Termination of Comnect’s Planned IPO Highlights Magnitude of Challenges Facing Chinese Networking Equipment Manufacturers

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By Andrew Spivey | 2Q 2024 | IN-7346

Comnect’s cancelled Initial Public Offering (IPO) shines a light on the current challenges the industry is facing, and offers lessons for how to counter the current downturn.

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Comnect Pulls the Plug on Shenzhen Stock Exchange IPO


One year ago, at the close of 2Q 2023, the outlook was bright for Shenzhen-based networking equipment Original Design Manufacturer (ODM) Comnect. Annual revenue for 2022 had jumped an astronomical 80.5% Year-over-Year (YoY) to reach US$108.76 million, well-established relationships had been secured with numerous fast-growing overseas partners, and the company was in the process of opening both a new manufacturing facility and a Research & Development (R&D) hub in the central Chinese city of Changsha. Buoyed by this rapid expansion, on June 28, 2023, the company filed its application with the Shenzhen Stock Exchange for an Initial Public Offering (IPO). Yet by early 1Q 2024, less than 9 months later, Comnect was facing a complete reversal of fortunes. Revenue had rapidly deteriorated, business with overseas partners had contracted sharply, and the company’s heavy investments were beginning to look like a liability. Compounding the issue was Mainland China’s economic slowdown, combined with a withdrawal of local government support, heightened domestic competition, and widespread insolvencies among critical component suppliers. Facing both external and internal challenges, on March 4, 2024 Comnect cancelled its planned IPO. This ABI Insight investigates the factors that triggered Comnect’s negative turnaround, analyzes how the impact on the broader industry, and offers recommendations for how networking equipment ODMs can benefit from recent shifts in industry dynamics.

A Perfect Storm of Domestic and Foreign Pressures Batter Comnect


One of the biggest shocks the Chinese networking equipment industry has faced over the past 12 months has been the curtailment of provincial and district government subsidies, previously distributed to support the development of local industry. Comnect’s scale had enabled it to collect these government subsidies not only from Nanshan district in Shenzhen, the location of its headquarters, but also from Pingxiang city of Jiangxi province and Changsha city of Hunan province, where it has regional production facilities. In total, Comnect’s total government subsidies for the years 2020, 2021, and 2022 were US$0.77 million, US$0.71 million, and US$0.83 million, respectively. Although these figures might appear relatively insignificant compared to the company’s total revenue (in 2022, the subsidy amounted to just 0.8% of annual revenue), they are substantial when you consider that they were the equivalent of 20.2%, 17.0%, and 6.2% of the company’s total pre-tax profits across each of those years. This important pillar of support for Comnect gradually dwindled in 2023, as local governments were forced to rein in spending as they grappled with the immense debts they racked up during the COVID-19 pandemic and a reduction of their income caused by the downturn in the property market. Any remaining aid was then redirected toward what were deemed strategically important sectors for the achievement of “high-quality development” such as semiconductors. This retrenchment resulted in Comnect receiving only US$0.16 million in recorded subsidies for the first 6 months of 2023.

Subsidies have continued to shrink in 2024 as the Chinese economy remains lackluster, and industry sources claim that it is now commonplace for district governments in Shenzhen to hand out what are essentially IOUs, acknowledging that while a company may be entitled to some financial assistance, the authorities are unable to provide any at this time. Instead, local districts have set up new organizational departments to support companies through alternative means, such as with the provision of policy support (including helping them understand export requirements for certain markets), or by organizing (but not funding) attendance at international trade shows. Despite best intentions, these initiatives are unable to directly compensate for the lost funding in the short term, and so subsidy withdrawal has hit the bottom line of companies like Comnect hard.

Increasing local competition is a second major domestic challenge that the Chinese networking equipment industry must contend with. On the one hand, many small-scale Original Equipment Manufacturers (OEMs) and ODMs that ceased operations during the height of the COVID-19 pandemic in China have now resumed production, increasing the number of active vendors. On the other hand, industry heavyweight Huawei, backed by its strong company performance in 2022 and 2023, has invested heavily in regaining market share that it lost earlier this decade. This pressure from revived vendors, coupled with the general poor economic environment and large inventory backlogs, is producing a strong downward force on equipment pricing. Highlighting the severity of this price pressure is the outcome for a recent tender to supply 80 million Passive Optical Network (PON) Customer Premises Equipment (CPE) for China Mobile—competition was so fierce that China Mobile was able to drive the unit price down from US$27.70 to US$15.93. Margins are, of course, squeezed in such an environment, again impacting the profits of Comnect and others in the industry.

Further exacerbating the industry’s challenges has been the high rate of bankruptcies of the critical upstream suppliers for networking equipment vendors, such as the manufacturers of Printed Circuit Boards (PCBs) or Bi-directional Optical Sub Assembly (BOSA). An initial wave of insolvencies was triggered by the widespread enforcement of Zero-COVID policies across Mainland China, and the persistent economic downturn since then, combined with the retrenchment of subsidies, has acted to drive even more component suppliers out of business. While identifying an alternative supplier might not be a challenge in the “factory of the world” that is Mainland China, Quality Control (QC) is. The loss of a long-term partner can be devastating, as it will take many years to develop trust and understanding with the new supplier, and they may not possess the requisite capabilities or capacity to handle any custom requirements. Moreover, downstream customers are often uneasy when component suppliers are replaced, and are prone to question the reliability of the new components. This may ultimately result in lost business. Companies the size of Comnect have expansive networks of suppliers, many of which may themselves sub-contract portions of orders, so they too will be unable to avoid this major headache.

All of the above issues could potentially be overcome if it weren’t for a fourth challenge—a contraction in overseas demand for networking equipment. Comnect was highly exposed to the external market because exports are its primary source of revenue—overseas sales represented 71.3% of revenue in 2020 (US$36.91 million out of US$51.79 million), 77.0% in 2021 (US$46.31 million out of US$60.25 million), and 90.2% in 2022 (US$ 97.97 million out of US$108.76 million). While a reliance on export markets is not uncommon for Chinese ODMs, Comnect’s vulnerability was exacerbated by the fact that its business was highly concentrated, with 61.5% (US$66.85 million) of revenue in 2022 coming from just five customers: GX India, Heimgard, Intelbras, SDMC, and an anonymous company described only as a major vendor for Wi-Fi GPON gateways. The four named companies above all faced major challenges throughout 2023:

  • GX India, an Indian-based networking equipment ODM, was Comnect’s largest customer in 2022, with the company’s US$26.74 million purchase of primarily Wi-Fi GPON gateways responsible for 24.6% of Comnect’s annual revenue. Yet business contracted sharply in 2023 as GX India faced a cash crisis caused by the Indian Rupee’s steep devaluation and investments that were slow to show returns. As a result, GX India ordered just US$1.78 million in 1H 2023.
  • Heimgard, the Norwegian-based smart home vendor, expanded its procurement from Comnect by 146.3% between 2021 and 2022, from US$5.14 million to US$12.66 million. This made Heimgard Comnect’s third largest customer, responsible for 11.6% of 2022’s total revenue. Yet this growth relied on a contract Heimgard held with Mexican telecommunications company Telmex, and after this agreement expired in 2023, Heimgard’s orders quickly shrunk.
  • Intelbras, a Brazilian consumer electronics vendor, was Comnect’s largest customer in 2020 and 2021, with orders of US$16.73 million (32.3% of total revenue) and US$17.60 million (29.2% of total revenue), respectively. Business declined rapidly though, as internal restructuring and delayed downstream customer orders caused Intelbras to procure only US$7.49 million in 2022 (still ranking as Comnect’s fourth largest customer). Sales in 2023 remained below earlier levels.
  • SDMC, a fellow Shenzhen-based networking equipment ODM focused exclusively on the export market (thus classed as an overseas customer), was Comnect’s fifth largest customer in 2022, buying US$6.34 million of equipment (the equivalent to 5.8% of annual revenue). Unfortunately, similar to Heimgard, SDMC procured little in 2023 as orders from one of its main customers, France’s second largest telecommunication company Altice France, dried up.

A common thread throughout these cases is a reduction in orders from the downstream customers of Comnect’s clients, the Internet Service Providers (ISPs). While the above examples concern ISPs in the Latin American, European, and Indian markets, the current pressure ISPs are under to reduce their Capital Expenditure (CAPEX) is a global phenomenon. For example, AZ-Technology, the Malaysian home networking and appliance vendor that was responsible for 3.6% of Comnect’s revenue in 2022 (US$3.55 million), also saw its purchases become almost negligible in 2023 as its ISP partners (including Telekom Malaysia) delayed their orders. As anemic ISP demand was broadly spread across all regions, Comnect had a limited ability to source alternative drivers of growth. Thus, with little prospect of the market picking up in the near term, Comnect was left with no choice but to abort its planned IPO.

Does the Current Downturn Offer Any Opportunities?


Although the cancellation of Comnect’s IPO has shone a light on the company’s struggles, the challenges that caused the about-face are not unique to Comnect, but rather are being felt across the entire ecosystem. This means that all industry players must reassess their strategies in response to the new environment. Part of this strategic realignment may include shrewdly taking advantage of some of the opportunities that this current downturn provides. Below are four potential opportunities:

  • Bring Component Production In-House: Aside from identifying redundant sources of components, another way to build supply resilience is to bring production capabilities in-house. This can be achieved inexpensively if networking equipment vendors take advantage of the current downturn and acquire struggling component suppliers at a low valuation and integrate them into their business. Of course, directly purchasing loss-making companies may not be a wise choice for all, as it may negatively impact the valuations of listed companies or those that plan to list. For such companies, the alternative is to poach talent from the failing firms, or to discuss the potential of absorbing key staff once the company eventually folds. There have even been cases where equipment vendors have negotiated agreements with suppliers to hire all their staff once the company officially goes bankrupt, essentially performing an acquisition in all but name.
  • Hire Top Talent Laid Off by Competitors: The industry downturn has caused many large networking equipment vendors to cut head count. One notable case has been Tenda, one of the industry’s leading vendors, which has reportedly cut over 20% of its workforce since mid-2023. This means that there is ample supply of strong talent available in the labor market for a relatively low expense, something that ecosystem vendors should take advantage of. Some companies have even seized this opportunity to make their own poorly performing staff redundant and replace them with top talent who previously worked for their competition.
  • Develop New Relationships: The current downturn is causing many networking equipment vendors to scale back investments and prioritize retaining existing business over expanding relationships with new partners. Although working with long-term partners may be more efficient (trust has been established, there is deep knowledge of requirements, and the approvals process can be streamlined), in the long term, this limits the Serviceable Obtainable Market (SOM), exposes companies to the vulnerabilities of high client concentration, and can cause a vendor to fall behind on innovation. It is therefore recommended that forward-looking networking equipment vendors use this time to explore new markets and establish relationships with new partners that may become future drivers of growth. In some instances, cutting back by competitors will create a vacuum in the market to be exploited.
  • Take Advantage of Geopolitical Shifts: While geopolitics is a contributing factor to the current downturn, changing relations between nations can also benefit those with foresight into how they are evolving. One aspect of this is recognizing that business with certain countries is likely to dwindle as tensions rise, whereas opportunities may emerge elsewhere as government relations flourish. Another aspect is identifying optimal sites for overseas production facilities or R&D hubs, which allow for improved access to regional markets and a greater ability to conduct customizations for local market conditions.


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