Asia/Pacific Enterprise Networking Trends in 2003

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1 Strategic Planning, G. Johnson Research Note 22 November 2002 Asia/Pacific Enterprise Networking Trends in 2003 The Asia/Pacific region faces challenges because of the global telecom turmoil, but there will be opportunities for enterprise buyers in less-expensive equipment and contract renegotiation, even as some network service prices rise. Core Topic Enterprise Networking: Network Procurement, Sourcing and Staffing Key Issue Which organizational and management strategies and architectures will enterprises use to successfully deliver service excellence? Strategic Planning Assumptions By 2005, as the global telecom market stabilizes, Chinese network infrastructure vendors will emerge in global markets with high functionality and lower prices (0.7 In 2003, enterprises that purchase telecom carrier services in the Asia/Pacific region will have to balance the risks of the financial instability of seductively priced new competitors against the "flight to quality" and apparent "safe haven" of well-funded, often dominant, market incumbents (0.8 Through 2007, Asia/Pacific network service price increases will range between flat and rising by an average of 5 percent each year (0.7 In 2003, the Asia/Pacific region will move into the "resolution" phase to address global telecom turmoil; however, industry turbulence will not subside until carrier and manufacturer consolidation and balance-sheet repair are well-advanced. A new market dynamic is emerging, with lower prices for equipment and pressure from dominant carriers for higher network service rates. Less-expensive equipment The "world's best-kept secret" in telecom and networking equipment manufacturing will gain prominence in 2003, as China's less-expensive and highfunctionality products become increasingly known worldwide. Better carrier prices Bankruptcy recoveries in the telecom industry will deliver assets to acquisitive suppliers at severely reduced asset value, but revenue derived from these assets will remain elusive for their new carrier owners. Asian buyers' "flight to quality" that is, their propensity to use the (perceived) highest quality, and priced, network service providers and safety regarding suppliers is as strong in Asia as in any other world region. Tier 2 discounters will benefit from the carrier sentiment that prices must increase, and these discounters will float their prices with the rising tide. Contract renegotiation opportunities Enterprises will take advantage of the challenging business environment faced by network service providers (NSPs) by renewing their telecom contracts to gain more-favorable terms. Prediction: Chinese network infrastructure vendors that offer inexpensive prices emerge in Western carrier and enterprise markets. Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 By 2005, as the global telecom market stabilizes, Chinese network infrastructure vendors will emerge in global markets with high functionality and lower prices (0.7 Impact on 2003: To date, only major Western networking vendors, such as Cisco Systems, Nortel Networks, Lucent Technologies, Nokia, Ericsson and Motorola, appear to be aware of emerging serious competition from China's large-scale telecom manufacturers, such as Huawei Technologies (or its subsidiary in the United States, FutureWei Technologies) and Zhongxing Telecommunications Equipment (ZTE). However, this will change in 2003, as carriers worldwide begin to evaluate and purchase Chinese vendors' network infrastructure, which may be approximately half of the price of Western vendors' products. We expect that China's Tier 1 players such as Huawei, ZTE, Datang Telecom Technologies and UTStarcom will burst onto the global carrier scene in Tier 2 suppliers such as Julong, Jingpeng and TCL Mobile, and Putian's subsidiaries Capital, Eastcom and Bird, make almost all telecom products, but their focuses are quite distinct. For example, ZTE invests in personal communication services and code division multiple access (CDMA). Huawei focuses on Global System for Mobile Communications and wireless CDMA infrastructure and terminal devices, as well as transmission equipment, such as Synchronous Digital Hierarchy and enterprise-grade routers (see Table 1). Table 1 Chinese Telecom Vendors' Products Company Telecom Products Huawei Access Switching Transmission Data ZTE Access Wireless local loop Personal HandyPhone System Mobile devices Datang Asynchronous transfer mode (ATM) Passive Optical Network Digital subscriber line Hybrid fiber-coaxial (cable) Time Division-Synchronous Code Division Multiple Access UTStarcom Personal access system wireless Wireless local loop Voice and data Source: Gartner Research 22 November

3 Reacting in 2003: Global carriers and, eventually, enterprises will discover familiar and satisfactory functionality, lower prices and a stronger downward price trend with Chinese telecom vendors than what are available from Western vendors. (A research engineer in China costs one quarter of the West's cost). In China, telecom manufacturing is moving toward two strong (Tier 1) "poles" Huawei, with a full range of telecom technologies; and ZTE, with predominantly access networks and mobile technologies. China has an intense commitment to self-help as it industrializes. This is evident in all of its industries, but especially in the telecom market. A domestic focus has been so strong for Tier 1 vendors that they have begun to export only in recent years. These vendors are most successful in developing economies in Asia, Eastern Europe and Latin America. We expect that there will be more proactive collaboration between China and the West, such as the Alcatel Shanghai Bell consolidation. Prediction: Asian buyers' flight to quality indicates that the telecom pricing decline has ended; pressure to raise network service prices increases. In 2003, enterprises that purchase telecom carrier services in the Asia/Pacific region will have to balance the risks of the financial instability of seductively priced new competitors against the "flight to quality" and apparent "safe haven" of well-funded, often dominant, market incumbents (0.8 Impact on 2003: The years of enterprise budget reductions that were based on renegotiating Asia/Pacific network service contracts to save 15 percent to 20 percent have ended. Enterprises should expect more bankruptcies, financial difficulties, mergers and acquisitions among their NSPs. No provider is absolutely safe from market instability; most are weakened because of the global telecom turmoil will be a difficult year to judge the true status of even the largest and previously most-credible NSPs, given the corporate malfeasance that has been seen with WorldCom, Global Crossing, Tyco and other companies, as well as many other NSPs' crippled balance sheets. Asia's new level of excess capacity and network diversity has created inexpensive bandwidth via excessive competition from new players in a significantly fragmented market. The availability of new services such as IP virtual private networks (VPNs), Multiprotocol Label Switching (MPLS) and Gigabit Ethernet metropolitan-area networks will add to choice and competitive pressure. Global carrier alliances (such as Concert and Global One) have failed. Wholesale carriers' carrier models, such as 22 November

4 Level 3, Global Crossing and Asia Global Crossing, mostly have failed. This situation usually would cause price wars; however, discounted prices now are seen as synonymous with degraded or failed NSPs. Reacting in 2003: Enterprises should develop a multiple-nsp strategy, with clear contingency plans to replace an underachieving NSP. Enterprises should welcome NSP consolidation, and plan to upgrade and displace frame-relay and ATM networks with more cost- and performance-effective services (such as IP VPNs, MPLS and Gigabit Ethernet metropolitan-area networks). Favor service-level-agreementmandated performance and support rather than price discounts. Prediction: Through 2010, there won't be a better time to renegotiate NSP contracts than in Through 2007, Asia/Pacific network service price increases will range between flat and rising by an average of 5 percent each year (0.7 Impact on 2003: Through 2010, enterprise cost allocations for networking will increase by 5 percent to 10 percent annually as the combination of extra traffic and firm NSP prices places greater demand on the networking budget. Upgrades to newer technologies, new strategies and contract renegotiation will be necessary. By 2007, at least 20 percent of large, multinational enterprises that operate in the Asia/Pacific region will have replaced their frame-relay networks with broadband-enhanced IP services, such as IP VPNs, MPLS and Gigabit Ethernet (0.7 Acronym Key ATM CDMA MPLS NSP VPN ZTE Asynchronous transfer mode Code division multiple access Multiprotocol Label Switching Network service provider Virtual private network Zhongxing Telecommunications Equipment Reacting in 2003: Enterprises should plan and pilot new IP services (including value-added services) in preparation for wider IP deployments beyond Enterprises that operate in the Asia/Pacific region should lock in prices now. The buyer's market in network services in this region is ending; the time to act is now. Enterprises should investigate how to make service-level agreements and price the basis of enduring contracts, rather than a necessarily fixed period, unless equipment amortization is involved. Bottom Line: In 2003, as carriers evaluate emerging Chinese network infrastructure vendors, enterprises should know of and consider these new equipment suppliers for themselves, as well as how they will affect the global carrier industry. Network managers must change their mind-set on downward price movements in network services in the Asia/Pacific region, and educate their enterprises' leadership about possible increasing networking budgets. Today, enterprises should revisit network 22 November

5 service contracts to possibly lock in favorable terms and prices for network services in the Asia/Pacific region. 22 November