Mobile Data Demand Will Expand Market for TDD, Says ZTE Head

September 29, 2010  

Source: Leading industry magazine Global Telecoms Business (September/October 2010 issue)

The new president and CEO of ZTE is enthusiastic about the future of China’s home-grown version of 3G mobile technology—and its LTE upgrade—as a way of tackling the huge strain that data services are putting on mobile networks.

Shi Lirong, the 46-year-old telecommunications engineer who took over at the top of ZTE at the end of March 2010, believes that many of the 500 operators that already have time-division duplex spectrum will consider migrating to the TD version of LTE.

“The technology can bring new value to operators,” says Shi, in an exclusive interview with Global Telecoms Business. TDD spectrum is valuable “and the TDD spectrum is cheaper”, he adds.

Some operators are already deploying the more usual frequency-division duplex version of 3G and then LTE, but, says Shi, “because of spectrum limitations they are considering TDD spectrum for their data services.”

China Mobile pioneered TD SCDMA, a TDD version of 3G technology that was invented in China.

 When Chinese telecoms operators were reorganized in 2008, each of the three companies was allocated a different 3G technology: China Unicom got conventional WCDMA, as used in most of the world.

The Chinese government told China Telecom to use the Qualcomm version of 3G, and China Mobile—the biggest operator in the world—was allocated TD SCDMA.

There was some cost to China Mobile, as the then CEO, Wang Jianzhou, told Global Telecoms Business in 2009: TD SCDMA did not have the volume advantages that would drive cost down.

But the sense of the industry appears to be shifting in favour of TDD, as customers around the world start to use mobile broadband at levels few ever expected.

And the attraction of TDD is that it is efficient for data, which tends to flow unequally upstream and downstream. The system can dynamically adjust the timeslots for each direction, freeing space for other users.

“There are lots of new opportunities” with TDD, says Shi, who was in charge of ZTE’s sales and business development operations for 11 years until his promotion earlier this year. He started out as an engineer, with a master’s degree in telecommunication and electronic system engineering as well as a master’s degree in engineering.

Focused on Innovation

Is it engineering that excites him, or the prospects of sales for ZTE? Both, it seems. “We are more innovation focused: we can bring propositions to our partner operators,” he says, neatly straddling both.

“Our innovation is oriented to market needs and oriented to the needs of our customers,” he says. “We believe in the future if ZTE wants to lead the telecoms industry. This strategy is the number one priority.”

But he swiftly moves on to his second priority for his leadership of the company: market share. “Currently more and more operators know that ZTE has good technology and good total cost of ownership, and we can deliver,” he says. The company can execute on the projects on which it works, he says. “We have very competitive products now, so we hope we can grow more market share.”

This is the result of high spending on research and development, he says: consistently about 10% of turnover.

Revenue was $4.5 billion in the six months ending June 30 2010, according to the company’s results published in August, and was increasing by more than 10% a year. Profit in the first half was $129 million, a rise of 12% year on year.

That means that annual spending on R&D is getting close to $1 billion. “We have a huge R&D investment,” says Shi. “We can develop lots of innovative products.”

About 10% of that R&D spend is on forward-looking research, he notes—on projects such as next generation base-stations and network.

ZTE has a patent portfolio of over 30,000 patents in China and 4,100 patents overseas, covering 2G, 3G and 4G, including what it says are “essential patents” in LTE and UMTS. In 2009, ZTE says it ranked number one in patent applications in China, and it tripled the number of international patent applications.

One result of this investment has been the company’s software-defined radio equipment, says Shi.

This is a system that allows an operator to hedge its bets on when demand for 3G will start to overtake the need for 2G base stations—and when, in turn, it will need to ramp up 4G services. The answer, according to ZTE, is to install a single standard of hardware and put the difference in the software.

Software-Defined Radio

“It’s a unified platform for 2G, 3G and 4G LTE,” he says. “We are the first company to develop and deliver this software-defined radio equipment.”

CSL, Telstra’s mobile business in Hong Kong—conveniently just a few kilometres from ZTE’s headquarters in Shenzhen in southern China—is an enthusiastic user of the vendor’s SDR, but there are others, says Shi, listing South African operator Cell-C, Portugal’s Sonaecom and KPN of the Netherlands.

SDR is even more flexible than just providing the ability to move through the GSM family of technologies. “We can even combine CDMA, WiMAX and TD-SCDMA in the same platform,” smiles Shi. So, if a WiMAX operator wanted to do so, it could consider a move to the TDD version of 3G—an intriguing possibility.

The company makes WiMAX systems, which are also TDD: it has, for example, supplied Telefónica with equipment for one of the first WiMAX networks in Spain.

“More and more people are considering the TDD spectrum, as FDD can be very limited and expensive,” says Shi. “With more data focus and broadband focus, operators need more spectrum resources, so people are considering TDD for wireless broadband.”

When the reorganization of China’s telecoms operators was completed in 2008, it had taken a long time to sort out, leaving all three some way to catch up with the rest of the world in 3G operations. But that meant they all invested heavily and quickly in 3G—and ZTE was a huge beneficiary.

“We got the number one market position in Chinese 3G, mainly because ZTE is more competitive in technology and total cost of ownership,” says Shi.

It is competing in China with all four of its international rivals: Huawei is Chinese; Alcatel-Lucent has its own Chinese subsidiary, Shanghai Bell; and both Ericsson and Nokia Siemens Networks have a significant presence in China.

“There are five vendors and all five vendors compete,” says Shi. But ZTE claims to have won the five-way battle in terms of market share. “The three operators all assessed the network quality and ZTE’s performance is the best with the three operators,” he says. Best on what basis? “For example, China Unicom calculates factors such as power consumption and so on.”

Volume Advantage

This success in the first 3G investment phase “gave us a volume advantage and therefore we became more cost effective and more experienced in 3G”, he adds. “So we will get more chances in the second phase and the third phase.”

That’s given ZTE a good market share in its homeland, and no doubt helped with volume efficiencies worldwide. “In Asia Pacific our market share is high,” says Shi. And he has his eye on other parts of the world: “I hope in the near future in big countries—Brazil, Russia, South Africa, Nigeria—we will get higher market share.”

In the developed world, ZTE has had a number of successes, but it’s probably fair to say that the company has not achieved the same sort of market share as it has in the Asia Pacific region and other emerging markets. “In Europe and North America there is big potential,” Shi accepts.

Politics possibly plays a part. Both ZTE and its Chinese rival Huawei—and they are fierce rivals—have had political opposition in the US, but Shi is quick to respond that ZTE is a public company, with shares quoted on two stock exchanges.

“We are a listed company, not only in Shenzhen but also in the Hong Kong region,” he says. “Everything is very strict, as we follow Hong Kong regulations. It’s more transparent and more regulated.”

Around 21% of ZTE’s shares are foreign owned, he adds, and in 2010 the company appointed an American as an independent board member. This is Timothy Seifert, a former Freshfields lawyer who is general counsel of Alibaba, a Chinese online trading company. “We are quite confident that ZTE is a very different Chinese company,” says Shi.

“China has also changed, like ZTE has changed from a small company to a big company. Our thinking has also changed—that’s very important,” he adds.

So in the US, ZTE has started slowly. “The ZTE corporate motto is ‘step by step’,” he notes—though a more formal corporate slogan is “bringing you closer”.

It has started its approach in the US with handsets and terminals. It was two years’ hard work, he notes, but “that was the right strategy”, which appears to have paid off. “Now the main operators are choosing ZTE for the devices,” he says. “We have delivered handsets to Verizon.”

In the longer term ZTE’s ambition is “to provide an affordable smartphone”, says Shi. “The smartphone is still priced too highly. People are asking what will be next after Apple. I think ZTE can provide this.”

But meanwhile the next step in the step by step approach to the US market is “to approach the networks”, he continues. “We have some successful middle and small operators. Next step, we hope we can get into tier one operators.”

Tier One Customers

Tier one is the clear goal. “Our strategy is focused on the big countries and the big operators, multinational operators like MTN, Bharti, Vodafone, France Telecom,” he says. “We are more focused on those operators.”

The company is “very careful” when dealing with smaller operators—and, he added, “in India we are very careful because there will be consolidation”. There are many operators fighting for market share in India.

ZTE doesn’t completely avoid small companies, though. In June 2010 the company signed a deal with a small Canadian start-up operator, Public Mobile, to design, build and operate an end-to-end CDMA network which includes wireless, core network, service platforms and IP architecture. ZTE will also deploy over 1,000 base stations for the network.

That deal, said at the time to be worth $350 million, was funded by the Export-Import Bank of China. “When you provide the equipment and the technical solution, sometimes we provide a package of financial facilities,” says Shi. “This can bring value for operators. We have lots of different financial partners—Chinese and European banks.”

A financial package is not standard, but “sometimes we can provide a package if the operator needs it”, he notes. Customers “also have their own channels” for finance and “they evaluate the financial costs”, but “if we can provide this we like to do so. It’s an option for our operators.” He adds: “We are a listed company and we have very strict regulations on risk control.”

The design, build and operate part of that Canadian contract is intriguing too. Managed services are “a very important strategy for ZTE”, says Shi. “We don’t announce very much about it, but we have already provided services in many countries.”

The company has “2,000 people providing managed services in different countries over the last three or four years”, he adds. “We employ some very professional people.”

Shi lists MTS in India—the joint venture between Shyam of India and Sistema of Russia—as well as another Indian company, Idea Cellular, and Cell-C in South Africa as managed services customers. “We believe we can see a very high potential in this area, with more and more networks,” adds Shi.

ZTE’s contracts are “mainly greenfield, where we have built the network, but some we take over, along with the existing operational staff”, he notes.

Management Efficiency

Meanwhile, ZTE is as focused as most other vendors on trimming costs. The company wants “to optimize our internal management”, he says: “Cost saving is also very important.” He means internal cost saving, by optimizing its structure. ZTE has to “reorganize our structure to be more flat and more effective”.

That means he will be setting “clear goals” for different departments in the company, and assessing their performance. He wants to save money on travel by making more use of IT and telecoms. “Globally we have 400-500 videoconference terminals. We don’t need to travel.”

Where next? The “bringing you closer” slogan Shi mentioned earlier is intended to reflect ZTE’s “corporate high concern for humanity, the company’s global vision and insight, the value of dedication to the development of the communications industry”. Top issues include “corporate social responsibility, green technology, carbon reduction, solar powered handsets and green technology for our customers”, says Shi.

“We need to bring ZTE propositions to the operators, to the people, to the community. That’s very important. With R&D, technology, products, service, we hope we can contribute to the community. That’s very important.”