Brazil's Padtec: ‘We hope never to get into a situation like Prysmian's'

Brazil-based optical equipment manufacturer Padtec reported mixed results for the first quarter, buoyed by partnerships but facing pressure from cheap imports. 

On the one hand, net revenue dropped 26.3% year-on-year, which the company attributed to seasonal effects and temporary saturation in the telecom sector, due partly to heavy exports from China, which also have seriously hurt Italian competitor Prysmian, whose fiber optics factory in São Paulo state is at imminent risk of closure because of low-cost imports.

ALSO READ Prysmian's Brazil fiber optics plant in imminent danger of closure due to Chinese dumping

On the other hand, Padtec is expanding its market reach through partnerships and new product lines. 

Although it operates in several countries in the region and the US, new collaborations were announced with Hayex Technology (Peru) and Kubos Tecnologia (Colombia) to boost the company's presence across Latin America.

The company also inked a partnership with Parallel Wireless for Open RAN offerings, including 5G products, while an agreement with datacenter network software provider Arrcus marks its entry into the IP switch and router segment.

Padtec also implemented cost adjustments for staff and materials and renegotiated supplier contracts, with which it expects to save 30mn reais (US$5.8mn) annually, and it restructured debt and secured 150mn reais in new credit lines.

In this interview, CEO Carlos Raimar talks about Chinese competition, business performance and the company’s new bets going forward.

BNamericas: The company posted a 26.3% drop in Q1 sales, attributing that to seasonality and market saturation. Can you explain? Did competition also have an effect?

Raimar: There were several factors. Stocks were high in the post-pandemic period [and] there is the issue of the flood of Chinese products. We're not suffering as badly as Prysmian, but there is some impact.

Our new line of optical transponders makes us technologically competitive and we're in the price range of Huawei, for example. Huawei is the most voracious in this segment, then comes ZTE, FiberHome, etc. They all have some flavor of DWDM [Dense Wavelength Division Multiplexing, optical solution].

And since they're prohibited from selling in certain geographies, and Brazil, Latin America are completely open [to Padtec], we get some advantage there. 

But there are impacts in the sector. Competition has reached OLTs [Optical Line Terminals], ONTs [Optical Network Terminals]. Fiber cables, of course, have been suffering for the longest time, with high product dumping.

BNamericas: What are your strategies?

Raimar: We made the decision to align ourselves with the US supply chain market to obtain photonic microchips produced in Taiwan and have scale thanks to that. We're in the same line for these products with Cisco. The chip supplier for Cisco's DWDM is also our supplier.

All the software, the rest of the components, the mechanics, we make in Brazil, with local production. Not all by Padtec, which has specialized in the photonics part, which no one has mastered, but we use local partners for the electronic part.

So I would say that in Padtec's core, which is DWDM, we're technologically competitive and we're able to compete on price, except in cases where there's dumping, very aggressive prices and questionable ethical standards.

And there are executives, companies who are really committed to quality national content, in addition to proximity to delivery, which helps us.

BNamericas: Who, for example?

Raimar: Brisanet has 99% of their network on Padtec, Você Telecom, V.tal is a big customer that trusts Padtec for optical solutions, BR Fibra.

On the government side, we're with Telebras. We won all the Infovias [sections of the Norte Conectado Amazon river fiber program].

Where we start bidding in a serious, ethical and competitive process, we win.

Other companies, like RNP, open an international purchasing process, allowing imports and we have to compete via Colombia. Huawei wins 90% of these contracts, delivered by a local Huawei reseller.

BNamericas: In the Infovias processes, Chinese company ZTT was the winner of the contract to supply the fiber cable for three routes.

Raimar: That's right, and in addition to being suppliers of the optical equipment, we were also hired as Padtec Serviços to audit ZTT's production of the cable.

BNamericas: You spoke about dumping in optical products. Who is dumping DWDM now?

Raimar: Well, Huawei has prices well below ours, although it hasn't managed to reach our technological maturity yet, but they're very aggressive in pricing.

They offer long-term financing, great discounts. And this is imported equipment, so there's a question of state policy there, an option to develop this industry in the country or not.

We hope never to get into a situation like Prysmian's, I'm preparing myself to avoid situations like that. Fortunately, we operate in several geographies, and our strategy is to depend less and less on Brazil. Our option to diversify the business is also part of this strategy.

BNamericas: In what sense?

Raimar: We're getting into switches and routers, initially bringing them in from outside. If the game is about importing and reselling, then I'm also going for that.

The IP Infusion equipment [which Padtec is reselling] competes with Huawei and was chosen by major global players such as Telefónica, AT&T to disaggregate networks.

If it costs around 500mn reais to develop this line in Brazil, then let's do what the Chinese do: first I import and resell. Then I assemble it and can start manufacturing. We're more advanced with this segment outside Brazil.

In Brazil, we're also starting with the router line, which is a market at least five times larger than the DWDM market. And it's big in telecom, but even more so in datacenters.

We're preparing the company to be in datacenters on both fronts: on the photonics front, with equipment called pluggable photonics, and on the connectivity front.

We're very technologically capable of doing this and very well equipped in the supply chain.

We're also advancing in mobile, with an alliance with Parallel Wireless, and I hope to bring good news on that soon.

BNamericas: What does that partnership involve?

Raimar: It's a project to generate revenues in 2025. Parallel has the full support of the US government to be an ‘anti-Huawei’ in networks and we're bringing their technology to the region.

The idea is the same in other cases. We import, assemble and then eventually develop locally. Parallel believes that Brazil is the natural hub for manufacturing, although all of this will depend on support for this production line.

BNamericas: In Colombia, Telecall signed up with Parallel Wireless for their 5G network.

Raimar: Yes. And we're together with Telecall in this project. Besides, there's US funding for them. The US government will provide funding and we will go with our team in Colombia for the services. With that, we create diversity so that we can keep the company thriving.

This is in the equipment line. It doesn't stop there. There are many things being studied, such as alliances to resume operating in the underwater segment, not just as optical solutions providers.

And in the service line, we're investing in network management and multi-vendor assistance. We have 90 specialized service contracts in Brazil.

BNamericas: You reduced staff to adapt to lower market demand. What was the impact of these cuts?

Raimar: We had to, unfortunately. We rationalized production. We didn't stop doing anything. But we were prepared for much more market growth in terms of equipment.

We laid off 100 people in the organization. We currently have 640 people. There's no point in maintaining opex if I don't know if the demand will come. If demand comes, we will have a lower breakeven.

Our strategy was broad: automate operations, bring in more outsourcing, make better use of our geographic locations and costs between countries, and adapt production capacity.

This brings approximately 30mn reais in fixed costs. And financially we're prepared to look at other revenue opportunities, to bring products that are ready to be incorporated into the portfolio, even via acquisitions.

In all, I'd say that today we're much more structured to evolve our business without getting into a situation of closing any line or production.