Monday, January 22, 2018

Will Huawei's rapid growth continue in 2018?

by James E. Carroll

For the past decade, Huawei has been a shining star for the networking and telecoms field. 2015 and 2016 were especially good years as the company’s overall revenue grew 37% and 32%, respectively.
In a New Year’s message to staff, Huawei’s rotating CEO Ken Hu noted that the tepid growth rate slowed considerably, to 15% in 2017.  This is the slowest pace of expansion since 2013. Huawei's final revenue figure for 2017 should be in the range of 600 billion yuan (US$91 billion). Hu cited fluctuations in telco investment cycles, perhaps alluding the strange position that the Chinese telecom sector finds itself now that 4G infrastructure rollouts are mostly completed but 5G has yet to arrive.

Still, Huawei remains strong compared to any of its nearest competitors. For its most recently completed fiscal quarter, Cisco reported a growth rate of -2%.  Nokia reported a 7% year-on-year decrease (4% decrease on a constant currency basis).  Ericsson’s Q3 sales were also down 6% year-over-year (down 3% on a constant currency basis). Even when looking ahead to 2020, Ericsson is forecasting that its sales of radio access network equipment will decline or at best remain flat. At its Ericsson Capital Markets Day in Stockholm in November, the company even gloomily predicted that sales for IT and cloud solutions would likely decline.  Even worse, in late December, Ericsson signed a credit agreement with the Nordic Investment Bank (NIB) for US$220 million and another one with AB Svensk Exportkredit (SEK) for US$150 million, to shore up its balance sheet and help fund its 5G R&D activities.

These discouraging pictures come after several years of weak Service Provider sales for the industry as a whole. Ericsson's revenue crashed 10% YoY in 2016. For instance, IBM's sales in 2016 were down 2%, Microsoft's were down 9%, and Cisco (despite spending several billion dollars on expensive acquisitions every year) struggles to even maintain its current level of sales, although to be fair, profitability has been improving.

Despite the slide in its growth rate, Huawei’s CEO said the overall business remains strong. Unlike any of its network equipment rivals, Huawei also competes in the consumer segment, where the smartphone is king. In 2017, Huawei sold a record 153 million smartphones, giving it approximately 10% of the global market. The flagship Huawei Mate 10, which boasts an in-house 8-core CPU and 12-core GPU based on 10nm technology, is critically regarded as a close competitor to the flagship phones of Apple and Samsung. It is also priced at a significant discount to those brands. It now looks quite possible for Huawei to establish itself as a premier global brand. Remember when Nokia enjoyed such success? Ericsson too was a mobile phone contender in the days before the iPhone. Cisco even made a half-hearted effort to enter the consumer space. Now, all of these companies can only sit back and watch as Huawei uses its growing consumer success to build up its brand.
In the enterprise sector, Huawei is focused on opportunities in cloud, campus networks, data centres, and IoT. Hu said 197 companies in the Fortune Global 500 have selected Huawei as their digital transformation partner.

Hu’s New Year’s greeting did not provide a geographic breakdown of the company’s sales (perhaps we will get that information in a later report), but over the past few years, these have been fairly evenly split between domestic and international sales. In its home market, we can confidently say that Huawei’s position is strong and getting stronger. While the western vendors continue to compete in China via their joint venture companies, the nationalist tendency to “buy local instead of imports” seems to be on the rise.

One example is China Telecom recently completed 100G ROADM backbone network on the middle and lower reaches of the Yangtze River, including the provinces of Jiangsu, Zhejiang,  Hubei, Anhui, Jiangxi, and the municipality of Shanghai.  In the past, this type of contract might have split between several vendors, with perhaps a small share of the pie going to one of the foreign joint venture companies. That was not the outcome here. Huawei was the exclusive network solutions provider for the China Telecom optical backbone project. Remarkably, the completed the upgrade in only five months, which is perhaps indicates a good contracting decision by China Telecom. Since the project is described as an optical mesh backbone that is already carrying over three hundred 100G services from the outset, we can presume that the network will grow by leaps and bounds over the coming decade – the Yangtze River basin is after all one of the most densely populated regions of the planet.  Good luck to any other vendors getting in

In the international market, we only have anecdotal evidence for how Huawei is actually performing. Because Huawei is a privately-held company, only a limited amount of financial data is disclosed to the market. The biggest story in networking is, of course, the rapid rise of the public cloud, especially AWS, Microsoft, Google, Alibaba and handful of others. To our knowledge, Huawei is not a significant supplier to any of the hyperscalers.

Although Huawei has made remarkable inroads with top telecom operators in western Europe, its revenue growth rate is constrained by the flat to declining CAPEX budgets. Until investments in network infrastructure rise again, it will be difficult for any vendor to grow faster than 10 per cent annually.

There are opportunities for Huawei in developing markets, especially those tied into China’s Belt and Road initiative.  For example, Huawei Marine is the lead vendor for a new Pakistan East Africa Cable Express (PEACE) submarine cable that will connect South Asia with East Africa. This project will  offer the shortest fibre route from western China to southern Europe, when combined with terrestrial fibre between Pakistan and China. The project is funded by China Construction Bank.

One problem that has not been solved is the impasse with the U.S. government. Over five years have now passed since the U.S. House of Representatives' Permanent Select Committee on Intelligence issued its report recommending that Huawei and ZTE be blocked as suppliers of critical infrastructure due to security concerns. The United States remains the largest single market. No resolution to this standoff appears to be in sight. More recently, the Australian intelligence service has acted to block Huawei Marine from its role in funding and constructing a high-capacity subsea cable that is to link Sydney to the Solomon Islands. Apparently, security concerns were raised concerning China’s growing presence in the region. Nevertheless, Huawei smartphones are growing in popularity with consumers worldwide, including in the U.S. and Australia.

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