If you’ve been in the telecommunications market longer than a decade you have witnessed the rise of the Chinese dragon. Chinese firms have aggressively engaged every marketplace on the planet with a rulebook that is totally alien to incumbent vendors. Aggressive pricing, support giveaways and a seemingly limitless supply of human capital are tactics used in every engagement. North America is now the last frontier.
The secret to Chinese success is a very simple idea; A complex system is made up of cleverly connecting simple components together. We can use our human capital to connect these discrete components together and build software around them much less expensively than our western counterparts. We will pass these cost savings along to our customers and undercut the competition.
This model has been wildly successful at gaining marketshare in Europe.
Customers are in the drivers seat as they can use the threat of Huawei or ZTE to dictate pricing to almost any other vendor. I have been many sales meetings where a customer put an offer from a chinese vendor on the table and said:
“You’ve got some really interesting technology here. Here’s the pricing from a chinese vendor, if you match it we an discuss this project further.”
So, price is more important than technology differentiators. That’s a powerful statement and contrary to how the western vendors have positioned themselves.
This is a headache for the western(American/European) based telecommunications vendors. Most of them have reacted by slashing prices, discounting aggressively or offering free services to match the financial terms that the Chinese vendors have set.
The 400Kg gorillas of the telecoms vendor world (Cisco, Alcatel, Ericsson) have many ways to counter this threat; Relationships, long contract cycles, deep pockets and of course brand name recognition, but these models aren’t sustainable in the long run.
So how can we change the game to our advantage?
As usual, we need to turn our attention to the next-generation technology companies for an answer. Some of these small technology firms have found a way to leverage their expertise to change the rules of the game by vertically integrating technologies into silicon. This strategy is core to obviate the labor cost burden most western vendors have today while simultaneously adding more technology differentiators for Carriers to exploit.
So, price is more important than technology differentiators. That’s a powerful statement….
As stated above, complex systems are cleverly connected discrete components. If these components can be integrated into silicon we gain a cost reduction by obviating the need for a bunch of people to “glue components together”. Although the initial R&D cost is high, the follow-on manufacturing cost is significantly reduced. This can result in a scenario where a company can compete with the chinese on price while maintaining a Wall St. margin expectation.
When components and software are tightly integrated together on silicon, a performance advantage emerges. Consumers, businesses and Carriers have been clamoring for more bandwidth, cleverer packet handling, more services and lower cost. Integrated Silicon, whether it’s in the form of ASICs (Application Specific Integrated Circuits) or FPGAs(Field Programmable Gate Arrays) is the foundation of ensuring network elements have the ability to provide all existing and future services at wirespeed,
There has also been concern regarding the software development practices of Chinese Vendors. Issues ranging from disregard of software patents to blatant piracy have been reported. This is only a threat of the software has code that is portable, i.e. can be run on any other machine. When the hardware is vertically integrated and the software written specifically for this hardware then the threat of software appropriation is significantly reduced.
A number of companies have been very successful at this, even some of the 400Kg gorillas. Here are a few examples of companies who have integrated silicon at the core of their product strategy:
- Juniper Networks – Internet Processor Family of ASICs
- Timetra, later Alcatel – MPLS and Ethernet chips
- Infinera - The Photonic Integrated Circuit
- Accedian Networks – integration of testing, measurement and service creation
- CyanOptics – Vertical Integration of Lambda, Ethernet and Transport technologies.
Vertical Integration of technologies is the only way forward for Western Technology companies. If you run a high-tech company in the western hemisphere, leveraging advanced technology expertise to reduce costs, increase performance and protect Intellectual Property is the way to secure your future.
As always, I’d love to hear your comments, please let me know what your experiences are.
Related posts:
- Network Management – Steps in the right direction
- Telecom Vendor Challenges
- Your gear is good? Prove it!
