While Nortel Networks CEO Bill Owens fielded questions from analysts last week about how the company would defend itself from the cutthroat pricing of rival vendors from China, one of those vendors, ZTE, was roping in a major contract in one of Nortel's most prized markets (Asia) and making a push into Nortel's own North American backyard.

ZTE announced a major contract to supply the equipment for China Telecom's long-haul voice backbone, a nationwide network spanning 31 provinces that the vendor's spokesperson called, “the biggest ever [next-generation network] program in the world.” The same day, ZTE announced the opening of a new U.S. headquarters in Dallas, expected to employ nearly 100 people by year's end.

ZTE already had research and development facilities in the U.S. (and its peer, Huawei Technologies, has had a U.S. headquarters for several years). And some say the China Telecom job was ZTE's to lose. But the two announcements — coming while Western vendors appear increasingly vulnerable and defensive to their Chinese counterparts — gave ZTE an air of momentum and advantage for the week.

“The competition is tough,” Owens said of his Chinese rivals during his company's first-quarter earnings call. Nortel will compete using its reputation for five-nines reliability, its growing security expertise and its enterprise technology, he said, while continuing to shorten product cycles and cut costs to hold its ground in price fights.

Over time, Chinese vendors may be able to match Nortel's reliability and enterprise traction, said Mark Sue, RBC Capital Markets analyst, but it will take longer to duplicate Nortel's long-standing relationships with major carriers, especially those in North America. FutureWei, Huawei's North American subsidiary, launched in 2002 and hasn't won any major carrier deals in the U.S. market yet. On the other hand, Huawei was named in April to supply multiservice access and optical gear for BT's 21st Century Network business. Nortel was not.

Owens stressed a reliance on local partners for help in some other geographic markets, adding, “It's our intention to partner in ways that we have not in the past.” Earlier this year, Nortel announced a partnership with Chinese vendor China Putian that is specific to 3G UMTS wireless technology. Alcatel, Ericsson and Siemens have made similar moves. Could North American vendors partner with more Chinese vendors in other technology sectors, offering quid pro quo help in Europe and North America, where Chinese vendors could use it? Perhaps.

“There's a notion that, in the future, if you can't beat 'em, join 'em,” Sue said. “But Nortel or Lucent Technologies would probably have less to gain [from a partnership] than the Chinese vendors.”

Any such partnerships could be rife with conflict, said one analyst who requested anonymity, because Western vendors' highest priority would be profits, while Chinese vendors would prize market penetration above all. Also, a history of disputes over intellectual property between Chinese vendors and others could make Westerners nervous.

Meanwhile, ZTE's and Huawei's success has so far affected mostly DSL, metro optical and wireless sectors, pointing more toward Alcatel than Nortel (though Alcatel also recently initiated a CDMA-related partnership with Huawei). In one of their most successful sectors — DSL — the Chinese duo lost market share in 2005's first quarter, according to the Dell'Oro Group, as Chinese carriers paused to let subscriber additions fill their networks' capacity. Chinese vendors may pose the greatest threat in the wireless sector, upon which Western vendors have come to rely so heavily these days.

“When you go head-to-head with them in wireless, you run into a real issue,” the analyst said.