Huawei howitzer

Predatory pricing or competitive entry strategy? That’s the question now being asked of the bid by Chinese telecom firm Huawei Technologies for public sector BSNL’s tender for one million CDMA-based FWT phones in rural areas (basically Fixed Wireless Terminals are land line phones which are connected wirelessly and not through a copper line).

After winning the bid for MTNL’s (0.8 million) CDMA phones a little over a year ago, Huawei looks all set to do the same with BSNL with a price quote around 37 per cent that of US rival Lucent Technologies.

While Lucent has bid $83 million for the contract (for the network, not the phone instruments), Huawei’s bid $31 million. For some critical components like the MSC and the BSC, Huawei’s bid is a seventh that of Lucent’s $18.4 million!

With such a low bid that has the potential to change the dynamics of the mobile telephony market, which is growing by close to 1.5-2 million subscribers a month, Huawei’s rivals are naturally incensed and detailed presentations have been made both to BSNL officials as well as telecom ministry ones on how the Chinese are doing predatory pricing.

It is pointed out, for instance, that while standard PC workstations which will be used in the network cost around Rs 30,000 apiece, Huawei’s bid puts the cost of these as only Rs 209; a Sun Solaris operating system costs Rs 4,500 while Huawei costs this at Rs 9; a Sun Blade server costs Rs 150,000 while the Chinese firm is charging just Rs 347 for this.

No details are provided, however, of just how much all such bought-out items add up to in the Huawei bid, whether this is a significant or an insignificant part of the bid. Right now, though, the difference between Huawei’s bid and that of the others is too large to be explained only by the artificial pricing of bought-out items.

Another allegation made is that while, traditionally for such projects, hardware costs account for around 70 per cent of the total project and software makes up the balance, Huawei has flipped this around to save on customs duty.

While Huawei says its strategic pricing is part of an entry strategy for a very large market, it categorically denies the customs duty charge and says its hardware/software ratios are 70:30, which is the acceptable limit.

Interestingly, both BSNL and the telecom ministry, who are the only ones to know whether the charges and rebuttals are correct or not, appear unmoved, and have said there’s little they can do in a competitive tender of this type. Nor is any allegation being made about Huawei’s technology being of a poor quality since, before being allowed to make a financial bid, every vendor’s equipment has to pass field trials.

Whether Huawei’s bid is predatory is, of course, a moot point since, by definition, predatory pricing is done by someone who has great market power (which Huawei doesn’t) or by someone who is subsidised in a manner not available to the competitor—usually this means a government subsidy.

In the bid for Unocal in the US by Chinese company CNOOC, for instance, rival bidder Chevron has argued that the CNOOC offer is funded partly by subsidised government loans that effectively help CNOOC raise its bid price by about $10 per Unocal share.

CNOOC, naturally disputes this claim, but the point here is that, if true, this is a valid reason for Chevron to claim predatory practices. So far, in the case of the BSNL tender, US rivals have not even made this claim, leave alone substantiated it. (When Reliance Infocomm came out with its Monsoon Hangama offers and 40 paise national long-distance phones from one Reliance phone to another, the telecom regulator didn’t take any action on the cellular industry’s complaint of predatory pricing precisely because Reliance was a new entrant with zero market power in telecom, and if it wanted to burn up its money, then so be it.)

Of course, if such a charge of government subsidies to Huawei is to be made, it has to be made to the US government since it involves Chinese companies being subsidised unfairly while competing with US firms. There is nothing that either BSNL or government officials can do, more so given the strict adherence that is paid to the lowest-bid criterion.

Postscript: Another issue that comes up very forcefully, of course, is that of the Access Deficit Charge (currently around Rs 5,500 crore a year) that is paid by consumers each year to fixed-line service providers—each time you make or receive a long-distance call, either a national or an international one, you pay a fixed charge per minute and this is distributed to fixed-line service providers in order to cover the difference between their costs and the lower tariff that they charge customers.

Well, if a CDMA-based line can cost around Rs 1,500 each (CDMA-based mobile lines of the sort provided by Reliance and the Tatas cost 10-15 per cent more than CDMA-based FWTs of the type BSNL is setting up), and the very basic mobile handset costs another Rs 1,500-2,000, this makes the total cost of the line around Rs 3,000-3,500 per subscriber.

In comparison, a land line costs anywhere between Rs 10,000 and 12,000. Naturally, if ADC payments for fresh lines are going to be calculated on the basis of Rs 10,000 per line they’ll be dramatically higher than if they’re calculated for a service that costs just Rs 3,000-3,500.

Interestingly, as far back as October 2003, when Trai was giving its recommendations on unified licensing, it said the cost of wireless lines to fixed wire lines was 1:3! And yet it continues to give ADC to even new fixed-wire lines!