was to make it ubiquitous and affordable to everyone, he said.

Privately-held HKBN will not disclose the acquisition price, which is partly in stock. The company went private last year and is now owned by senior managers and private equity firm CVC Capital.

HKBN is Hong Kong’s second largest fixed-line broadband provider. Its all-fibre network connects to 85% of households and offers packages of 100Mbps for HK$168 ($21.80) and 1Gbps for HK$268.

“We think of not hotspots but ‘hotzones’,” said Yeung, an industry veteran who founded PCCW’s ISP arm in 1993 and set up Y5Zone 11 years ago. “Instead of a single hotspot in a mall, we will cover the whole mall.”

“Hong Kong may not have the most number of WiFi hotspots in Asia, but we hope to have the most sophisticated users of any Asian city,” he added.

Y5Zone will continue its Wi-Fi wholesale business, which supplies connectivity to every major telco except for incumbent PCCW.

First MVNO licences could be in June

The move to spark competition by introducing MVNOs – albeit on a trial basis - is the biggest change in Chinese telecoms in the last five years. So no surprise there’s been a steady drip of reporting. 

In the last two days we have learned:

• The first trial licences are expected to be issued in June
• Details of Suning’s MVNO ambitions
• That at least Ericsson is prepared to cool expectations

The first licences could be issued as early as June, according to this Sina Tech report. That’s when Suning, one of the big electronic and appliance chainstores, hopes to receive its trial licence. Suning and rival retailers like D.Phone and Funtalk have emerged as the early favourites.

“The opportunity will lie with those who prepare,” CEO Jin Ming told Sina, explaining that the company has already restructured its existing communications and operator sales groups as its prepares  its application.

It is touting its 1700 nationwide stores, 8m online members and 3000-seat call centre and in the future, says the CEO, will go from offering customized handsets to delivering “customer experience” and “handset content service development.”

So far, so normal.

But you have to wonder how far Suning will get with its plan for “complete operator cooperation.”

While that’s a lot smarter than talking up competition with its future wholesale suppliers, it’s hard to see what advantage operators will get from forging ties with their rivals, especially as they are forbidden from striking exclusive deals.

Finally, for a more cautious perspective, Ericsson’s Chang Gang told the C114 website that he didn’t expect MVNOs to make much difference to the market.

"We haven’t seen a big change in other countries brought about by the arrival of MVNOs,” he said, and it wasn’t certain they would "cause any special change" in China, either.

The flaws in the MVNO plan

Who’s interested in China’s MVNO market? Mobile phone and electronics retailers, like D.Phone, Suning, Gome and Funtalk, according to this report at 21cbn.com.

That makes sense. MVNOs are about brand and customer service. Plus these guys are already in the mobile retailing game.

It makes sense too that they’ve already held preliminary talks with the MIIT via its research arm. The MIIT’s priority pretty clearly seems to be to seek out strong local brands to become MVNOs.

However, creating a competitive telecom landscape doesn’t appear to be a priority.

The concerns expressed by analysts and would-be licensees reflect this. They’re worried about the cost of resourcing an MVNO player, the lack of scale, the wholesale price and the availability of number portability,  none of which is satisfied by the MIIT’s vague stipulations.

For example, the wholesale price has to be lower than the operator’s lowest retail price. As one unnamed executive says, if the lowest price is 48 yuan and the wholesale is 50 yuan, “we still have no way of launching a service, because we still have site, customer service and operating costs.”

Once again China has managed to avoid a quarter of a century of telecoms regulatory experience. 

Elsewhere (including Hong Kong) successful regulation is about ensuring new players get access to infrastructure at a reasonable price and providing protection against predatory pricing and obstructionist behaviour.

The MVNO plan skips most of that. It may improve over the consultation period but basically we are stuck with the traditional post-hoc regulation. New entrants will run into trouble and the ministry will have to step in and broker an agreement. That could take up to a year.

With the spirit of reform pervading the country, perhaps now is the time to consider a dedicated telecom regulator. It can execute the detail of competition and allow the ministry to manage the big policy picture across its vast portfolio.

It can build up a body of competition expertise that will help consumers get a better deal and make the government look like it really cares. That’s a win all-round, but the probability of it comig to pass is close to zero.

The incoming players will need deep pockets and steady nerves.

China preps for private MVNOs

China is proposing to open up its tightly-controlled telecom market to privately-owned MVNOs.

A consultation paper issued by the MIIT yesterday sketched out some guidelines for MVNO trials, which would be the first voice or data service to open to privately-owned telecom firms.

But the lack of key details, such as interconnection pricing, and the two-year timeframe for the trials, once more suggests that China has little interest in allowing serious competition to the state-owned incumbents.

The move was foreshadowed last year as the MIIT explored ways of allowing private investment into value-added services, or Type 2 telecoms under Chinese law. Type 1 - or infrastructure ownership - remains exclusively in the hands of the three state-owned operators.

Although the MVNO concept is well-established, with 633 licensed operators worldwide, the paper did not explain why the ministry needs two years to evaluate the service. Essentially an MVNO player needs no more than a brand, a customer care platform, and a deal with an infrastructure owner. There isn't much to test.

Early MVNOs had a high failure rate, mostly because of the high wholesale prices charged by MNOs, but in recent years the market has blossomed. The MIIT paper makes no mention of interconnection pricing or framework, nor does it explain how it would protect incoming players from the incumbents – a glaring omission given the alleged abuses by China’s fixed-line players, and the lack of progress in resolving complaints.

The announcement of the trial, while no surprise, also underlines the MIIT’s disinterest in honouring China’s WTO telecom commitments. Foreign operators can only enter the China market in partnership with an existing operator and with a hefty capital base (some $150-$200 million). Only a small number of VAS areas are open to foreign investors, despite the huge range of VAS services offered domestically.

By contrast, major foreign markets are open to Chinese MVNOs. China Telecom last year won a UK MVNO licence and is planning to expand into other major EU markets.

The MIIT paper did specify that a would-be licensee must have a security management department and must build a “network and information security management system” and an emergency response system.

Chinese website Sohu has nominated internet firms such as Tencent, Baidu, Alibaba were potential licensees. This is pure speculation but, given the limited opportunities in China’s telecom services market, it is unlikely there will be a shortage of firms willing to take a punt on the market.

The MIIT said each individual trial would need to complete within a year. At the end of the trials it would draw its own conclusions and “conduct research into formal MVNO arrangements.”

The consultation period lasts until February 6.