Huawei, Lucent and Alcatel

Behind the Lucent-Alcatel merger: competition from Chinese companies like Huawei and ZTE.

WSJ: One key factor fueling the merger talks between France's leading telecommunications-equipment maker and its longtime U.S. rival is a looming competitive threat: China.

In a plan made public late Thursday night, Alcatel SA of Paris is pursuing a more than $13 billion merger with Lucent Technologies Inc., whose roots stretch back to Alexander Graham Bell's first telephone. The two came close to merging five years ago but talks fell apart.

Now, there is renewed urgency for a deal. Chinese upstarts such as Huawei Technologies Co. and ZTE Corp. are beginning to enter their turf with cheaper products, threatening to seize market share, take jobs and set industry standards for the huge Chinese market.

Alcatel, Lucent and its main competitors Telefon AB L.M. Ericsson, Nokia Corp. and Nortel Networks Corp., make technology that is largely invisible to consumers but underlies many of the services they use: telecommunications networks transmitting voice, video and Internet traffic.

...Last year, for instance, BT Group PLC of the United Kingdom signaled Huawei had arrived on the global stage by awarding it a sizeable piece of its multibillion-dollar project to upgrade its infrastructure. Huawei, based in the southern Chinese city of Shenzhen, started by concentrating its export strategy on developing countries, partly to avoid competing with the industry's giants as it built up its expertise, touting deals in Thailand, Indonesia and Bulgaria.

The pressures Lucent and Alcatel are facing in such markets was visible at an industry trade show in New Delhi this week. Just inside the main entrance, the first sight for many attendees was the giant booth of China's ZTE, where it demonstrated equipment for next-generation cellphone networks, wireless broadband and video cellphones.

For ZTE and Huawei, India is a second big opportunity to prove themselves against global competitors. Both companies played starring roles in the rapid buildup of China's wireless networks during the past six years.

Meanwhile, China is expected to start awarding licenses for so-called third-generation, or 3G, networks in the next six months in order to give its own state-owned phone companies time to prepare services for the 2008 Olympics in Beijing. China already is the largest mobile-phone market, and the upgrade may form the world's biggest high-speed wireless network.

To be sure, Chinese vendors including Huawei currently make up a fraction of the world market. They hold about 5% of the wireless market, including new contracts within China, and about 10% of the market for optical equipment such as switches, according to analyst Paul Sagawa of Sanford Bernstein.

"The biggest impediment to Huawei on a global stage is the lack of a service and support infrastructure," Mr. Sagawa says. "Carriers don't want to have to rely on engineers in Beijing to solve problems. They want people on the ground."

...Some analysts wonder why Mr. Tchuruk is plunging the company into a risky deal when Alcatel just now seems to have gotten its own house in order. "It would take a herculean feat to put two companies together," said Richard Windsor, an analyst at Nomura Securities. "You likely end up with a value-destroying merger."

Large buyers of telecom equipment signaled their support over the prospect of a deal. William Smith, chief technology officer of BellSouth, says that "there is an onslaught of new Chinese technology" that poses a threat to companies such as Lucent and Alcatel. By pooling research resources, the telecom industry could see the development of more new technologies, he adds. "You haven't seen any Nobel Prizes out of those organizations recently," he said.