Is Huawei in for a Bumpy 2017?

Iain Morris
Morris Lore
Iain Morris, News Editor

Eric Xu was evidently in a poetic mood when he penned his New Year message last week. "Fear not the drifting clouds that block your eyes: Beneath shifting sands bright gold still lies," wrote Huawei's rotating CEO.

So far, the Chinese equipment giant has found bright gold relatively easy to uncover. While other vendors scrabble for whatever rewards they can obtain, Huawei has been filling its coffers. It now expects to report impressive sales growth of 32% for its 2016 fiscal year, in marked contrast to the fortunes of Ericsson and Nokia, its chief rivals, over the first nine months (see graphic below). Yet Xu's musings betray concern that Huawei's alchemy might not have such glittering results in 2017. (See Another Bumper Year: Huawei Sales Soar 32% to $74.8B.)

Differing Fortunes (Revenues in $B, Using Current Exchange Rates)
Source: companies.
Source: companies.

Citing growing "political and economic uncertainties," Xu complained that -- despite double-digit growth in sales -- Huawei's operating efficiency and cash flow have seen little improvement. Remedial action is urgently required, he said, listing a number of priorities for 2017. Those include cutting down on "empty and extravagant marketing events and conferences," and avoiding "blind optimism and rhetoric about Huawei as an industry leader."

Like its rivals, Huawei Technologies Co. Ltd. is staring at an economic and cyclical slump. Having already spent heavily on 4G and fiber-based networks, some of the world's biggest telcos have been tightening their belts, diverting resources to less costly investments in software, virtualization and IT systems. The emergence of 5G, a next-generation mobile technology, is expected to fuel a new round of spending on network equipment. But standardized 5G products are at least three years away from commercial deployment.

So far, circumstances may have played somewhat into Huawei's hands. A big chunk of its sales growth has come from an expanding range of low-cost but increasingly sophisticated smartphones, while both Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), its chief network rivals, have exited that market in recent years. Moreover, having firmly shaken off any reputation it once had as an imitator, rather than a true innovator, Huawei still competes fiercely on price in the infrastructure game, just as telco budgets are being squeezed.

Despite its vast R&D resources, which are buoyed by the handset business, Huawei also remains more efficient than either Ericsson or Nokia on a revenues-per-employee basis. The strategic uncertainty, leadership changes and merger activity that have preoccupied the Swedish and Finnish players have given Huawei even more of a free rein.

Annual Revenues Per Employee ($)
Source: companies
Source: companies

But the tough global realities are starting to cast a harsh light on the profligacy of the last few years. Staff numbers have soared along with sales, rising by about 60,000, to more than 170,000, between 2010 and 2015. Next to the fleet-footed Facebook and Google (Nasdaq: GOOG), which are becoming more active in equipment markets, Huawei fares badly in a revenues-per-employee comparison. As Light Reading noted in October, the lavish events now attracting Xu's opprobrium often seem to feature a surplus of Huawei staff. (See Is Huawei Suffering Middle-Aged Spread?)

Nor can Huawei depend eternally on the misfortunes of Ericsson and Nokia. The Finnish vendor is sharpening its focus on the enterprise sector, which is also in Huawei's crosshairs, while a new and financially savvy CEO is due to take the helm at Ericsson. Last year could mark a low point for the Western firms. (See Nokia: A Global Network Operator for the Enterprise? and Is Ekholm Ericsson's Savior or Seller?)

Next page: Market share stabilization

Market share stabilization
Whether either player can mount a more effective challenge to Huawei remains doubtful, of course. Google, Facebook or some other upstart seems the likelier threat. Nevertheless, service providers may be keen to prevent Huawei from becoming even more of a dominant force, which would risk the collapse of another infrastructure player, according to Bengt Nordström, the CEO of consulting firm Northstream. "That would have negative consequences for the operator community," he says.

Even before Xu published his New Year message, Northstream had predicted that market shares held by the three big vendors would stabilize this year -- following one in which Huawei appears to have further grown at the expense of Ericsson and Nokia -- and that pricing pressure would ease. "The ability of vendors to finance large break-in deals is very limited," says Nordström. "When I meet with Huawei, they are as worried as Ericsson and Nokia about price competition and how hard it is to make money from infrastructure."

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All of this calls into question some of the forecasts that Huawei made last year. During an analyst summit in April, the vendor indicated that annual sales from its carrier and enterprise divisions could nearly double between 2015 and 2020, rising from about $41.4 billion to as much as $80 billion over that period. The implication, taking into account Ericsson's own forecasts at that time, was that Huawei's carrier business would be more than one and a half times the size of Ericsson's by the end of next year. (See Huawei's Carrier Division Set to Dwarf Ericsson by 2018.)

If the bare numbers now sound fanciful, then Huawei may still be on track to achieve them. A 32% increase would boost overall sales to nearly $75 billion, using current exchange rates. And if the carrier and enterprise divisions accounted for the same proportion of revenues as in 2015, they would together generate about $49 billion. To remain on course for $80 billion in 2020, Huawei would need to generate $47 billion in carrier and enterprise revenues in 2016, according to calculations previously carried out by Light Reading.

Xu may be concerned about some bumps in the road ahead, but it would take a big fall to really upset Huawei.

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

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