China’s telecoms manufacturing stars Huawei and ZTE (HKEx: 763; Shenzhen: 000063) are turning up their PR offensives in the US with announcements of major new purchasing deals, in what also looks like an intensifying rivalry that could ultimately result in a bruising war as each vies for new dominance in the low-cost smartphone space. It what looks almost like a case of deja vu, both companies have just announced new deals that look almost identical to purchase billions of dollars worth of chips from leading US design houses Qualcomm (Nasdaq: QCOM) and Broadcom (Nasdaq: BRCM). Perhaps not coincidentally, both deals come just days after a visit by Chinese Vice President Xi Jinping to Southern California, where both Qualcomm and Broadcom are based, and I suspect all 4 companies were working hard to finalize their deals to announce during that visit but probably couldn’t meet the deadline. Still both deals mark relatively major formal commitments to US purchasing by both Huawei and ZTE, which are both trying to prove that they can be strong partners in the lucrative but competitive US market, where suspicions run high that both companies, especially Huawei, are spying arms of Beijiing. Let’s look at ZTE’s deal first, which will see it invest $4 billion over the next 4 years to buy chips from Qualcomm, and another $1 billion to buy chips from Broadcom over the same period. (company announcement) In a separate announcement ZTE also said it will launch 2 new 4G smartphones at the world’s biggest telecoms show coming up next month in Spain, reflecting its recent big push into cellphones and indicating that a big portion of the purchasing for chips from Qualcomm and Broadcom over the next 4 years will be for use in cellphones. Meantime, Huawei has also announced it will buy $6 billion worth of chips over the next 3 years from 3 California companies, including Qualcomm, Broadcom and a third company called Avago Technologies. (English article) From a business perspective, both of these chip-buying deals look more like public relations exercises than anything else, though they also reflect the growing rivalry between Huawei and ZTE as each tries to develop its cellphone business, which tends to be less cyclical and less politically sensitive than their older networking equipment businesses. Both Huawei, ZTE, and nearly any telecoms equipment and handset maker for that matter, have both been clients for a long time already for Qualcomm and Broadcom, which are 2 of the world’s leading makers of both networking equipment and cellphone chips. My ZTE sources tell me that ZTE purchased more than $3.5 billion worth of chips and other telecoms components from US firms in the first 10 months of last year alone, although that list also included names like IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and Texas Instruments (NYSE: TXN) in addition to Qualcomm and Broadcom. I suspect this latest agreement probably doesn’t represent a huge increase in purchasing from Qualcomm and Broadcom, but is rather designed to highlight how both companies support the US economy and local jobs through their big purchasing. That’s important as both Huawei and ZTE work hard to penetrate the tough but potentially lucrative US market, with Huawei in particular embarking on aggressive PR campaign over the last year that included hiring more foreigners and making some goodwill investments in the US. At the same time, these big purchasing commitments also reflect both companies’ growing interest in cellphones, especially low-cost smartphones, with both recently stating their goals of becoming top 5 global players in the next few years. (previous post) These latest announcements indicate the rivalry on the low-cost smartphone front is heating up, which has already begun to take a toll on ZTE’s margins and bottom line and will likely erode profits at both companies in what could turn into a bruising battle over the next few years.

Bottom line: New mutlibillion-dollar purchasing announcements by Huawei and ZTE look largely like PR moves aimed at US politicians, but also reflect a growing cellphone rivalry between the pair.

Related postings 相关文章:

◙ Huawei Prepares for Change of Guard 任正非或准备告别华为

◙ Huawei and ZTE: Swapping Networking for Cellphones? 华为和中兴：转型进军手机市场？

◙ Huawei Discovers Cellphones 华为手机要向世界前三进军

China’s big banks are no doubt suffering new headaches these days after learning over the weekend that Beijing has lowered their reserve requirement ratios, in the latest of a growing series of mixed signals as the government tries to maintain the health of both the banks and the broader national economy at the same time. The latest announcement has seen the banking regulator lower the amount of money that banks must keep in reserve, in a clear signal that the government wants them to lend more to help China maintain its economic growth that has shown recent signs of slowing sharply. (English article) The cut was the second in the last 3 months, and could add up to 400 billion yuan to China’s financial system as Beijing tries to boost domestic consumption to offset a sharp slowdown in exports due to weak demand from the key US and European markets. Analysts forecast the regulator could lower the reserve requirement ratio again this year, again in a bid to stimulate growth. The only problem in all this is that Beijing has taken away many of the banks’ most important channels for new loans, meaning they could find it difficult lending all of the new money being freed up by the regulator’s moves. Beijing remains determined to cool the nation’s overheated property market, meaning the banks won’t be able to use the new funds to make more mortgage loans that are one of their most important sources of new lending. At the same time, banks also won’t be able to make many new loans to local governments for infrastructure projects, as most of those local governments are already struggling to repay massive loans they took out for similar projects under Beijing’s 4 trillion yuan economic stimulus plan at the height of the global economic crisis in 2008 and 2009. Many of those local government loans are already showing signs of problems, leading reports to emerge last week that Beijing was considering a plan to allow banks to delay collection of repayments for as much as 4 years. (previous post) Exporters aren’t likely to need new funds from the banks either, since many are seeing demand rapidly fade for their products. One of the few sources that could actually use the funds are small- and medium-sized companies that cater to the domestic market, many of which generally suffer from a lack of access to credit and are forced to look to gray markets for their money. But with their history of lending to big state-run firms, China’s big banks have little or no experience making loans to these smaller companies and thus currently lack the channels to make them an important source of new lending. As a result of all this, the banks may have a difficult time boosting their lending despite Beijing’s wishes. One of the few remaining outlets for loans is the stock market, which means we could see a rally in stocks for the first half of the year as new funds flow into the market. But any such rally will probably be short lived, leading to new problems as many loans to stock buyers could also start to go bad. On the whole, the situation for the banks doesn’t look very good in the next year, as many will be forced to making questionable loans in unfamiliar areas in their drive to fulfill Beijing’s wishes for more lending.

Bottom line: Beijing’s latest move to boost lending bodes poorly for the nation’s banks, which are likely to make dubious loans in their quest to fulfill the government’s wishes.

Related postings 相关文章:

◙ China Considers New Bank Rescue 中国考虑出台措施援救银行

◙ Banks to Lend More, But to Whom? 银行获准增加放贷 但流向选择有限

◙ China Banks: More Trouble Signs