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The Chinese telecommunications war in Africa

africa_cell_phones_0401Caixin Media’s Zao Hemei travelled to Ethiopia with the support of the Wits China-Africa Reporting project to research this article, which was originally published in Caixin New World in 2012 issue no. 3.

“5 years ago, I was the only one with a cellphone in my family, and today the whole family, including my two children and my father, all have cellphones.” Getachew, who is responsible for the Ethiopian Telecommunications Corporation (ETC)’s operations in the Nazereth region, says excitedly in front of his office desk, “Do you know why? China, China!”

Unlike most African countries, Ethiopia’s telecommunications industry is entirely closed; the entire country has only one operator, and all investment in telecommunications is made under the auspices of the government. Five years ago, when ZTE Corp. (000063.SZ, ZTE) won the exclusive rights to engineer a complete telecommunications network for Ethio Telecom, there were only 500, 000 cellphone users in Ethiopia, not even 1% of the country’s total population. By the end of 2010, all of Ethiopia’s networks were available for commercial use, and Ethio Telecom’s network capacity had increased by a factor of 19, while the total number of cellphone users reached 12 million, increasing by a factor of 20.

Ethiopia is not the only country in Africa whose telecommunications industry has grown explosively. The international telecommunications research group Informa Teleco’s latest market data shows that in the second quarter of 2011, Africa surpassed the Western European market, and the North American market in the 3rd quarter, becoming the second-largest market in the world, second only to Asia. When being interviewed by Caixin  New World‘s correspondent, Matthew Reed, Informams&Media head of research for Africa and the Middle East, said that this high rate of growth in African telecoms will continue, and that by 2016, there will be more than 1 billion cellphone users in Africa. This means that over the next 3 to 5 years, the number of cellphone users there will almost double.

This is no accident. In a report by the British publication The Economist, it was pointed out that 6 of the 10 fastest- growing countries in the last 10 years are in Africa, and that the economic growth of these countries in the last 10 years has surpassed that of East Asia. The International Monetary Fund (IMF) predicts that the economic growth of Africa will have been 6% in 2011, and that it will also hover around 6% in 2012, maintaining parity with Asia. The Economist’s analysis believes that African economic growth is a byproduct of its growing population, flourishing commercial trade, and the pursuit of new technology. It appears that the current extended global economic crisis has had no influence whatsoever on the mainland African market.

The gold rush towards Africa among Chinese enterprise is gaining strength. The rise of the telecommunications equipment businesses Huawei and ZTE has been especially eye-catching. After 5 to 6 years of cut-throat competition, Huawei has become the largest telecommunications supplier in the Middle Eastern and North African markets, taking the place of Ericsson, Siemens and other western operators. In South Africa, Huawei also occupies second place, second only to Ericsson. In Nigeria, the most liberalized telecommunications market, Huawei and ZTE have all but monopolized the local market, occupying 90% of the market. Chinese enterprises have already overtaken traditional European and American enterprises in the largest markets with the largest populations, such as Nigeria, Egypt, South Africa, and Ethiopia. Many believe that the future African telecommunications market will be entirely the domain of these two Chinese enterprises.

At the end of 2011, Caixin’s New World correspondents spent almost a month visiting South Africa, Ethiopia, Nigeria, and other African countries. Judging by these visits, Huawei and ZTE have struck into the African market, and while they have relied on low-priced products, high-quality, flexible, service and sustained long-term investment, the key has been massive financial support from strategic and policy-accordant banks. When being interviewed by Caixin  New World‘s correspondents, many individuals in the management of African operators said that the ability of Chinese banks to provide financial support is the key reason they have chosen Chinese industry.

Since 2004, China National Development Bank (CDB) and China Import and Export Bank (China Exim Bank), among other national banks, have continued to provide massive export credit to Huawei and ZTE since 2004. Based on publicly available information and statistics, the CDB alone has provided Huawei and ZTE with as much as 45 billion dollars in authorized export credit. How much has actually been loaned? Bill Plummer, Huawei’s vice president in charge of external relations, revealed in June 2011 that Huawei had borrowed 2.99 billion dollars (around 20 billion Yuan).

The effect this credit has had is as great as the debate to which it has given rise. As far as poor African countries such as Ethiopia and Nigeria are concerned, although their governments dearly hope to develop telecommunications industry as soon as possible, relying on their own financial revenues to raise the massive investment needed to establish telecommunications infrastructure is simply not feasible, as a result of which Huawei and ZTE, who bring massive funding, have been welcomed with open arms. Their maintenance of high financial leverage, as well as strong executive ability has been the engine through which Huawei and ZTE have moved into the African telecommunications market.

However, the speed at which investment on this scale has expanded has also given rise to complaints from competitors, particularly after the National Development Bank decided to provide Huawei with 30 trillion dollars in authorized export credit. Critics began to trace the success of Chinese enterprise back to financial support from the Chinese government. On the 15th of June 2011, Fred Hochberg, President of the Export- Import Bank of the United States, directly stated that one of the reasons Huawei was able to grow so quickly was that it had won 30 trillion dollars of authorized credit in support from the China National Development Bank, which allowed Huawei to provide clients with better service payment conditions than competitors.

Regardless of whether credit is provided to buy or sell exports, and although it has helped to advance many of Huawei and ZTE’s undertakings in Africa, the solvency risk it has brought is not easily disregarded. This credit has been provided to clients who buy equipment from Huawei and ZTE by Chinese banks, but their ability to repay will eventually be decided by the real growth in local telecommunications markets. Presently, this risk is being passed between the related banks and the hundreds of small-to-medium-sized enterprises in the industrial supply chain, and repayment has already become an important task for subsidiaries of Huawei and ZTE.

Starting from scratch

Five years ago, Ethiopia’s telecommunications equipment vendors were still in a confused “Spring and Autumn Period” of complicated warfare; Ericsson, Nokia, Siemens, Lucent Technologies, ZTE, and Huawei were engaged in fierce fighting over a pitifully small cake- less than 700, 000 cellphone clients. “At that time, a SIM card could fetch as much as $100 on the black market, not including call charges and 15% tax, and what’s more, you couldn’t necessarily buy one even if you did have the money.” Zhang Jinyu, Chief Inspector of ZTE Ethiopia’s technology center, told Caixin  New World‘s correspondent.

The installation of network hardware is even more “valuable.” before the first official phase of ZTE’s project in Ethiopia, the broadband Internet capacity for the entire country was a trifling 1400 clients, all of whom were large clients, or large enterprises, who paid high fees. For example, installation fees for a 512k connection were as high as 12,000 dollars (90,000 Yuan using the exchange rate of the time), with 3,000 dollars (around 20,000 Yuan) in monthly rent. More importantly, the applicant had to undergo examination by the Minister of Communications before being able to obtain Internet access.

Necessity is the mother of invention. In 2005, the Ethiopian government, longing to change this state of affairs, proposed the construction of a backbone network which was to cover the entire country, GSM, CDMA, and other plans, projects for which ETC invited tenders from around the world, in which key global telecommunications vendors and manufacturers such as Ericsson, Nokia, Siemens, Lucent Technologies, Huawei, and ZTE participated and submitted bids.

Ethio telecom’s greatest difficulty was lack of money. When Ethiopia signed a framework agreement with ZTE in 2006, the entire country’s GDP was only around 15.1 billion dollars, a relatively low income by African standards. At the same time, Ethiopia was facing a severe shortage of foreign reserves. 3 Chinese producers and suppliers, ZTE, Huawei, and the China Communication Services Corporation all tendered bids, and eventually it was ZTE, who had won the financial support of the National Development Bank, which came out ahead.

Based on the memory of heads of the Ethiopian Ministry of Transport and Communication, the reason ZTE was able to win the bidding, aside from the fact that their ability was recognized, was a result of 3 advantages: the CDB’s favorable export credit, sufficiently low prices, and their willingness to share technology and train a large number of local communications personnel. For a long time, Ethiopia’s best university, Addis Ababa University, did not offer courses in telecommunications; the head of the IT and electronics administration said “Our ultimate aim is to have our own ZTE or Huawei, like China, and we think we’ll need ten years at most to do it.

Caixin  New World‘s correspondent understands that the CDB has provided 1.5 million dollars of purchase credit for the Ethiopia project, which was provided as 3 phases of the project came into effect. ZTE, Ethio Telecom, and the CBD have signed a long-term payment agreement which covers a period as long as 13 years, and is considered a mid-to-long-term loan, of which the first 3 years are interest-free. Vendor credit is provided by the export bank to the exporter (i.e. the supplier, in this case ZTE), and then the exporting and importing businesses (in this case Ethio Telecom) signing a separate repayment contract.

Ethio Telecom and ZTE signed an exclusive supply agreement on the 8th of November 2006. The complete project was the provision of a package solution to Ethio Telecom by ZTE, to be implemented in 3 periods. Implementing this project was like developing a wilderness. The first period was divided into 2 phases, the first of which lasted until April 2007, and the second of which ended on September 2007. The latter date was also the first day of the 20th century in Ethiopia (the 1st of January 2000 according to the Ethiopian calendar). The primary aim of this project was to rapidly expand the capacity of the capital and 13 surrounding cities, which included laying 2259 kilometers of fiber-optic cable to cover 13 large cities, a project which became known as Ethiopia’s “Millennium Plan.”

Aside from this, ZTE and Ethio Telecom also have an “engineering implementation agreement”, which is based on the provision of the aforementioned facilities, including installation, construction, fiber-optic cable engineering, and other projects. Valued at 500 million dollars, this part of the contract was signed in 2007.

The second phase would have needed at least a year and a half to two years under normal conditions, but in order to complete it before the millennium as required, ZTE needed just 5 months to go from signing the agreement to handing over the goods. Balcha Reba, the head of the Communications Division at the Ministry of Transport and Communications says “The speed and efficiency of ZTE’s construction was amazing.”

When being interviewed by Caixin  New World‘s correspondent, the CEO of ZTE Ethiopia, Zhang Tingmeng, revealed that Ethiopia’s lacked a unified plan for telecommunications development before 2006, and that every major producer and vendor in the world was active in the country, depending on relationships with the government to get orders. “Whoever had the best relationship would get orders, you’d get them today, someone else tomorrow, and they’d change all the time, which resulted in uncertain quality and slow development.”

Everything started from scratch. “Operators usually already had plans, so as the supplier, ZTE just had to proceed according to their plans and it would be fine, but there was no plan in Ethiopia, so we had to start from scratch.” says Zhang Jinbao, head inspector of the ZTE Ethiopia Technology Center, who was responsible for the whole project.

Controversy regarding the “hand of finance”

ZTE’s reliance on credit from the CDB to win the Ethiopian engineering contract, is a classic example of the financial model with which Chinese telecoms suppliers have invaded the African market. The model itself is nothing new to other enterprises or countries; what’s surprising is the speed at which the scale of this model has grown in the last few years.

In 2009, Zhao Jianping, a member of the CDB’s Communist Party Committee and the CEO of the Sino-African Fund, emphasized CDB’s “key support” for Huawei and ZTE’s projects in Africa when summarizing the CBD’s work in Africa at the bank’s 2009 General Assembly. The CDB and Huawei signed the agreement for the first phase of authorized credit, which reached as much as 10 billion dollars, in November 2004. At the time, Huawei, which had just emerged from the IT bubble, was pursuing a strategy of realignment, and viewed the African market as a beachhead in rapidly developing its overseas business. In 2005, Huawei’s overseas investment surpassed domestic investment for the first time.

Aided by such strong financial support, Huawei and ZTE rapidly expanded to most countries in Africa. The CDB provided 50 million Yuan in preferential credit to the Tunisia National Telecommunications Company on the 20th of January 2006, to be used for investing in a smart cellphone network; it was Huawei who took on this project. The CDB’s credit was also the primary reason Tunisie Telecom chose Huawei; the credit was chiefly used to purchase Huawei’s equipment and engineering services.

After the financial crisis of 2008, this financial ability added to the weight of Chinese telecommunications suppliers’ competitiveness due to financial strain in the banks backing Western telecommunications enterprises. In 2008, Huawei’s overseas revenues exceeded 17 million dollars, accounting for 75% of a historic height. Credit support from the CDB and China Exim Bank reached a new peak at the same time. The first 5-year agreement between Huawei and the CDB, worth 10 billion dollars, expired in 2009; the new agreement provided an increase of as much as 30 billion dollars of authorized credit. On the 20th of March in the same year, the CDB signed a 15 billion dollar “Development Credit Co-operation Agreement” with ZTE, mainly in order to meet the financial needs of overseas clients for the purchase of ZTE’s equipment and related technological services. In May, the China Exim Bank and ZTE signed a “Strategic Cooperation Agreement”, the former providing 10 trillion dollars of credit for buyers.

This further spurred the pace of Chinese enterprises in Africa. ZTE won an order for work on Nigeria’s public safety telecommunications network worth 400 million dollars in December 2010; subsequently, Nigeria and the China Exim Bank signed a 900 million-dollar credit agreement.

Based on reports in International Finance Magazine, by the end of January 2010, the CDB had provided Huawei and ZTE with loans which amounted to $17.4 billion and $14 billion respectively, totals which comprised 68% and 50% of the two firms’ “walking out” project financing respectively.

When Liu Yunshan, a member of the Chinese Central Political Committee, the Secretariat of the Chinese Communist Party, and the Minister of Publicity, visited Ethiopia in November 2011, he inspected the progress of the Ethiopian National Telecommunications Project constructed in co-operation by ZTE and Ethio Telecom, praising the project as “a model for Sino-African cooperation.”

However, this “model for co-operation” has in fact met with much controversy both domestically and internationally, which has centered around the question of whether the export credit provided by strategic Chinese banks was “tied loans”, and therefore in violation of fair competition.

Adolfo Hernandez, President of the Europe, Middle East, and Africa region for Alcatel-Lucent (one of Huawei and ZTE’s competitors) once publicly complained that “Export credit programs are available everywhere, the difference in China is mainly that they’re bigger.”

In reply to critics who claimed that Huawei reliant on government funding to win business, Bill Plummer, Huawei’s Vice-President in Charge of External Relations, replied, telling Reuters that from 2005 to the present day, Huawei’s gross sales had been in excess of $110 trillion and that in those in which clients had been provided with credit by the CDB comprised a very small part of the total. He revealed that since 2005, Huawei has provided $4.25 trillion in authorized export credit to clients, to support 35 projects around the world. Of these, only $2.99 trillion has been used. Accordingly, he said “”The suggestion that there’s some $30 billion credit line to Huawei that has driven our global growth is fundamentally incorrect.”

“This (model of co-operation) can be said to be a good things for Chinese and Ethiopian enterprise, stable and harmonious government relationships are founded on the basis of investment, exchange, and trade in the two enterprises, but there are always people who feel that there is some special aim behind this.” Qian Taogang, Economic and Commercial Counselor at the Chinese embassy in Ethiopia, told Caixin  New World‘s correspondent. “

Over the course of my visit to several countries in Africa, more than a few local operators, telecommunications enterprises, and researchers mentioned that they were aware of the Chinese government’s “going out policy”, and that more and more Chinese enterprises in different sectors are obtaining support from this policy, however, telecommunications is the core investment area.

(translated and edited)

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