The rise of Huawei and China Inc. -- Chinese telecom equipment vendors with government backing -- is a growing challenge for European and North American telecom vendors. At the same time, telecom service providers analyzing RFP responses are finding it difficult to make apples-to-apples comparisons between vendors due to a lack of transparency into future contract costs from Chinese vendors.
After the initial capex, providers need to know the cost of necessary customization.
Managing Partner, ACG Research
The telecom equipment business has already changed due to Huawei’s influence. But as the Sundance Kid asked Butch Cassidy, “Who are those guys?” In parts one and two of our ACG Research on Huawei series, we talked to Dr. Ray Mota, ACG’s managing partner and founder, whose analysts spent months researching Huawei's business model and its plans to compete in the global telecom equipment market.
Now Mota offers telecom vendors and service providers seven recommendations for dealing with the market force dubbed “China Inc.” by Cisco CEO John Chambers in 2007 when asked which company was his closest competitor. Mota advocates closer service provider/vendor partnerships since operators are under pressure to sustain profitability. “Vendors need to align themselves with providers’ Telco 2.0 business models to become more partners than companies providing individual products,” Mota said. To make that happen and to compete or work with China Inc., he offers the following recommendations for both vendors and service providers.
1. Understand your value proposition and be honest about it. Vendors shouldn’t go after certain deals because they don’t make good business sense. Look at the requirements and see how much network and service intelligence is needed. If it’s very little, like dumb access aggregation or something that doesn’t require a lot of differentiation, those deals may not be good for you, because if an RFP becomes a price war, it could be very difficult for vendors to differentiate themselves. Huawei could come in with a profit margin so low it would be a waste of energy to bid against it.
2. Understand and study the vendor selection criteria. Many service providers create vendor selection criteria based on many different functions. First ask the service provider for clarification on the criteria. Vendors will find that certain service providers rate criteria at varying levels of importance. Some examples include vendor reputation, professional services, quality of sales team, price or available financing. By understanding the vendor selection criteria, vendors can do an assessment to see if they can compete. If the criteria include low intelligence or low price, it may not be a fit.
On the service provider end of vendor selection, providers should spend the extra time and the due diligence on how they rate the selection criteria. Is it price, financing, product breadth, financial packaging or roadmap architecture? Providers need to do a much better job at that, as well.
3. Create collaborative partnerships. One important vendor selection criteria in an RFP might be “breadth of products.” For certain RFPs, you need to identify vendors you can partner with to fill gaps in order to offer a better solution for that requirement. The description I use is, “An enemy of your enemy is your friend.” Identify that partnership in the RFP. You can’t be all things to all people, but with strategic partnerships, you can come close. Providers are OK with that if the story is seamless. If it’s a customized solution, you as a vendor have to make sure your support and escalation terms are clear. If you have gaps in terms of “breadth of products,” either walk away or partner up.
4. Stop the internal fighting and focus on winning the war. Vendors need to come together and understand that on certain deals, profit margins need to be a corporate responsibility, not a corporate line of business battle. Huawei is better at that than most vendors, as is China Inc. in general.
5. Offer bundles and package deals. Better bundling and packaging can generate a different thought process for service providers and help them think more about bundles. If you as a vendor really put a lot of value on services, and service providers are looking for a product, suggest services you can bundle in with that product. Use creative marketing to leverage a bundle and create more stickiness within the product.
6. Change the conversation: It’s fine to lead purely with technology for the short term but not for the long term. Change the conversation to talk about service creation, business model or service opportunity analysis. That is a discussion that Huawei isn’t prepared to have today.
In terms of the service provider business, providers are being challenged on profit margins, so they need to be more accepting of vendors that come in with business model solutions and show them how to make new money, create new revenue streams or expand into new markets.
7. Address the need for transparency. Vendors need to talk to service providers about the need for full transparency disclosure on their bids because Huawei doesn’t do that. At the same time, make sure you point out your own line card price, or the price of customized development not just this year but for years going forward to give them full transparency.
For service providers, transparency is extremely important. After the initial capex, providers need to know the cost of necessary customization. They shouldn’t focus on the initial price, but on the individual line items, the cost of customization and ongoing support, and the quality of that support.