Chinese firms, Ericsson dangling cash for deals

BEIJING/HELSINKI (Reuters) - Cash-strapped telecoms operators, shunned by banks, are turning to equipment makers for financing in a likely boon for global leader Ericsson and fast-growing Chinese rivals.

This vendor financing had been on the wane since the dot-com bubble burst in 2000 but with global recession forcing telecom carriers to slash investments and cut jobs [ID:nLI180069], the sometimes risky practice is making a return.

And with not all governments and banks able to provide cash for gear makers, China's Huawei Technologies and ZTE Corp along with Ericsson could benefit.

On Friday, ZTE, which overtook Motorola last year to become the sixth-largest mobile gear maker, won a $15 billion credit line from China Development Bank, allowing it to expand its global reach and introduce new technologies.

The amount is nearly a third of the $49 billion annual global market for mobile network equipment.

"We're encountering more and more demand for the financial solution as well as the technical solution," said George Sun, chief executive of ZTE's U.S. unit. "Right now it's a tough time for everybody."

But if things are equally tough for every company in the sector, some are more equal than others.

Project risk for Chinese companies is a relative term because central government-dictated policies are as much a determinant of corporate behavior as supply and demand.

"We are aware of a few tenders where financing packages from Chinese vendors, valued at more than 100 percent, have been the decisive factor to get the deal," said Bengt Nordstrom, chief executive of telecom consultancy Northstream.

A STATE OF MIND

Industry players also named Ericsson as a key provider of vendor financing through Sweden's state credit support agency.

"We don't do it on our balance sheet," Ericsson chief executive Carl-Henrik Svanberg said last month.

While Ericsson is holding its market share versus Chinese rivals offering cheaper products that are increasingly sophisticated, others are faring less well.

"The government is encouraging ZTE and Huawei to expand, in projects that are directly supported by the Chinese government," said Frank He, analyst at BOC International in Hong Kong.

"State-owned banks like the China Import-Export Bank and the China Development Bank would also lend to foreign carriers to support that policy," He said.

CREDIT CRUNCH?

China's mostly state-owned banking sector lent 2.7 trillion yuan ($395 billion) in the first two months of the year, more than half the minimum target for the year in response to Beijing's call for more stimulus action.

Huawei in particular has been able to increase its market share rapidly and, according to some research firms, has passed Alcatel-Lucent to become the number 3 mobile network gear vendor after Ericsson and Nokia Siemens.

"Huawei chairman Ren Zhengfei does not talk to the mayor of Shenzhen, he talks directly to (Chinese) Premier Wen Jiabao. His relationship with the central government is very strong," said BOC International's He.

Telecoms is a strategic industry for China, which is encouraging companies to expand overseas with incentives, tax breaks and subsidies.

That government backing allows Huawei and ZTE to take a very long-term view of development, a strategy that has helped in Africa, South America and even the Middle East.

"We are seeing an uptick in requests, generally in the Middle East and Africa region and a bit in Asia Pacific," said a source at a large network gear maker. "Customers in the Middle East are clearly on the search for financing."

NAME CHECK

The aggressive state-backed Chinese strategy, bolstered by improving technology that is producing world-class products, is putting the heat on everyone, including Ericsson.

Duncan Clark, chairman of Beijing-based consultancy BDA, noted Ericsson mentioned Huawei by name in its annual report last year for the first time, having previously only talked about "low cost providers."

"It is getting personal now," Clark said.

(Additional reporting by Simon Johnson in Stockholm and Sinead Carew in New York; Editing by Dan Lalor)

($1 = 6.826 yuan)