China's Huawei Overcomes Opposition in India

In the U.S., Chinese telecom equipment manufacturer Huawei Technologies is encountering new opposition from Republican senators. Huawei has had its share of political problems in India, too, with New Delhi putting Huawei and Chinese rival ZTE on a blacklist earlier this year because security officials worried about the risk of Chinese infiltration. “The Indians are incredibly paranoid about China,” David Zweig, a professor of politics at Hong Kong University of Science & Technology, told me at the time. (Read that story here.)

But the Chinese company is making progress in overcoming opposition in that market, with the Indian government easing up on its ban. On Monday, Indian operator Tata Teleservices said it is buying 3G equipment from Huawei. This comes just a few weeks after Huawei announced an earlier deal with the Indian operator to provide CDMA equipment in Mumbai.

Indian security concerns aren’t limited to Huawei and other Chinese companies, of course. Look at what RIM has had to go through in order to keep New Delhi from kicking the BlackBerry out of India. http://www.bloomberg.com/news/2010-09-01/india-asks-rim-google-skype-to-set-up-local-servers-update1-.html Huawei’s breakthrough is probably a sign that the company made enough concessions to satisfy India’s security officials. It’s also a sign, though, that for all the rhetoric about the threat from China, Indian companies can’t afford not to do business with Chinese suppliers. As Insead professor (and sometimes Businessweek.com columnist) Anil Gupta told me a few months ago, Chinese equipment makers like Huawei enjoy a big price advantage over Western competitors. “We are talking about very competitive tech at 30% lower price; in a very capital intensive biz, that is important,” he said. As Indians look to spend to fix their woeful infrastructure, “India as market becomes the most attractive for capital goods from China. And because of China’s cost advantage, China becomes the most attractive supplier base.” For the two Asian giants, that co-dependence could help both countries put aside their past hostilities and work together.

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Delays Threaten India's Commonwealth Games

October’s New Delhi Commonwealth Games* were supposed to be for India what the 2008 Beijing Olympics were for China, the big sporting event showcasing the country’s arrival as an economic power. Instead, the Games are putting the spotlight on India’s worst problems, widespread corruption and poor infrastructure. Check out this story by my Bloomberg colleague, Subramaniam Sharma. “A day after the delayed opening of the weightlifting hall for New Delhi’s Commonwealth Games,” the story begins, “workers in white helmets climbed across its roof to fix leaks.” Subbu adds, “While state control in China ensured [Beijing] was ready for rehearsals, Delhi’s government-run efforts have been mired in delays, accusations of corruption and mismanagement.”

With more than a dozen other Commonwealth Games venues also behind schedule, Prime Minister Manmohan Singh over the weekend ordered an investigation. That begs the question of why Singh waited so long. The Commonwealth Games ain’t the Olympics, and as the Financial Times points out, several big-name athletes are giving it a pass. (Queen Elizabeth isn’t planning on showing up, either.) Still, this is a major event and I can’t see why Singh is stepping in only now, less than 50 days before the Games are scheduled to begin. Say what you will about the Chinese government, this kind of embarrassment wouldn’t happen in China.

* Originally I wrote the Games start in September, but opening day is October 3.

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China Has Foreign-Worker Problem, Too

While the U.S. and India squabble over H-1B and L-1 work visas for employees of Indian outsourcing companies, there’s a debate about foreign workers going on in China, too. Wait - China? The country with the world’s largest population and a bottomless pool of cheap labor? That China? Hard as it might be for Americans to believe, China has a growing illegal alien problem, too. According to Thursday’s South China Morning Post, officials in southern China’s Guangdong province are concerned about undocumented workers from neighboring countries. The SCMP cites the Nanfang Daily, the official newspaper of the Guangdong government, reporting that the province is about to impose new regulations on foreign workers. “With a huge workforce and strict immigration policies, the mainland is still closed to overseas labourers,” the SCMP reporter, Ivan Zhai, writes. However, local companies are looking for foreign workers thanks, in part, to higher costs associated with a new labor law that calls for better pay and benefits for Chinese workers. “More and more manufacturers are likely to employ illegal labourers from Southeast Asian countries such as Vietnam and Cambodia. The reason is they that they will work for less pay and endure worse working conditions.”

For years, Guangdong officials have talked about the need to upgrade the local economy and shift away from reliance on low-wage labor. That’s happening, as companies like Foxconn (which manufactures for Apple and many others) are moving away from Guangdong. Foxconn is hiring as many as 300,000 workers at a new plant in central China. Not everybody can afford to pick up and move, though. For those companies stuck in Guangdong, hiring low-wage foreign workers is an attractive option, whether local officials like it or not.

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Demand Grows Despite H-1B Fight, TCS Exec Says

The chop-shop fallout continues. Senator Chuck Schumer (D-N.Y.) caused an uproar in India recently after he called Indian IT outsourcing companies chop shops during debate on a proposal to double their fees on H-1B and L-1 work visas. The proposal passed—with no nays in the Senate—and the Indian government is now pondering its next move. Prime Minister Manmohan Singh’s government might challenge the U.S. at the WTO, The Economic Times reports. The Economic Times also reports that many Indian IT executives want more push-back from Nasscom, the industry lobbying group.

Not everyone thinks this is such a big deal, though. Vish Iyer is the head of Asia Pacific for Tata Consultancy Services (TCS:IN), one of India’s biggest IT services companies, and he was in Bloomberg’s Hong Kong office the other day to talk up the company’s expansion in China and other parts of the region. Iyer says the new fee and the anti-India rhetoric coming from U.S. politicians isn’t that worrisome. "We must distill the news and politics," he explains. "We have seen this in the past." TCS employs 700 people at a center it opened three years ago in Cincinnati, Iyer adds, and the company is expecting more business from American companies, no matter what the politicians say. With the passage of Wall Street reform, for instance, "we see a phenomenal growth in demand from the U.S. banks," says Iyer. "They need help from people like us."

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After Chinese Flop in Korea, Indian Rival Takes a Turn

Mahindra & Mahindra knows how to make tractors. It’s the biggest tractor maker in India. The company wants to join local rival Tata Motors - owner of Jaguar and Land Rover as well as the developer of the locally-made Nano, the world’s cheapest car - as a global player in the auto industry. Mahindra on Monday is signing a preliminary agreement to buy a stake in bankrupt South Korean automaker Ssangyong Motor, Bloomberg News reports. The move is the latest step by Mahindra to build its car business: In April Mahindra bought out local joint venture partner Renault and in May bought 55 percent of Bangalore-based green-car pioneer Reva Electric Car.

If Mahindra follows through on the preliminary deal and takes control of Ssangyong, the Indian company will have the opportunity to show it can succeed where a Chinese rival failed. As Chinese companies look to expand globally through M&A, Ssangyong is the prime example of what can go wrong. SAIC Auto, the Chinese automaker from Shanghai that is one of the most successful producers of cars in China, tried to make Ssangyong the center of an overseas push back in 2004, paying more than $500 million for a 51 percent stake in the Korean automaker. Things didn’t go well after that. “In Ssangyong, it was buying a smaller company. And the acquired company was located in South Korea—next door, both geographically as well as culturally,” Anil K. Gupta and Haiyan Wang wrote in this column on Businessweek.com last year. “Yet, look at the results: bitter disputes over Korean perceptions that SAIC was an exploitative owner, criminal investigations, very little value capture by SAIC, a collapse of Ssangyong into bankruptcy protection, and a complete wipeout of SAIC’s investment.”

SAIC is GM’s Chinese partner and today is the biggest automaker in the world’s biggest auto market - yet it still couldn’t make an investment in Ssangyong work. Who knows, maybe Mahindra will do things better. The Economic Times, for instance, quotes analyst Shishir Bajpai of IIFL Wealth Management saying Ssangyong is “definitely a strategic fit for Mahindra.” He adds, “Ssangyong buy makes a lot of sense for them. It is their step towards establishing a global footprint.” Another bullish analyst, Arun Kekriwal of KRIS, says “Mahindra has ventured in many areas and their track record so far shows they have been right with their decisions and timing.” SAIC had a good track record, too. A lot of good that did. As Mahindra now branches out from its home market, it will be interesting to see what the Indian company has learned from the Chinese company’s failure.

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Fixing China's Banks: The Next Round

No rest for China’s weary banking reformers. Over the summer, they got Agricultural Bank of China over the finish line, with the state-owned bank pulling off the world’s largest IPO. AgBank was the weakest of the Big Four state-owned banks, and with its listing all of the large Chinese banks are now publicly traded. No small accomplishment, given how the banks for decades existed simply as ATMs to direct money from the Finance Ministry to large, state-owned enterprises.

There’s still a lot of work for China to do before it has a well-functioning banking system, though. Next up: fixing the banks owned by local governments. These banks are important because traditionally they’ve been more innovative and have been more willing to lend to smaller, private-sector companies. One sign of what’s to come: China Daily reported last week that China Pacific Insurance, the country’s third-largest insurer, is going to invest $735 million in one of these local banks, Shanghai Rural Commercial Bank. The paper also reported China’s banking regulators are pushing M&A among rural credit cooperatives (RCCs). "RCCs have long been the weakest sector of the country’s financial industry," the government paper said. "Financial experts estimate that nonperforming loans of the RCCs have reached 700 billion to 800 billion yuan ($102.74 billion to $117.41 billion)." Look for more news on this in the months ahead.

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GOP Senators Go After China's Huawei

China’s biggest maker of telecom equipment is the subject of a new campaign by a group of Republican senators demanding the Obama administration investigate the company, which wants to sell equipment to Sprint Nextel. “Huawei has a concerning history,” write the senators (Bond, Bunning, Burr, Collins, Inhofe, Kyle, Sessions and Shelby), who go on to cite old reports about Huawei selling equipment to the regimes of Saddam Hussein and the Taliban. Oddly, the senators make just a passing reference to a dispute between Huawei and Motorola, writing that alleged Huawei violations of intellectual property rights “appear to have led Motorola to refuse to enter into a deeper business relationship with Huawei.” That’s a strange understatement by the GOP senators: Motorola and Huawei are now slugging it out in court; the U.S. company just last month sued Huawei for allegedly conspiring with former Motorola employees. Huawei says the complaint is “groundless and utterly without merit.”

How serious is this latest salvo from Washington? No Democrats signed the letter, and with the midterms approaching it’s easy to dismiss this call by Republican senators as a stunt to embarrass the Obama administration. For the GOP, it’s win-win: If Obama does nothing, Republicans can hammer the Democrats for being soft on China; if Obama intervenes, the Republicans can claim credit.

The company has been burned in the past. See its failed attempt to take over 3Com after politicians raised security concerns. Here’s a suggestion for Huawei, one I’ve made before: Open up. The senators write in their letter that the company’s founder and CEO, Ren Zhengfei, “was a member of the PLA” (the People’s Liberation Army, China’s military). Huawei says the company isn’t connected to the PLA, but clearly people in the U.S. have their doubts. Ren, who doesn’t give interviews, doesn’t help matters by being so secretive. If Huawei really wants to allay security concerns and make headway in the U.S., Ren needs to take some tips from experts in crisis PR, who generally coach execs to tackle problems like these head on. CEO Ren, you need to talk to the media. (Your PR folks know my number.)

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Japan Can't Afford Fight with China

I was in Beijing late last month, shortly after news broke that China had passed Japan as the world’s second-largest economy. The official line in the Chinese media: No gloating over passing China’s longtime rival. For instance, when Premier Wen Jiabao met with Japanese foreign minister Katsuya Okada in Beijing on August 29, leaders about ways the two countries could work together. Wen talked about enhancing bilateral cooperation and Okada was upbeat, too. “During the meeting on Sunday, Okada said the future of China and Japan was becoming increasingly integrated,” the official English-language China Daily reported. ” ‘Not only do Japanese companies position it (China) as a manufacturing base, more importantly, they regard it as a very important consumer market,’ Okada said.” Reflecting Beijing’s don’t-kick-them-when-they’re-down approach, on August 31 the China Daily followed up with this headline: “China, Japan can herald ‘golden age for Asia’”

The era of good feeling didn’t last long. Less than a month later, Sino-Japanese relations are at their worst point in years. Beijing has cut senior-level government contacts and Japan’s top spokesman has warned against “extreme” nationalist sentiment. The two sides are fighting over Japan’s detention of a Chinese shipping-boat captain following a Sept. 7 collision near islands in the South China Sea administered by Japan but also claimed by China and Taiwan. My colleagues at Bloomberg News report investors in Tokyo are nervous the fight could hurt Japanese companies that do business in China. “There’s a possibility Japan would try to implement sanctions on China, which would be bad for related companies in Japan,” Daiwa Securities Capital Markets general manager Kazuhiro Takahashi told Bloomberg.

I don’t see that happening. Japanese Prime Minister Naoto Kan’s government last week declared war on currency traders, intervening in the markets to strengthen the yen for the first time in six years. That yen battle is far from over, and the fortunes of Japanese exporters like Sony, Honda and Toyota are up in the air as it plays out. The last thing the Japanese need now is to open a second front and invite Chinese retaliation against Japanese exporters. The Chinese captain is currently scheduled to be in detention until Sept. 29. Chances are, he’ll be on his way back to China soon after that.

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MakeMyTrip Could Pave Way for More Indian IPOs

For years, Wall Street hasn’t been a welcoming place for Indian IPOs. This year alone, at least 14 Chinese companies have had U.S. IPOs, according to Bloomberg News, but since 1999, only four Indian companies have managed to list in the U.S. From July 2006, when WNS Holdings had an IPO, four years went by without any Indian listings on Nasdaq or the NYSE. A pretty sorry record, and probably one reason that India lags far behind China in the development of homegrown Web companies. (Quick - can you name India’s answer to Baidu? I didn’t think so.)

On Thursday, though, Indian online travel company MakeMyTrip finally ended the IPO drought in pretty spectacular fashion. MakeMyTrip’s stock price jumped 89 percent in the first day of trading. That’s the biggest first-day jump for any U.S. stock since 2007. To be sure, the deal was modest - the company sold just $70 million worth of stock, selling 5 million shares at $14 apiece. Still, the successful launch could make investors keen on looking for more Indian listings soon - and help India’s would-be powers in search, social networking and e-commerce start to catch up to their counterparts in China.

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No iPhone Boost for Apple's Chinese Partner

Apple’s in a bind in China. It has teamed up with China Unicom, the perennial also-ran in the country. Unicom has exclusive rights to the iPhone in the world’s biggest cellular market, but it wasn’t Apple’s first choice for a Chinese partner. The American company conducted long on-again, off-again talks with the powerhouse player, China Mobile. Those negotiations went nowhere. As the dominant carrier (with 554 million subscribers by the middle of this year) China Mobile is no AT&T and wasn’t about to agree to give Apple the kind of sweet deal that more desperate carriers gave Steve Jobs. So China Mobile went its own way, launching a bunch of Android smartphones, and Apple was left with a new challenge: Could the iPhone magic work at longtime doormat Unicom?

On Thursday, we got our answer. Unicom reported a 54 percent drop in profit for the second quarter, earning $205 million. “Terrible numbers,” HSBC analyst Tucker Grinnan told Bloomberg News. One big problem: Unicom suffered from high marketing costs to attract customers to the iPhone. Apple’s smartphone is popular with Chinese users - but many of them buy their iPhones on the gray market rather than from Unicom. Unicom sold 500,000 iPhones in the first half of 2010, and Chinese bought another 400,000 on the gray market, according to Beijing-based market research firm BDA China.

China Mobile, meanwhile, earlier this month reported a better-than-expected 6.8 percent increase in profit for the quarter, earning $4.7 billion. Who needs Apple? Not China Mobile.

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U.S. Stem Cell Ruling May Boost Asian Research

Asian countries are well-positioned to benefit from the latest setback for stem cell research in the U.S. During the Bush years, countries such as Singapore and China took advantage of the U.S. ban on embryonic stem-cell research by providing a more welcoming environment for scientists to work. See, for example, this story I did back in 2005 about Asian efforts to capitalize on the U.S. ban. Describing what he called the "astonishing" progress made in Asia, Robert A. Goldstein, chief scientific officer at New York-based Juvenile Diabetes Research Foundation International, told me then that many Asian governments were asking themselves: “Since the U.S. doesn’t seem to be taking a lead role, why don’t we?”

With Obama’s election and his easing of restrictions, that question became moot as the U.S. got back in the game. Now, though, the Aug. 23 ruling by U.S. District Judge Royce Lamberth halting U.S. funding for embryonic stem-cell research is a reminder of the uncertainty surrounding the issue in the States. Even if Judge Lambert’s ruling is overturned on appeal, what happens if Sarah Palin, Newt Gingrich, or some other conservative Republican defeats Obama in 2012? Count on a new executive order banning research before the Inauguration Day balls are even over. There’s almost zero chance of any such change in policy in Singapore, China, or other Asian countries aspiring to be centers of stem cell research.

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Nokia Profit Tops Estimate as Share Falls

The Finns aren’t gloating types, but they must be taking a certain amount of delight from Nokia’s third-quarter comeback. The world’s largest mobile phone maker on Oct. 21 reported revenues of €10.3 billion ($14.4 billion), up 5 percent from the same quarter in 2009 and higher than the €9.99 billion average estimate among analysts surveyed by Bloomberg. More importantly, net income of €529 million ($740 million) was nearly three times consensus. In last year’s third quarter, Nokia (NOK) lost €559 million.

Driving the turnaround was a huge jump in smartphone sales, which hit 26.5 million units in the quarter, up 61 percent from a year earlier and 10 percent from the second quarter. All told, the category of products that Nokia calls “converged mobile devices” contributed €3.61 billion to the top line, while sales of nearly 84 million conventional handsets in the quarter brought in just €3.56 billion. That makes this the third consecutive quarter in which smartphone revenues outpaced those from simpler, higher-volume phones.

Other metrics also showed positive movement. Operating margins for Nokia’s dominant Devices and Services unit, which accounts for 70 percent of total revenues, climbed one point from a year earlier, to 10.5 percent. And the company’s closely watched average selling price (ASP) crept up to €65, from €61 in the previous quarter and €64 a year earlier. This was due to the higher relative volume of pricier smartphones in the mix, though the ASP of those devices continues to sag—down a worrisome 28 percent during the past year, suggesting Nokia may have been forced to discount in order to move merchandise.

Still, there was enough good news in the quarterly report to drive Nokia’s shares up 6.3 percent in Helsinki trading, though the rise wasn’t matched later in New York, where shares rose 3.3 percent by late afternoon. It also helped that Nokia forecast flat to higher margins in the fourth quarter and raised its forecast for overall industry growth to “more than 10% in 2010,” compared with an earlier estimate calling for a rise of “approximately” 10 percent.

Unfortunately, that’s pretty much where the positive points run out. Nokia conceded in its earnings statement that it expects to “slightly” lose market share this year compared to last in both volume and revenue terms. To help keep costs in line, the company announced plans to lay off 1,800 people from corporate functions, R&D, and at Symbian, a Nokia-owned, London-based software firm that develops the operating system used in Nokia smartphones. It will also streamline operations by merging the development of the Symbian 3 and Symbian 4 operating systems.

Fixing Symbian is key to addressing Nokia’s slipping market share. Simply put, the King of Handsets is having a tough time delivering products that excite buyers the way Apple (AAPL) iPhones and models running the Google (GOOG)-backed Android operating system seem to. Reviewers and bloggers tend to pin the blame on the Symbian software, which though powerful and robust, is faulted for being less intuitive to use.

That point was made starkly clear when researcher Strategy Analytics released its third-quarter smartphone market share estimates later on Oct. 21. In a market that grew overall to 77 million units, up 78 percent from a year earlier, Nokia’s sales grew at less than the rate of the market, up 61.6 percent, while Apple’s grew 90.5 percent and the “other” category, which includes a lot of Android sellers such as Samsung, HTC, and Sony Ericsson, soared 117%.

To be sure, Nokia still has 34.4 percent market share to No. 2 Apple’s 18.3 percent, but that’s a historic low for Nokia—and Apple is closing the gap. At the same time, a crowded market is getting even more competitive: BlackBerry-maker Research in Motion (RIMM) slipped to No. 3 in the third quarter, according to Strategy Analytics, with unit sales up 45.9 percent, but retains its strong footing in corporate accounts, while giant Microsoft (MSFT) is trying one more to time to barge into the handset market with its new Windows Phone 7 software.

All these challenges raise the stakes for Nokia’s new CEO, Stephen Elop, who joined the company five weeks ago from Microsoft. He’s got a lot of work to do, especially addressing Nokia’s tiny market share and near irrelevance in the U.S. Having a decent set of quarterly numbers under his belt and a nice pop in the stock could help smooth the transition.

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China Buys Gas-Tapping Technology

My colleague John Duce and I wrote in this week’s issue of Bloomberg Businessweek about China’s search for unconventional gas — gas trapped in coal deposits, for instance, or in shale. The country has huge potential for this kind of unconventional gas: China has as much as 30 trillion cubic meters of gas trapped in coal and shale, ten times more than the country’s conventional gas reserves. Getting access to all that unconventional gas isn’t easy, though, which is one reason state-owned PetroChina has invested in Australian company Arrow Energy, which specializes in extracting unconventional gas.

In June, China National Petroleum formed a joint venture with a Canadian company, Encana, to develop unconventional gas projects in Canada. As Worldwatch Research Fellows Saya Kitasei and Haibing Ma write, “the deal with Encana will give CNPC a chance to gain insight from an independent gas company that has some of the longest experience with applying hydraulic fracturing and horizontal drilling to extract gas from shale formations. In this model, one hand washes the other: major oil and gas companies gain access to the technology and expertise they need to develop unconventional gas, and smaller independent gas companies get access to the sizeable amounts of capital that many have needed in recent years.”

Now comes news that another state-owned company, CNOOC International, has agreed to pay $1.08 billion in cash for a one-third stake in a shale gas project in south Texas owned by Oklahoma City-based Chesapeake Energy. Like PetroChina’s Aussie deal, this Texas investment is not just about a short-term boost to supply from developing unconventional gas reserves overseas; it should also help the Chinese achieve their bigger goal, developing unconventional gas reserves at home.

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China Buys Gas-Tapping Technology

My colleague John Duce and I wrote in this week’s issue of Bloomberg Businessweek about China’s search for unconventional gas — gas trapped in coal deposits, for instance, or in shale. The country has huge potential for this kind of unconventional gas: China has as much as 30 trillion cubic meters of gas trapped in coal and shale, ten times more than the country’s conventional gas reserves. Getting access to all that unconventional gas isn’t easy, though, which is one reason state-owned PetroChina has invested in Australian company Arrow Energy, which specializes in extracting unconventional gas.

In June, China National Petroleum formed a joint venture with a Canadian company, Encana, to develop unconventional gas projects in Canada. As Worldwatch Research Fellows Saya Kitasei and Haibing Ma write, “the deal with Encana will give CNPC a chance to gain insight from an independent gas company that has some of the longest experience with applying hydraulic fracturing and horizontal drilling to extract gas from shale formations. In this model, one hand washes the other: major oil and gas companies gain access to the technology and expertise they need to develop unconventional gas, and smaller independent gas companies get access to the sizeable amounts of capital that many have needed in recent years.”

Now comes news that another state-owned company, CNOOC International, has agreed to pay $1.08 billion in cash for a one-third stake in a shale gas project in south Texas owned by Oklahoma City-based Chesapeake Energy. Like PetroChina’s Aussie deal, this Texas investment is not just about a short-term boost to supply from developing unconventional gas reserves overseas; it should also help the Chinese achieve their bigger goal, developing unconventional gas reserves at home.

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