Despite ZTE having 25% the sales of Huawei, business in smart city may be closer
One reference point for determining whether ZTE can achieve its ambitions to be the world leader in smart city is to look at the historic relationship between ZTE sales and those of Huawei, which is the much larger company. Since both have similar product profiles ZTE has certainly to at least do better than Huawei which is ranked by Navigant in 6th position globally in smart city markets. Both companies over the last decade have depended to a tremendous extent on being well-embedded in the explosively growing Chinese market. Huawei is an entirely private company fully-owned by its employees while ZTE is a quoted company, and both claim to be fully independent of the Chinese government. The level of preference they may have achieved domestically is difficult to assess but both are technically competent, high investing and energetic competitors that have generally achieved good local market shares in areas where they are competent and over the last few years have rapidly expanded the percentage of their business done outside China.
In 2015, Huawei sales were around RMB 390 billion ($60 billion), whereas ZTE has said its sales were about RMB 100.8 billion, up 23.8% year on year. Despite its fast growth by international standards ZTE has over the years continued to grow more slowly than Huawei. For enterprise sales, Huawei has reported they grew 44% in 2015 to $4.5 billion, while ZTE has concentrated its efforts mainly on wireless and optical communications and its unlikely its annual enterprise sales are more than $1 billion. On the other hand, judging by the relatively public emphasis given by ZTE to its smart city activity the percentage of ZTE's enterprise business contributed by the smart city sector could well be higher than that of Huawei, which has developed a much wider enterprise product range and aimed at achieving strong positions in big standard global markets such as servers and storage. In its observations on the 2015 sales level recently ZTE emphasised higher revenue from sales of enterprise ICT solutions including smart city and data centre solutions. It may be that despite only having an overall level of business about one quarter that of Huawei's that there is not as big a difference between the two companies' smart city sales and in this particular field ZTE could be growing faster.
The smart city situation in China
Opportunities in the Chinese market are likely to be a major contribution to ZTE sales for several years to come, and superficially smart city activity in China appears to be immense and could possibly be larger than Navigant credits. IDC suggests it was $16 billion in 2014 but its definition is unclear. Reportedly something like 80% of Chinese homes have been equipped with smart meters. In January 2013, the Ministry of Housing and Urban-Rural Development (MOHURD) formally announced the first list of national pilot smart cities. By April 2015, there were over 285 pilot smart cities in China, as well as 41 special pilot projects. However, an up to date report by the EU SME Centre of January 2016 details all the reasons why the market has not developed as fast as might be expected. This report includes some good definition of who the leading vendors are in the various vertical and horizontal markets. Specifically for hardware and software it lists ICT hardware providers (mainly network equipment and data processing) ZTE, Huawei, FiberHome, H3C, Ruijie, Sugon, Inspur, isco, IBM, HP and Dell, and software providers (including operating systems and basic application) Microsoft, IBM, VMware, Oracle, Digital China, Neusoft, Chinasoft International and iSoftStone.
It is of some interest that the lists, which are not alphabetical, rank ZTE first in the hardware listing, providing some evidence that the company genuinely has the strongest position in the Chinese smart cities market. As far as the vertical markets are concerned the EU list notes 8 local Chinese vendors in smart energy, 5 in smart water, 6 in smart transportation and 6 in smart healthcare.
In October 2015, IDC announced the IDC 2015 China Leading Smart City Award, ranking 20 Chinese cities and their key associated projects as follows: Beijing (economic development), Hangzhou (social services), Yinchuan (PPP model), Shanghai (transportation), Wuxi (agriculture), Qinhuangdao (healthcare), Shenzhen (public safety), Ningbo (healthcare), Dalian (commerce), Nanjing (transportation), Xi'an (tourism), Chengdu (social services), Guiyang (big data), Suzhou (education), Guangzhou (administration), Fuzhou (tourism), Wuhan (administration), Wanning (tourism), Dunhuang (tourism) and Qingdao (administration).
Levels of activity by vendors under the smart city banner
ZTE claims to have signed up 100 cities in China and forty elsewhere, Cisco claim to be working with 120 cities worldwide and as of June 2015 Huawei said it had provided smart city solutions to more than 100 cities in over 40 countries (interestingly Huawei seems to be doing particularly well in the Netherlands). According to IBM in May 2015, by mid-2016 it would have made Smarter Cities Challenge grants to more than 130 cities worldwide chosen from more than 600 applicants, with nearly 800 IBM experts delivering pro bono services valued at more than $66 million.
At the most superficial level this might imply that all four of these companies are at about the same level of development in smart city sales. However, that might be a rather dangerous assumption to make without a better idea about the nature of these vendor-city relations. It costs very little for two large entities to announce that they are have signed an agreement to work together on a project as the publicity generated by the announcement may be very good value for money, even if there are never any practical consequences from the pact. It is interesting to note that Ericsson, rated by observers like Navigant as quite a bit less active than IBM or Cisco but still in Navigant's Top 10 vendors, has just signed its first smart city contract in India, a somewhat surprising bit of news considering Ericsson's historically very wide international market coverage, the number of years everyone has been talking about the smart city theme and the fact that India is the world's ninth largest economy. This again suggests that all the brouhaha of the last few years about the smart city opportunity has been very much overdone,
Similarly, IBM's statement that the cumulative level of the company's investment over several years in smart city evaluations has only been $66 million is even more surprising. Whilst it is ambiguous, pro bono expenditure on free $500,000 per city consultancy might be seen as rather generous, that is only really true if you assume that the return on that investment has not been very great.
ZTE's reported smart city marketing activity
In China, ZTE has announced projects in Yinchuan city, Beijing, Ningbo, Wuhan, Henyang Park, Suzhou Park, Hong Kong, Qinhuangdao, Guanxi and Taicang. Overseas, it has announce projects in Romania, Kenya, Laos, Sri Lank, France, Turkey, Russia, Nigeria , Ethiopia, Sudan, Chile, Venezuela, Uruguay, Egypt and the Netherlands.
Cooperative agreement signed by ZTE with the government of state of Gujarat
In India in May 2015 ZTEsoft and the Indian state ghovernment of Gujarat entered into an agreement for smart city projects in the state where seven of the hundred cities selected by the Modi government for smart city treatment are located. ZTEsoft and the state government said they aimed to identify a specific city and trial project on which they would work together. In September 2015 speaking in Ahmededbad, one of the seven cities selected, Philip Liu, CEO of ZTE India said that $100 million a year for several years would be required to turn Ahmedebad into a smart city. In November 2015 the city of Shenzhen announced that it would invest $200 million in the ZTEsoft JV in Gujarat. Meanwhile, ZTEsoft had already started negotiations on this subject with the city councils of Ahmedebad and Gandhinagar, another of the seven Gujarati smart cities.
Navigant ranking for smart cities not meaningful
To say Samsung is the world leader in smartphones is a meaningful statement backed up by comparatively accurate sales and marketing detail and thousands of technical evaluations. However, when Navigant describes IBM as the No. 1 vendor in the smart cities that is far less meaningful. The nature of the problem becomes apparent when one considers Envision America, a $160 million funded program backed by the White House, partially modelled on the Envision Charlotte program, which aims to support projects in 10 selected cities (Cambridge, MA; Dallas, Greenville, SC, Los Angeles, Milwaukee, WI, New York City, Pittsburgh, Portland, San Diego and Spokane, WA). This project's vendor roster includes 18 companies, notably AT&T, Bank of America. Cisco, Duke Energy, GE, IBM, Intel, Microsoft and Qualcomm. Likewise, in Stockholm the list of participants in the Royal Stockholm Seaport joint smart city area trial where Stockholm and Ericsson have been engaged since 2009 contains only one member of the Navigant - Ericsson.
Some other members of the Navigant list will perhaps appear as subcontractors to the project and also Sweden is a rich technically advanced country which is relatively self-sufficient in modern technology, but still it is the case that it must be the case that a high percentage of any smart city expenditure anywhere in the world will go to local suppliers wherever possible. The same phenomenon will be found anywhere you go in the world. For instance, the list of vendors to King Abdullah Economic City in Saudi Arabia, probably the world's largest greenfield smart city development, contains a variety of local or international vendors that are not in the list defined by Navigant. Vendors to Songdu, the Smart City on the outskirts of Seoul, inevitably include many South Korean suppliers. So Chinese vendors will certainly get the highest share of the Chinese smart city market.
To date there is little doubt that the immediate opportunities for smart city vendors have been tremendously overstated. Not only is the market much smaller than Cisco and IBM have been trying to make out but it is also growing much more slowly than might be expected. There are many reasons for this including the absence of clear definitions, the lack of standards, the fact that vendors have focused far too much on issues of technology and what they are theoretically capable of achieving rather than on solutions, as well as the fact that the implementation of an IT solution is very often a rather speculative investment which may theoretically produce benefits but given the day to day operational and budget crises, political and growth pressures which all cities are faced with these solutions are typically left in the 'nice to have' folder. Moreover, there are no cities yet that have got anywhere near the ideals often hypothesised by these vendors and the lack of any truly successful models even at small city level, where these should by now have been achievable, carries its own negative message. Also, as we have pointed out, the market opportunities are fragmented across literally thousands of suppliers worldwide, and at a guess the Top 10 suppliers as defined by Navigant will never get more than 50% of the market and probably less.
The absence of any strong billings statements by any of these vendors seems to confirm this view. It seems obvious also that IBM has to some extent lost interest in this market and is focusing on super intelligent vertical solutions, where it may well have a genuine edge rather than a scattered low technology market where it does not. In such a market a company like ZTE, which has the advantage of a large home market where it is still a preferred vendor, does have a chance of becoming one of the market leaders, but probably not a dominant one because such an opportunity does not exist in this market. More importantly, it is possible that ZTE may modify its position once it realises the limitations of the market.