Tuesday, April 18, 2017

Huawei's Target of $150bn revenue by 2020 - Part 2

2016 financial results (continued)

Breakdown of Huawei 2016 and 2015 revenue by business group (RMB/$ millions), with RMB growth rate and share of corporate sales:

2016 2016 $  2015 Growth %  % of total
Carrier Business  290,561 41,841 235,113 23.60% 55.70%
Enterprise  40,666 5,856 27,610 47.30% 7.83%
Consumer  179,808 25,892 125,914 43.60% 34.47%
Other  10,439 1,518 7,092 48.60% 2.00%
Total  521,574 75,107 395,009 32.00% 100.00%


It is worth noting that while the two numbers may not be exactly comparable Huawei's $41.8 billion for its Carrier Business in 2016 is about 60% larger than Ericsson's $26 billion for the same period. If Ericsson shrinks a further 6% in 2017 and Huawei grows by 17% Huawei will end up in nine months time about twice the size of its nearest competitor, and this scenario is not too unlikely.

Ericsson is now going through the kind of heavy restructuring from which companies almost never recover (since, to frame a medical analogy, surgery, or cost cutting, applied under panic conditions can often result in as much serious damage to healthy tissue as to those parts that are its main target). It is certainly a remarkable transformation in a relationship which only a couple of years ago was that of two strong but equal peers.

It should also cause some concern at U.S. majors such as AT&T and Verizon (forced by pressures from various sources in the U.S., including some elements of the security services, from doing any business with Huawei), who may see the possibility in a projected future scenario that they could start to fall behind technically and commercially because they were not allowed to do business with the world's largest communications equipment producer.

Looking at Huawei's Enterprise Business it also becomes clear why Cisco, despite its heavy year on year investment in reputedly market-leading fast growing acquisitions, is having difficulty even maintaining zero growth. The Huawei business was only founded a few years ago and is already one of the largest companies in its field globally, adding over $2 billion of new business every year. Whilst possibly half of Huawei's $2 billion annual addition may well come from new opportunities it has created through technology development and custom engineering the other $1 billion is probably being filched from existing business at traditional competitors, of which Cisco is the largest.

This level of competition is likely to accelerate. In September 2014 Eric Xu, Huawei's acting chief executive, told The Wall Street Journal in an interview that Huawei was aiming by 2019 to build a $10 billion sales level for its information-technology infrastructure business, consisting mainly of computer servers, storage and data centre management; two years later in September 2016 rotating CEO Guo Ping confirmed that Huawei was dedicating $1 billion annually, or about 10% of its R&D budget, to that particular initiative.

Breakdown of 2016 and 2015 revenue by gross geographical region (RMB/$ millions), with RMB growth rate and share of corporate sales:

2016 RMB  2016 $  2015 RMB  Growth %  % of total
China  236,512 34,057 167,690 41.00% 45.35%
EMEA  156,509 22,537 127,719 22.50% 30.01%
Asia Pacific  67,500 9,721 49,403 36.60% 12.94%
Americas  44,082 6,348 38,910 13.30% 8.45%
Other  16,971 2,444 11,287 50.40% 3.25%
Total  521,574 75,107 395,009 32.00% 100.00%


A geographical breakdown of revenue by companies are often the least useful sets of information because they are so broad and include very often such a disparate set of economies. In EMEA, for instance, is it useful to include Saudi Arabia with Zimbabwe or the Central Africa Republic, or within the Americas Haiti with Canada? However, some relevant observations can be made on the above. The first and most obvious one is that contrary to the idea of Huawei diversifying rapidly across the globe and away from its home market, in practice in 2016 Huawei's Chinese business grew considerably faster than its business in the rest of the world. More specifically, Huawei's business outside China grew at around 25.4% from RMB 227,319 in 2015 to RMB 285,062, not much above half the 41% growth in China. However, this is more consistent with at least part of reality than one might think.

China's growth in GDP in 2016 according to the IMF was 6.6%, compared to global growth of 3.1%, and is currently predicated to grow at 6.5% in 2017 and 6.0% in 2018. Obviously that ratio of 2 to 1 between China and the world as a whole is even better comparing China with the rest of the world. So that 41% compared to 25.4% starts to look quite logical. Also, Huawei is spending a great deal of money on R&D and it is obviously fairly practical for the company to test this innovation at various levels in its home market first. However, the counterargument is that looking at the ratio of Huawei's business to GDP for the various geographies for which it provides revenue data those ratios vary dramatically.

Roughly speaking, the global nominal GDP of just over $75 billion is split as far as the Huawei regions are concerned $11 billion for China, $25 billion for EMEA, $27 billion for the Americas, and $12 billion for Asia Pacific, plus other. Therefore Huawei does about five times as much business in China compared to China's GDP as it does compared to the rest of the world, and in particular for the Americas the disparity in the ratios is in the region of 15 to 1. That probably means both that Huawei has an excessive share of its home market and could be at risk as other Chinese companies develop an interest, often through partnerships with western companies, and also that Huawei is still very underrepresented outside China.

See also