Huawei: New King of the CSP Market

China's biggest equipment vendor has built up a huge lead over its Western rivals in the global communications service provider (CSP) network technology market.

Iain Morris, International Editor

April 7, 2016

9 Min Read
Huawei: New King of the CSP Market

After years of staggering growth, Huawei is now the single biggest supplier of technology and related services to the global communications service provider (CSP) sector by sales, having overtaken Ericsson and its other Western rivals in 2015.

The Chinese vendor, which is still a privately-held company, recently announced audited financial results for 2015, reporting total group revenues of 395 billion yuan, about US$61 billion at current exchange rates. (See Huawei Profits Soar Despite Forex Hit.)

But not all of those revenues come from its CSP customers, as Huawei comprises three lines of business: the Consumer Business Group that makes and sells mobile devices and which accounted for about 33% of sales last year; the Enterprise Business Group, which generated about 7% of sales; and the Carrier Business Group, which sells goods and services to CSPs of all types around the world and which generated 59% of last year's revenues.

It's the Carrier Business Group that competes directly with the likes of Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK), Cisco Systems Inc. (Nasdaq: CSCO), ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) and many others to secure business from the CSPs and which has now become the clear market leader.

Data compiled by Light Reading, using year-average exchange rates to make the comparisons fairer, shows that Huawei's Carrier Business Group generated revenues of about US$37 billion in 2015, some way ahead of Ericsson, which generated total revenues of $29.3 billion.

Figure 1: Revenues in 2015 ($B) Source: Companies, UKForex, Analysys Mason for Cisco figure. Notes: Currency conversions have been carried out using year-average exchange rates. Analysys Mason's revenue number for Cisco includes an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services. Source: Companies, UKForex, Analysys Mason for Cisco figure.
Notes: Currency conversions have been carried out using year-average exchange rates. Analysys Mason's revenue number for Cisco includes an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services.

In close third place, with revenues pegged at $28.6 billion, is the CSP business of Nokia, comprising Nokia Networks and the Alcatel-Lucent business acquired by the Finnish company earlier this year: While those operations were not integrated in 2015, we have combined their revenues for the chart above to create a direct competitive comparison. (See Ericsson Shares Tumble Despite Profit Growth and Nokia, AlcaLu Steady Ship on Costs Before Tie-Up.)

While Cisco does not break out CSP revenues, market-research company Analysys Mason estimates 2015 CSP revenues for the vendor at $11.1 billion, comprising an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services. Gartner Inc. , meanwhile, estimates that Cisco generated revenues of $9.56 billion in 2015 from solutions specific to the CSP market. Those estimates put Cisco slightly ahead of the Carrier Networks business of fifth-placed ZTE, Huawei's smaller Chinese rival.

Figure 2: Revenue Development at Leading Vendors ($B) Source: Companies, UKForex. Note: Currency conversions have been carried out using year-average exchange rates. Source: Companies, UKForex.
Note: Currency conversions have been carried out using year-average exchange rates.

Using the year-average conversions to US dollars paints a very clear picture of market dynamics, as shown in the chart above, which shows how Huawei's CSP business gained ground on Ericsson in recent years and then finally overtook the Swedish company in 2015.

It also shows how the two Chinese vendors, as they push ever more aggressively into international markets, have been attracting more and more business, particularly during the past three years. By contrast, the major Western vendors have been in decline in recent years.

Local currency analysis paints a slightly different picture
The picture is not quite so grim for Ericsson and Nokia/AlcaLu when their revenues as reported in local currencies are analyzed in the chart below, which shows positive momentum year-on-year in 2015.

Figure 3: Rate of Revenue Growth (Local Currency Units) Source: Companies. Source: Companies.

Yet it's still the Chinese vendors that catch the eye in terms of sales growth. Despite its scale, Huawei was able to boost Carrier Business Group revenues by as much as 21.4% in 2015 compared with the previous year, while ZTE recorded a 30.2% increase in CSP revenues over the same period. (Both, it should be noted, benefited from significant telco investments in China, where they continue to attract the vast majority of the network investments made by the three major operators -- more on that later.)

By contrast, and despite benefiting from favorable foreign-exchange movements, none of the big Western equipment suppliers managed so much as double-digit year-on-year revenue growth in 2015.

Ongoing scrutiny
The Chinese vendors, and Huawei in particular, have played a significant role in reshaping the CSP technology supply market in recent years and that, in turn, puts their business practices increasingly in the spotlight.

Accused of violating sanctions on Iran, ZTE was hit with an export ban by the US in early March. Executives involved in setting up so-called "shell companies," allowing ZTE to ship to Iran while evading US authorities, have been forced to quit as part of an apparent settlement. (See ZTE CTO Becomes New Boss in Reshuffle, ZTE CEO to Quit in US Export-Ban Dispute and US Lifts ZTE Export Ban – Report.)

And unlike their European and North American competitors, Huawei and ZTE have also been able to rely on support from state-connected banks in China to secure equipment deals under controversial "vendor financing" arrangements. That has become a feature of business dealings in Africa in particular, according to Thomas Neubauer, the vice president of business development and RAN solutions for software vendor Teoco Corp. "Huawei has non-transparent financial institutions behind it and that makes it tough [for us] to compete," he said during a conversation with Light Reading at the recent Mobile World Congress in Barcelona.

Even so, Huawei and ZTE have continued to win business with many of the world's biggest service providers as telecom networks become more software-based. Having once been lambasted as copycats selling gear at knockdown rates, they are now widely regarded as innovators in their own right.

For more NFV-related coverage and insights, check out our dedicated NFV content channel here on Light Reading.

Moreover, both companies remain locked out of network infrastructure opportunities in the vast US market, policymakers there having judged them to be a security risk because of their close ties to the Chinese government.

Despite this prohibition, Huawei has made inroads in rural areas and with smaller US carriers. Should a future US administration relax its stance toward Chinese players, the likes of Ericsson and Nokia -- not to mention a number of smaller vendors -- would have even more to fear. (See Huawei Still Striking Out With US Cable, Huawei's New Acting CEO Key to Global Expansion, Curing America's China Syndrome , Surprise! Sprint Still Has Huawei in Its Network, Huawei Working Hard for Rural Success and Are Huawei & ZTE About to Feel a Thaw in the Comms Cold War?.)

Next page: Tough global market, slowdown in China

Tough global market, slowdown in China
Internationally, though, conditions are set to be a lot tougher for all equipment makers this year than in 2015. Dell'Oro Group , a market-research company, expects investments to decline around the world -- but especially in China and Europe -- and warns that constant-currency growth will slow down in all regions.

"In 2016, worldwide telco investments are expected to decline 6% in constant-currency terms, primarily reflecting weaker investment trends in China and Europe," said Stefan Pongratz, an analyst at Dell’Oro Group, in a recent press release.

Pressure is highly evident in China, where all three of the country's national service providers intend to spend less on network rollout in 2016 than last year. Having invested 195.6 billion Chinese yuan ($30.2 billion) in capital expenditure last year, China Mobile Ltd. (NYSE: CHL), the country's biggest operator, plans to spend RMB186.2 billion ($28.7 billion) in 2016. China Telecom Corp. Ltd. (NYSE: CHA) reckons spending will fall from RMB109.1 billion ($16.8 billion) in 2015 to RMB97 billion ($15 billion) this year, while China Unicom Ltd. (NYSE: CHU)'s capex is expected to fall from RMB133.9 billion ($20.7 billion) to RMB75 billion ($11.6 billion) over this period. (See Tower Sales Boost China Telecom Profits and China Mobile Flags Concerns as Profits Dip.)

Figure 4: Capital Expenditure (RMB Billions) Source: Companies. Source: Companies.

That retrenchment will affect all of the major vendors, but it could hit the Western firms the hardest if Chinese operators are persuaded to back the local vendors with an even bigger slice of their capex.

In Europe, meanwhile, incumbents have embarked on some bold network projects, but regional spending is set to shrink this year, according to Dell'Oro, as revenue growth remains elusive. With few national equipment champions, and limited government influence over the telcos, major players including the UK's BT Group plc (NYSE: BT; London: BTA), Spain's Telefónica and Telecom Italia (TIM) have been happy to hand major network and IT projects over to the Chinese as they look for cost-effective improvements.

That trend seems unlikely to change as budgets are tightened. Sweden's Tele2 AB (Nasdaq: TLTO), for instance, is using Huawei equipment during an NFV rollout that does not appear to involve Ericsson, whose headquarters are just 15 kilometers from its own. Amsterdam-based VimpelCom Ltd. (NYSE: VIP), meanwhile, has chosen ZTE over Western vendors for the initial phase of an NFV deployment covering a number of markets in central and south-east Asia. That large European service providers are turning to the Chinese for infrastructure virtualization is a troubling sign for the likes of Ericsson and Nokia, whose fortunes will hinge partly on their success in the market for New IP products and services. (See NFV App Architecture Must Improve – Tele2, Tele2 Gets 5G-Ready With NFV Moves and ZTE Wins NFV Deal With VimpelCom .)

Nokia's takeover of Alcatel-Lucent, and the partnership deal between Cisco Systems Inc. (Nasdaq: CSCO) and Ericsson, have raised hopes those organizations might be able to seize the initiative from the Chinese and thrive once again. They are under huge pressure to perform: If the Huawei juggernaut pulls even further ahead this year, its lead may start to look unassailable. (See Finn de Siècle for Alcatel-Lucent and Cisco + Ericsson: From Soup to Nuts.)

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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