Chinese for "Dangerous"

The company is still relatively small. It's based far away in China. You and I can't even invest in the company, as it's not publicly listed. But if you've got a stake in telecom equipment companies, you need to keep a close eye on Huawei Technologies. This fierce competitor represents a threat to your investment returns.

While telecom's biggies -- such as Lucent (NYSE: LU  ) , Nortel, (NYSE: NT  ) , and Ericsson -- fight to maintain growth, Huawei Technologies is racking up hefty gains. Hong Kong business paper The Standard reports that Huawei Technologies is on schedule to grab $2 billion worth of sales from overseas markets by year-end, up from $700 million in the first half of the year.

That sales success is pretty easy to explain. Thanks to low-cost engineering and manufacturing in China, Huawei can price its products 30% to 50% lower. With cut-rate gear that performs most, if not all, the functions of competing products, Huawei is making sales at the expense of bigger rivals.

Let's face it: The Internet is simplifying telecom network technology, creating a common platform for interchangeable devices. Increasingly, stingy telecom carriers can opt for cheaper, simpler broadband Internet and 3G wireless networking gear made by Huawei instead of those from the incumbents.

More worrisome is that privately held Huawei Technologies is unhindered by bothersome public shareholders like you and me; it can offer its customers hefty vendor-financing deals that its bigger, publicly listed rivals will be hard-pressed to match.

Ciena (Nasdaq: CIEN  ) and Tellabs (Nasdaq: TLAB  ) , arguably, are most at risk. The bulk of their sales comes from legacy telecom-switching equipment that's vulnerable to falling prices. Meanwhile, Nortel and Lucent have pinned a lot of their growth ambitions on China, where Huawei already owns a strong presence. Alcatel (NYSE: ALA  ) is also running up against Huawei in China and other emerging markets. Even Cisco (Nasdaq: CSCO  ) is feeling the heat.

The bulk of Huawei's export sales comes from developing regions such as the Middle East, Eastern Europe, and Africa, where price matters most. Inking partnership deals with Siemens, Infineon, 3Com (NYSE: COM  ) , Microsoft, and others, Huawei also has its sights set on North America and Europe, where price matters, too.

Be afraid. Be very afraid.

Fool contributor Ben McClure does not own shares of any of the companies mentioned.


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