The Ethiopian government has warned ZTE Corp. that it may cancel a huge contract it awarded to the Chinese telecommunications firm last year, amid concern about the prices ZTE is proposing to charge for its equipment, people familiar with the negotiations say.
Ethio Telecom, Ethiopia’s government-controlled, monopoly telecommunications operator, has been in contact with Swedish telecommunications giant Ericsson andNokia Corp. as possible replacements for ZTE, these people said. But Ethio Telecom has already started to award parts of ZTE’s contract to its Chinese rival, Huawei Technologies Co., an indication that the entire contract may be awarded to Huawei, said a person familiar with the moves.
The contract in question, worth around $800 million, is to provide mobile-phone base stations and other equipment to upgrade and expand Ethiopia’s mobile network.
The dispute between Ethiopia and ZTE is the latest problem to hit the country’s rickety communications network over the last eight years, during which ZTE has been the country’s main supplier of network equipment. Cancellation of the contract would also be another blow to ZTE’s business in Africa, where several countries have annulled contracts awarded to the firm because of concerns that it violated government purchasing rules, acted improperly or wasn’t up to the job.
Neither ZTE nor Ethiopian officials responded to repeated request for comment.
Last year, ZTE and Huawei split a deal worth $1.6 billion to upgrade Ethiopia’s network. Like many of the contracts that ZTE and Huawei have won in Africa, the two firms offered Ethiopia large amounts of financing backed by Chinese state-run development banks, brushing aside Western competitors for the contract.
While Huawei has since been carrying out its half of the contract, focused on bolstering the network in the capital Addis Ababa, ZTE and Ethio Telecom have been locked in a standoff over prices that Ethiopia would pay for ZTE’s equipment and other issues, say people familiar with the discussions.
Ethio Telecom could make a decision within the next month or two, said a person familiar with the talks. Ethio Telecom has been in touch with Ericsson and Nokia, but people familiar with the discussions says neither of those two companies may be able to provide the amount of financing that Ethiopia needs for the contract. That may be why Ethio Telecom is moving to give Huawei pieces of ZTE’s half of the contract, one of them said, since Huawei has access to state-backed Chinese financing.
In 2006, Ethiopia awarded a contract to ZTE that made the Chinese firm the sole supplier of telecommunications equipment in Ethiopia, for a huge expansion of the country’s telecommunications network.
ZTE agreed to provide $1.5 billion in financing to Ethiopia for the deal, funded by lending from the Export-Import Bank of China and the China Development Bank. An investigation by the World Bank subsequently found fault with the deal, criticizing Ethiopia for sidestepping government procurement rules to give the project to ZTE and for awarding such a big contract to one company. ZTE has said it didn’t violate the government’s rules.
The contract was awarded over the objections of some staff and executives at Ethio Telecom, who worried about ZTE’s performance record and about giving the contract entirely to one firm.
Since then, Ethiopia’s network has been afflicted by persistent problems. ZTE has helped Ethio Telecom expand mobile phone usage dramatically, but complaints about call quality are widespread. Internet connections are still slow. And Ethiopia still has one of the world’s lowest percentages of its population that have a mobile phone or access to the Internet.
Meanwhile, Ethiopian officials have continued to worry about ZTE’s prices. ZTE has argued that it must charge higher prices in Ethiopia in part to recoup the cost of financing provided by the Chinese banks.
“If you just think about the price compared with the others, you think, ‘Oh, your prices are very high, then you make a lot of money,’ “ Jia Chen, the head of ZTE’s Ethiopian division, told The Wall Street Journal last year. “But you have to think: This money, I’m going to get it back in 13 years!”
Write to Matthew Dalton at Matthew.Dalton@wsj.com