Thursday, April 20, 2017

Huawei's Target of $150bn revenue by 2020 - Part 3

Huawei unique in being a world leader in professional and consumer electronics

Huawei is currently unique, in the world, at least for a company of its size, in being amongst the leaders in both professional electronics equipment and also in consumer devices. Ericsson tried stubbornly for many years to pull off the same trick but failed utterly and still bears the scars and arguably its present woes stem largely from that lengthy, expensive and futile endeavour. Motorola was once a world leader in consumer and also quite strong in professional equipment but now is neither. John Chambers' reckless and amateurish and ultimately disastrous attempts to enter the consumer field damaged his credibility during his last few years as Cisco CEO. Nokia's precipitous collapse as the world's long time dominant mobile phone provider was quite shocking though the company has managed to hang on still in the professional field. Samsung, the market leader in smartphones, has a modest position in the base station market but shows no signs there of higher ambitions.

Despite stalled profits Huawei's commitment to massive growing R&D expenditure unwavering

In 2016, Huawei's spending on R&D rose by just over 28% from RMB 59,607 million in 2015, which was 15.1% of revenue, to RMB 76.4 billion ($11 billion), which was 14.6% of revenue. According to the EU Industrial R&D Investment Scoreboard, an annual ranking of the world's top 2,500 R&D investors, Huawei ranked as the world's eighth-largest company in terms of R&D spending in 2016. By comparison, Apple spent $10.39 billion in 2016, its highest level ever (although its Q4 spending did touch $2.8 billion). Meanwhile, Ericsson cut back its R&D spending in 2016 by over 10% to around $3.7 billion and Cisco's R&D has been flat at just over $6 billion for the last three years.

As shown in Part 1, Huawei's profits stalled in 2016 at RMB 37,052 million, only 0.4% up compared to RMB 36,910 million in 2015, which many analysts ascribed to the company's continued steady growth in R&D. Several overexcited commentators made rather too much fuss about that, but rotating CEO Eric Xu (whose six month tenure expired March 31st) pointed out that 2016 profits were still around 7% of revenue and the company's management had always made it clear it would never adjust its R&D expenditure just to meet a profit target.

In 2016, according to WIPO, Huawei filed 3,962 international patent applications which ranked it second in the world on that parameter behind only ZTE, which filed 4,123 patent applications during the year. These add to the total of 52,550 patent applications in China and 30,613 outside China, filed as of December 31st 2015 (of which s total of 50,377 had been granted at that time). According to Huawei's recent 2016 report it has so far been granted 62,519 patents. Roughly 45% of Huawei's 180,000 employees, or about 80,000, are R&D engineers working in 15 research institutes and centres and 36 joint innovation centres where they collaborate with global innovators. Huawei also is working with over 300 universities in more than 20 countries, and has sponsored over 1,200 innovation research projects by them. According to Huawei, it is currently a member of over 360 standards organisations, industry alliances, and open source communities, and holds over 300 positions of responsibility, and within these organisations its engineers have submitted 49,000 proposals, with around 6,000 submitted in 2016 alone.

What does Huawei consider its key achievements during 2016?

These achievements are scattered over several different sections and the following is a sample of Huawei's activities:

• Carrier operations – its Polar code was selected as a 5G standard.

• Collaboration with major operators - with Vodafone, Telefónica, Deutsche Telekom and China Unicom to roll out new services in smart home, smart meter, and connected vehicle domains; with China Telecom, China Mobile, China Unicom, Deutsche Telekom, Etisalat and others on benchmarking projects to develop video into a basic service; providing Deutsche Telekom, Telefónica, and China Telecom with public cloud services to help expand their B2B business; and strategic partnerships with China Unicom Shanghai and HKT to help evolve their O&M systems.

• Cloud - work with over 500 partners to provide cloud computing solutions across over 130 countries and regions; public cloud and big data solutions provided to over 300 financial institutions including six of the world's top banks; and deployment of over 2 million virtual machines and 420 cloud data centres.

• Enterprise business - installed smart city solutions in 100 cities in 40 countries; smart grid solutions installed for over 170 customers in the electricity sector across 65 countries.

• Consumer business - shipped over 139 million smartphones, up 29% YoY but below a target of 140 million (according to IDC Huawei shipped 45.4 million smartphones in Q4 for a unit market share of 10.6% and in 2026 shipped 139.3 million for a market share of 9.5% in a total market up only 1.1% YoY, and shipped 76.6 million phones in China for a 16.4% market share just behind OPPO); according to one source by end of 2016 Huawei had a market share of over 15%% in 33 countries and over 20% market share in 22 countries, half in Europe; and Huawei said it achieved key technological innovations in the consumer business including chipsets, UI and dual-lens camera technology.

Representative technology achievements in 2016/17

Batteries

In December 2016 Huawei at the 57th annual Battery Symposium in Japan announced  new graphene-assisted heat-resistant technologies that would enable Li-ion batteries to remain functional at 60 degrees C, 10 degrees higher than the existing upper limit and which would also support a lifespan for the graphene-assisted Li-ion batteries twice as long as ordinary Li-ion batteries. Huawei also, based on technology first announced in 2015, confirmed plans to bring to market a mobile phone with 3000 mAh batteries rechargable to 48% of capacity in five minutes.

5G technology 

In September 2016 at a conference in Beijing, Huawei announced that, working with China Academy of Information and Communications Technology (CAICT), China Mobile, China Unicom and China Telecom, it had completed first-stage field test verification of 5G air interface technologies, which: demonstrated three times spectrum efficiency improvement; successfully tested flexible air interface slicing, a technology expected to be a key component of 5G and which supports a particular connection type with a specific way of handling the control and user planes to provide only the traffic treatment that is necessary for the use case and avoid other unnecessary functionality.

On March 1st at MWC Huawei and Deutsche Telekom provided a demo based on work done at Deutsche Telekom's 5G network lab in Bonn, Germany using Huawei all cloud architecture to enable multiple industry services over one physical network, aimed at validating wireless network slicing technology and specifically showing E2E network slicing including RAN, transport, core network and massive MIMO C-band for high throughput, physical isolation and ultra-low latency mobile edge computing technology.

On March 31st Huawei and Telenor announced that during the month they held the first 5G-based, E-band, multi-user MIMO demo in Norway reaching a maximum speed of 70 Gbit/s.

Smartphone development

In its review of the 2016 global market for smartphones, which it said grew only 1.1% YoY to 1470.6 million, IDC observed that in the past year, vendors such as Huawei, Xiaomi and LeEco had developed phones with dual cameras, thin bezels, and digital headphone connectors well before many overseas vendors.

Summary and commentary

It is dangerous to bet against momentum on the sports field, the stock market, in business or in politics, and Huawei is certainly at this time going like a rocket. Almost whatever happens it is hard to see the company's drive for growth slowing significantly in under 2-3 years unless China Inc. itself crashes, which many analysts have been forecasting for years. However, China is a well-educated, hardworking, politically stable, technically ambitious and opportunistic country, centrally planned by a strong technocratic government with a very clear sense of direction and a sense of global mission and also with plenty of momentum, and nominal GDP per capita of $8,100 in 2016 is still 20% below the global average, so that seems rather unlikely.

Similarly, at Huawei there is just so much going on in terms of new technologies, new products, new joint ventures that even if growth slows and the company takes a year to consolidate and maybe lift its product margins the opportunities and desire for growth will still dominate the situation. However, there are a few caveats. Firstly, too much success for too long can result in complacency, overstaffing, reduced work rate and carelessness by staff who take success created by an earlier generation as guaranteed. There are rumours that Huawei's top management is worried that has happened and has been reading the riot act about under performance to many of its senior personnel, and even a suggestion that a whole layer of older management is about to be retired early in a bid to rejuvenate the company. Those kinds of internal strains and necessary restructuring are certainly quite likely in a company which has been regularly doubling in size every 3-4 years. There are at least two much more worrying issues than those necessary organisational adjustments to explosive growth mentioned above.

The first is the underlying threat of what one could term the 'constant curse of the consumer combination',which as noted above has already damaged or destroyed several once-great electronic hardware companies. Despite Huawei's remarkable consumer performance over the last few years there are already hints that the curse may be preparing to strike again. Both OPPO and Vivo arguably did even better at least in unit terms than Huawei in 2016. OPPO is now the leading Chinese smartphone company in terms of units shipped and at global level both OPPO and Vivo, according to IDC, gained more global market share than Huawei. Both companies are also ahead of Huawei in the fast growing, low priced Indian smartphone market. Suddenly Huawei not only has to take on Apple and Samsung in the high priced smartphone market but also watch its back against OPPO and Vivo at the low end. While Huawei may certainly gain share over the next 18 months, what one might call an outright market-dominating win by Huawei now looks very improbable and a five year scenario might suggest a global market which is much more evenly divided between half a dozen top players than has historically been the case.

The second problem for Huawei is the difficulties it has and is likely to continue to have in penetrating the U.S. market, where on the consumer side the company currently only has only a 0.4% market share mainly because the majority of consumer phones are marketed via the two main operators. Problems on the professional side have been frequently covered both in OND and elsewhere and with the present mindset of the ruling Republicans that situation looks unlikely to change in the next few years.

Huawei's semi-legitimate hope is that by forcing the pace in communications technology it can create a situation whereby AT&T and Verizon are forced to ask the U.S. government to drop its informal embargo on the two companies freely trading with Huawei because they are falling behind in technology. On the whole that probability looks quite slight, at least for a few years. After all, the U.S. has trailed several Asia Pacific countries for years in the use of top end fixed broadband in the home and although grumbling is frequent no one other than Google has made any serious effort to fix the problem. Similarly, the mass use of wireless technology in the U.S. lagged Europe and Asia for many years without huge impact. Huawei will certainly eventually achieve success in the U.S. but that may take at least five and up to ten years to achieve.


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