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Huawei Expects Dip in Networks Contribution

Robert Clark
News Analysis
Robert Clark
4/25/2014
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Huawei's current acting CEO Eric Xu certainly knows how to put on a show. The two top takeaways from this year's Huawei annual analyst summit, held in Shenzhen this week, are: while other vendors are struggling, the Chinese firm is in the sweet spot; and Xu has staying power.

Let's take Xu's performance first. He held forth candidly for close to two hours on everything from the CEO succession and politics, to open source and R&D investment. He doesn't hold back, labeling the constant questioning about the Snowden leaks as "tiresome," and warning that Huawei's devices unit had to come "down to earth." (See Huawei Boss Tells Handset Team to Sober Up.)

But he has reason to be ebullient. Huawei Technologies Co. Ltd. is hitting its numbers, and its diversification strategy appears well on track. All units posted growth in 2013 as it clocked up 239 billion Yuan Renminbi (US$38.3 billion) in revenues. (See Huawei Pumps Up Its Profits to $3.5B.)

It has achieved a CAGR of 13% during the past five years, and believes it can maintain that over the next five to become a $70 billion-a-year company.

Over that time, the vendor expects the contribution from its traditional network equipment business to decline in favor of services, enterprise, and devices.

Xu said the carrier network division, now accounting for 70% of sales, could decline to as low as 50%. Within that group, services -- currently the second-largest segment -- will almost certainly overtake wireless networks to become the biggest single revenue source in its core business.

The services segment, which grew 22% last year and is forecast to hit 17% this year, is tracking in the path of other global vendors, some of which earn more from services than selling network gear, Xu said.

Huawei is also expecting its three-year-old enterprise group, now generating annual revenues worth around $2.5 billion, to become a $10 billion business by 2018. Its handset group is already the number three worldwide in smartphones and represents nearly a quarter of the company’s business.

What ties these together is the company's "pipe strategy," or anything that drives network bandwidth. "Where there is data flow, that is our business," said Xu. "We will not touch content and applications."

He and other execs repeatedly struck two themes the company has identified as growth drivers.

The first is connecting the two-thirds of the world that aren't yet online, which plays to Huawei's strengths in networks, devices and emerging markets.

The second is enabling the coming "IT transformation" of business and consumer behavior. "With the increasing penetration of the Internet, IT is actually reshaping different industry verticals and our society," said Xu.

In telecom, for example, that means reforming BSS to deliver a better experience. It also refers to technologies such as SDN, which Xu believes can substantially improve O&M in mobile backhaul and large backbone networks.

Other technologies attracting Huawei's attention right now are multi-carrier access, 400GE core routers, and fixed access copper networks.

During the next decade, Huawei's headline R&D focus will be 5G, for which the firm has already set aside $600 million for initial R&D. Xu thinks 5G networks and terminals could be available as early as 2020. (See Huawei CEO Pledges 5G R&D Investment.)

But the one area where Huawei is easing back is in building a global brand to support its handset business."When it comes to branding we will take a different path from other companies," Xu said. "We won’t spend a lot on campaigns. We will trust in word of mouth."

— Robert Clark, contributing editor, special to Light Reading

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R Clark
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R Clark,
User Rank: Blogger
4/25/2014 | 11:37:21 PM
Re: Something missing?
Stat from Huawei: 77% of revenue last year came from among the world's top 50 carriers, up from 75.2% in 2012.  The major operators clearly have confidence in Huawei.
pcharles09
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pcharles09,
User Rank: Light Beer
4/25/2014 | 8:28:05 PM
Re: Something missing?
I think all they'd need is a carefully crafted marketing plan to approach the US to have a chance at some success. Then build on it little by little.
-0
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-0,
User Rank: Light Beer
4/25/2014 | 6:39:01 PM
Re: Something missing?
Frankly, I do not see what Huawei may do to improve its perception in the West (read - in US). It's not as much distrust of the company, it is distrust to the country where company is headquarterd (plus a lot of protectionism of domestic vendors). Thus Huawei's current strategy of concentrating on countries without protectionism barriers makes a lot of sense.

Trust is not something one can manufacture or buy, it's product of a time, a loong time. Being financially successful is a good step in building trust too.

 
allthingsCom
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allthingsCom,
User Rank: Light Beer
4/25/2014 | 4:28:57 PM
Re: Something missing?
Curently, majority of the world also doesn't completely trust the US .. I am sure that will work out in one way or another as well. US is less of a metric for decisions at a global scale than it used to be. Several examples are abound in current geo-political news. Events in BRIC regions definitely attest to that..
thebulk
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thebulk,
User Rank: Light Sabre
4/25/2014 | 2:55:47 PM
Re: Something missing?
@melao2, 

I am just going off of reports and conversations I have had with other network engineers in those areas. From what I have been told most of them are very sheepish on putting Huawei equipment in their networks and many companies do not consider them when taking bids. 
melao2
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melao2,
User Rank: Light Sabre
4/25/2014 | 2:35:30 PM
Re: Something missing?
I may be wrong, but West Europe experienced their biggest growth in 2013 for overseas.

It is in their annual report. Of course one can question those numbers, but that's an entirely different story. 

 
thebulk
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thebulk,
User Rank: Light Sabre
4/25/2014 | 2:07:48 PM
Re: Something missing?
My understanding is that they have been pretty much black listed in Australia and New Zeland and they are having a hard time doing business in France, Germany and the UK. Since the vast majority of the internet infrastructor is in the US, it may very well come down to a point that anyone who wants to do business with the US has to be Huawei free, not likely, but still a possibility. 
melao2
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melao2,
User Rank: Light Sabre
4/25/2014 | 1:56:54 PM
Re: Something missing?
Hi, which developed world do you think that Huawei does not have access?

Honestly it is only the US. All of the others they already have a strong presence, and moreover, their biggest overseas accounts are from European carriers that have global presence such as TI, Vodafone and Telefonica.
thebulk
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thebulk,
User Rank: Light Sabre
4/25/2014 | 12:14:07 PM
Re: Something missing?
Thailand has strong ties to the US so it might not be the litmus test for this. I would say keep an eye on countries like Myanmar (Burma), Vietnam and Lao those will be better indicators IMO I know Huawei has heavy market share in those countries. 
mendyk
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mendyk,
User Rank: Light Sabre
4/25/2014 | 12:00:30 PM
Re: Something missing?
That's something definitely worth watching -- Huawei's market share in regions where it's the de facto incumbent. Thanks for pointing that out.
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