Chinese tech giant eyes NZ

Econet Wireless has a lot going against it in its quest to roll out the nation's third mobile phone network. But it's also got at least one major factor behind it: Huawei Technologies.

As China's largest technology company, with massive revenue and operations in 130 countries, Huawei is the golden carrot dangling at the end of a string for a country starved of telecommunications investment.

That fact, analysts say, gives South Africa-based Econet - which has done little but talk in its five years in New Zealand - a fighting chance to grab a slice of the country's $2 billion-plus mobile market.

The two companies announced a partnership in December that will see a 10-cell-site pilot project rolled out in Auckland by April. If successful, Econet has plans for a larger rollout, with 410 sites in four cities.

Terms were not disclosed, but the deal is understood to be worth about $120 million.

Huawei, for its part, is growing quickly and broadly. The privately held Shenzhen-based company in January reported a 47 per cent increase in yearly revenue, to US$8.2 billion ($12.1 billion) from US$5.58 billion in 2004.

Of that, US$4.76 billion came from overseas markets - a 108 per cent increase over a year earlier.

The company owns about 20 per cent of China's huge networking and telecommunications market and operates in everything from cellphone manufacturing to broadband networking provision.

Huawei Australia managing director Rio Zhang said the Chinese telecommunications market is reaching maturity and it is in less developed nations - such as New Zealand - that the company is looking for growth.

"The situation in New Zealand is that they don't have large competition in the mobile and the 3G area," she said.

Third-generation phones are a "hot topic" right now, which Zhang sees as a major source of new revenue in this part of the world. Since New Zealand has only two operators - Telecom and Vodafone - "the business model is quite good to support Econet", she said.

Huawei in December opened an East-Pacific headquarters in Sydney to serve as its nerve center for expansion into Australia, New Zealand, South Korea, Hong Kong and the Pacific islands.

"That's a huge market with huge potential for Huawei," Zhang said.

Econet, for its part, faces a raft of challenges in getting its network off the ground.

First is an increasingly saturated market: With Telecom and Vodafone totalling 3.8 million customers, more than 90 per cent of the population has a mobile phone. That's beyond the "natural point of saturation" of about 85 per cent - or every adult, according to analyst firm IDC.

However, "there's a lot of fat in the New Zealand market", said IDC analyst Christopher Loh.

With some of the highest mobile costs in the OECD, industry watchers have suggested the New Zealand market is highly profitable, with plenty of room for additional participants.

But the second and perhaps more important barrier to entry is a lack of regulatory framework that encourages new participants.

A number of rules need to be in place for a rapid rollout to happen:

* Long-term guarantees on roaming arrangements, so that one company's customers will be able to stay connected through another company's network. In Econet's case, this means Vodafone since both will be using the same W-CDMA technology.

* The ability to rent space on competitors' cell towers and thus co-locate the newcomer's equipment. Potential new entrants have said that building an entirely new set of towers is not only hugely expensive but also an eyesore.

* Number portability, which allows customers to take their phone number with them when switching providers. Many cell customers become attached to their numbers and are averse to changing them by switching providers. New regulation was enacted last year, and number portability will be in place by April 2007.

* A prohibition of closed-network pricing, where providers charge customers differently depending on which network they are calling. For example, Vodafone charges its customers less to call other Vodafone customers than it does to phone Telecom users.

The last issue is perhaps key, Econet New Zealand managing director Tex Edwards said. "Econet is going nowhere" without this provision, he said, as Telecom and Vodafone could easily make it too expensive for Econet customers to call their customers. "It actually becomes the most important part of the regulatory menu."

This laundry list of regulations might have seemed like a big ask a year ago, but the climate is shifting. The Government has publicly stated its displeasure with Telecom over the company's broadband internet monopoly and is reviewing overall telecommunications regulation.

New Zealand ranks near the bottom of high-income nations in telecommunications investment. With Communications Minister David Cunliffe looking to overhaul the Telecommunications Act, some of that negative broadband sentiment may spill over into mobile phones.

If the road rules are put into place, Econet could make a good run by acting as a "price buster", said Sydney-based telecommunications analyst Paul Budde. With a low-cost network and inexpensive handsets from Huawei, Econet could afford to significantly undercut Telecom and Vodafone. It would need to slash prices for customers by about 50 per cent if it were to stand a chance, he said.

For Huawei, however, the move into New Zealand - where it had no previous presence - is seen as a winning situation regardless of Econet's success or failure.

"Given that they're coming from a zero base in New Zealand, it's all upside potential for them," said Loh. Huawei now has a beachhead and could get into selling other types of communications infrastructure, where it tends to have a price advantage over competitors.

Indeed, the company is seen as a major threat by multinationals. Swedish telecommunications giant Ericsson last year agreed to buy British equipment maker Marconi for £1.2 billion ($3.1 billion).

The move was seen as strategic in nature, to keep Huawei from buying Marconi and establishing a foothold in Europe.

Huawei could make similar waves in New Zealand, Loh said.

"Local competitors such as Cisco and Juniper could be affected."

POWERHOUSE

* Huawei Technologies is China's biggest tech firm, with 2005 revenue of US$8.2 billion.

* More than half that revenue came from overseas markets, with international expansion a key strategy for the company.

* The Pacific, including New Zealand, is a "huge potential market", the company says.

* Analysts say Huawei's entry into New Zealand should put rival network suppliers such as Cisco and Juniper on notice.