From Corporation, page 25, issue no. 382, August 25, 2008
Translated by Liu Peng
Original article:[Chinese]
A recent bidding invitation for China Telecom's CDMA equipment procurement had suppliers undercutting each other, what was at stake?
The bidding session for China Telecom's CDMA wireless equipment procurement held on the night of Aug 14 would long be remembered by businessman Li Mu (pseudoname).
Despite having been tipped off that outrageously low bids would be presented, Li was still dumbstruck that US-based telecommunication equipment provider Motorola qouted "zero cost" for 15 of the 81 areas opened for bidding.
"Upon hearing the price, I thought I could pack up and leave the conference room," recalled Li, but the qoutations that created the most buzz were actually other offers made by China's telecommunication supplier Huawei.
"Huawei basically offered a few hundred thousands yuan for each area, only in one place did the qoute go beyond hundred million. Take Guangzhou for instance, it qouted 980,000 yuan, this amount can't even buy one apartment in Guangzhou, yet Huawei intends to provide a wireless network that covers the entire city at this cost," Li said.
Undercutting Offers
The drama that night continued for three hours, sending out waves of surprises. For the same contract, the price gap could be two-fold, with the highest quotation from France-based Alcatel-Lucent at 14 billion yuan, and the lowest from China's very own Huawei at 690 million yuan.
The "zero cost" strategy deployed by Motolora in some areas was viewed as "agressive marketing" by some attendees.
The bidding invitation on Aug 14 was the first held by a recently restructured China Telecom. The state-owned firm used to be a fixed-line operator, but in late May, Chinese regulators merged five market players into three giants, and it announced would take over the CDMA network, enabling its mobile and wireless services, from China Unicom in October.
The bids were for part of the China Telecom's 27-billion-yuan budget to construct CDMA facilities. Insiders from the company disclosed that 30% of that budget would be allocated for auxilary equipment, while about 16 billion yuan would go to developing the CDMA access network and core network.
The access network bidding results had already been announced, with China's largest listed telecom manufacturer Zhongxing Telecom Equipment (ZTE) Corporation winning nearly 50% of the orders, followed by Alcatel-Lucent gaining about 20%, and the remaining shared by Huawei and other suppliers.
The Aug 14 bidding invitation was for the wireless equipment orders under the core network, including wireless base stations and station controllers for 81 areas, each under separate open for bidding. The overall offers made by Alcatel-Lucent totaled 14 billion yuan, while ZTE offered 7 billion yuan and Huawei qouted 690 million yuan.
If sliced by individual bids for each area, prices qoute differences were far more shocking. One example is Guangzhou, for which ZTE offered 390 million yuan, Alcatel-Lucent quoted 200 million yuan, Huawei bid for 980,000 yuan, and Motorola, zero.
Motorola also offered zero cost for providing wireless equipment in 14 other areas - Qingdao, Wuhan, Shantou, Chengdu, Wuxi, Shanghai, Suzhou, Nantong, Yangzhou, Taizhou, Ningbo, Wenzhou, Xiamen and Quanzhou.
Another surprise was the bid for orders in Shenzhen, where Motorola had a foothold already since being its wireless equipment supplier last year. Yet, both ZTE and Huawei's headquarters were based in Shenzhen, and both were keen to win the bid this time.
Motorola qouted 97 million yuan, Huawei offered a low price of 885,000 yuan, but the biggest catch came from ZTE, which went below zero cost and offered 1.52 million yuan worth of extra equipment as free gift.
Strategizing for Bigger Market Share
A report by Guotai Junan Securities named ZTE as the biggest player in the domestic CDMA market in 2007, having garnered 32% of the market share, followed by Motorola with 23%, Alcatel-Lucent with 22%, Nortel with 17% and Huawei with 2%.
The above-mentioned bidding session highlighted the fierce competition between these suppliers that resorted to undercutting strategies to boost market share.
The move became especially necessary as insiders from China Telecom revealed it would consider migrating to another platform once taking over the China Unicom CDMA network if prices from suppliers were too high.
That would mean former suppliers who had secured the market share might not have an advantage. Usually, once a city acquired the equipment from a certain supplier, future upgrading and expansion orders would also go the same supplier.
"Motorola's zero cost strategy is targeting its major rivals," said an industry source, pointing out that the company qouted zero yuan in places deemed as strongholds of ZTE and Alcatel-Lucent. In addition, in places where Motorola already had a presence, the price qouted remained low.
Huawei too launched an agressive price war. Industry sources interviewed by the EO expressed concern that Hauwei might continue this low-price onslaught in the post-Olympic bidding invitation for TD-SCDMA network.
They said aside from worries that Huawei and China Telecom enjoyed good relations, the former low-price qoutations would also give China Telecom more bargaining power in negotiating procurement with other suppliers.
(Gao Kun also contributed to the article)
