Huawei, ZTE have leg-up in vendor finance wars

Matt Walker/Ovum
15 Mar 2012
00:00
News
Commentary

Most governments help local companies export their wares. One technique is to offer attractive financing to their overseas customers. This is common in telecom, especially in emerging markets. Some vendors, notably Cisco, also maintain their own customer financing programs. Chinese government finance has tilted the market, though, due to the vast pool of funds and deal sizes.

Huawei and ZTE have benefited, as many sizable customers have proven willing to take on loans tied to equipment purchases. Notable recent deals include DiGi (Malaysia), Globe (Philippines), Megafon (Russia), Etisalat (UAE), America Movil (multi-country), Tele Norte (Brazil), and Reliance (India). As the capex climate remains tight, vendor financing should be appealing. To thrive in this environment, rival vendors may need their own financing tools, whether government-assisted or not.

The Chinese government, in helping local vendors grow globally, is keeping with industry tradition. In the 1990s, when telecom was bound tighter to the state, North American and European officials often lobbied actively for export deals. Export loans often came into play. During the bubble, vendor-run financing became important, but the high default rate turned the industry against vendor financing.

Some vendors still offer financing, though. Cisco Capital may be the biggest example, even if its deep cash reserves make it an exception. More common, though, is government-facilitated vendor financing. Ericsson has the Swedish Export Credit Corp, for instance, and won awards in 2010 for four separate Ericsson deals it financed: Turkcell, Telkomsel, Mocambique Cellular, and MTS. Nokia/NSN has Finnerva for financing. US-based vendors sometimes turn to the US Ex-Im Bank. But these are generally small deals.

What’s different in China is the scale. The loans tend to be spread across multiple years, and multiple product lines or projects, and are often enormous in size. America Movil and Reliance have both signed loan agreements for $1 billion or more with the China Development Bank (CDB), for instance; these are tied to Chinese vendor equipment purchases. Notably, these loans are guaranteed by “policy banks” such as the CDB, not the vendors.

Policy bank loans are designed to “explicitly support the government’s policy objectives.” (See the February 2012 Inter-American Dialogue report, The New Banks in Town: Chinese Finance in Latin America.) The CDB’s president noted last year that through its support for Chinese tech companies such as Huawei and ZTE, the CDB has “become the principal source of finance of our country’s overseas investments.”

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