CEO Interview: Huawei's Eric Xu
Huawei is now, very clearly, the leading supplier of communications networking technology in the world. It has been challenging, and overtaking, established rivals in the telecom networks technology sector for years and is now also an emerging player in the enterprise IT sector and a significant force in the global smartphone market.
With that broad sweep of the market, something that other vendors have abandoned, Huawei has managed to grow its annual revenues at a relentless pace, even while the global economy has stuttered and other major names in the communications technology industry have hit a sales brick wall.
Here's a reminder of what relentless growth looks like: In 2012, Huawei's full-year revenues totaled 220.19 billion yuan renminbi (at that time, the equivalent of US$35.5 billion): In 2016, its reported revenues will be in the region of RMB 520 billion ($75 billion), nearly double that of 2012. (See Huawei's Network Sales Up Around 32% in 2016.)
And, as you'll find out in the following interview, Huawei is far from being done with its sales growth ambitions, despite still being vendor non grata in the US. Growing fast, though, can also lead to significant challenges. (See Is Huawei in for a Bumpy 2017?)
Those that do business with Huawei will know that as it has grown, it has changed. Once known primarily for cut-price networking products (that were sometimes regarded as not very subtle copies of existing market-leading offers), aggressive competitive tactics (such as the Supercomm Spygate saga of 2004) and haphazard customer relationships, the company has changed and evolved into a more sophisticated global operation that has benefited from building business propositions based on customer needs.
That, by the way, is a view not offered up by Huawei, but one shared (often in private) by its service provider and enterprise customers that have been almost shocked but certainly very pleased by the company's cultural maturity. Ten years ago, doing business with Huawei made sense mainly to a customer's CFO who was focused on up-front cost and pricing -- now it makes sense for many more senior decision-makers. That's not to say Huawei isn't still undercutting its rivals: That certainly still happens, though there's often a payback further down the line when service and support charges kick in, according to some network operators that talked to Light Reading on condition of anonymity.
Huawei also differentiates itself from its rivals in other ways, such as its management strategy. It has several lead executives who, as well as having a seat on the board, hold the title "Rotating CEO" -- they take it in turn to be the "acting CEO," dealing with day-to-day decisions and running the senior team meetings.
Eric Xu is one of those rotating CEOs and, currently, is the acting CEO.
We secured some one-to-one time with Xu during the recent Mobile World Congress event in Barcelona to talk about future growth, the challenges that brings, the changing nature of Huawei's business (as the communications sector itself evolves) and the impact of technology trends such as artificial intelligence, virtual reality and IoT.
— Ray Le Maistre, , Editor-in-Chief, Light Reading
Next page: The five-year view
The five-year view
Ray Le Maistre, Light Reading: Huawei has been growing significantly in multiple sectors in the communications technology market for a number of years now. What is the company's strategy for the next five years and how important will the emerging markets such as Africa and Latin America be in terms of delivering medium-term sales growth?
Eric Xu, Huawei: We have been working on a five-year strategy plan for the three businesses in our overall portfolio -- carrier, enterprise and consumer. The carrier business will have a relatively lower growth rate, very possibly single digit growth -- even a 10% growth would be a stretched target to work on.
The enterprise business will grow very fast in the coming years and will become a major growth driver for our B2B business. I think it's possible for us to achieve a 30% annual growth for the enterprise business.
Similarly the consumer business will also grow very fast. But the consumer business is one that can suffer considerable fluctuation. If everything goes right it's possible that the consumer business could grow at 30% year on year.
So if you look at all the three businesses combined, the future growth will primarily not be coming from the emerging markets. The enterprise business is closely related to the GDP of a country -- the higher the GDP the better the market opportunity for the enterprise business. For smartphones we are now moving towards more premium, higher-end brands in our business and the markets where there will be demand for these will be the more economically developed markets.
Therefore if we look at future growth from a regional perspective, apart from the US market I think the markets with pretty robust economic growth with strong purchasing power will be the major source of growth for Huawei's business.
RLM: But Huawei is still focused on growing its business in Africa, Latin America and the emerging markets in South-East Asia?
EX: That is not clearly articulated in our strategy for the last couple of years. A more accurate expression would be that we focus on all the markets outside the US.
Next page: Emerging technology opportunities: AI, VR and IoT
Emerging technology opportunities: AI, VR and IoT
RLM: Will there be a need to create new divisions or business groups to reflect the change in the markets, for example the emergence of virtual reality and artificial intelligence? Will these emerging technologies require specific business units to capture potential market growth?
EX: We will not be setting up new business groups to address the opportunities that you have mentioned. Take AI for example. We have positioned AI as a technology -- we will be using AI to better serve our existing portfolio, to improve our internal efficiency and to improve the service we provide to our customers.
The idea is to make our products and services more competitive and to improve the efficiency of our internal operations. At this point we have no plans to set up AI as a standalone business in the current business portfolio. For virtual reality, we are positioning it to go hand-in-hand with our smartphone devices -- our smartphones and residential devices should have virtual reality capabilities. Again there is no plan to set up a business group or unit [for VR].
Having said that, it doesn't mean we won't be investing heavily into those two specific areas.
RLM: IoT offers great potential for the whole communications market. How does Huawei plan to make money from IoT? There are a lot of new technologies, a lot of new companies in IoT but few business models to make money from IoT? What is Huawei's strategy here?
EX: Huawei's strategy on IoT has been very clear for almost ten years. First, to enable telecom operators to carry more IoT connections. Second, to build a connectivity platform to better connect IoT objects and to deliver authentication for connected things. Third, to invest in IoT chipsets so they can be massively available to enterprises and industry verticals. Those are the three areas that comprise our IoT offerings.
The core of IoT is not the network, it is about things. Only when more things or machines are installed with IoT chipsets is there the possibility for wider activity. This is why we have built the IoT ecosystem to allow more businesses to participate and to ensure that more things can be installed with an IoT chipset so they can be connected.
RLM: But how will Huawei make money? This all sounds very capital intensive. Is this all about creating a massive scale in order to get a return on investment? Or does going big on IoT and trying to own a large part of the market enable new [Huawei] businesses to flourish? I'm trying to figure out where the money and profits will come from.
EX: [Laughter.] From Huawei's point of view, in all the three areas mentioned the investments being made are not exclusively for IoT. From the network point of view, IoT is just one additional function of the mobile network. Adding IoT functionality to our existing basestation offering does not necessarily involve any significant investment. And the IoT connectivity platform does not take any significant workload from an R&D point of view. A traditional HLR [home location register] has AAA [authentication, authorization and accounting] capabilities and we will be using those capabilities to come up with the IoT platform. In other words, we will build upon the existing technical capabilities we have -- it's an extension of our existing capabilities.
Of the three areas, the chipset development is the one that is the most capital intensive. To address that matter we acquired a UK company [Neul in September 2014] that was working on IoT chipsets and with the significant investment we have made into that company we are going to launch the industry's first NB-IoT chipset.
At this point in time, even if we only look at the chipset, we can still recover our investment.
This is just a Huawei perspective. This does not mean that other companies that are seeing a significant opportunity in IoT and which are making significant investments will have a justified RoI [return on investment]. Maybe they should not have made the investment in the first place. [More laughter.]
And behind Huawei's investment, the idea is to promote the development of the entire industry.
RLM: So you don't see IoT as a major profit engine directly for Huawei?
EX: It is not possible that IoT can deliver any substantial profits. But that's just within a short period of time. Maybe it is possible that in five to ten years the IoT market will really take off, so when the world becomes a fully connected world then maybe we will see a completely different situation than the one we see today.
Next page: Service provider consolidation
Service provider consolidation
RLM: In terms of Huawei's telecom customers, there has been a lot of consolidation amongst the communications service providers. Do you expect that consolidation trend to include the web services giants and do you expect the large web-scale companies to be running telecom networks in the future and for them to become customers of your carrier business unit beyond just data center interconnect (DCI) engagements?
EX: The consolidation among the network operators, especially among the mobile operators, is driven by the fact that there are too many licenses being issued in certain countries and therefore it is a trend we see in selective areas.
With regards to consolidation between web services companies and telecom operators, it is possible because we have seen such a case in Japan. That is the case of SoftBank… and now it is our customer. And in the future the possibility for other deals still exists.
RLM: So you see potential for the likes of Google, Amazon, Alibaba, even maybe some of the emerging web services companies such as Uber, to become communications technology customers for Huawei?
EX: They are actually already using our technology today -- Alibaba, Tencent are already using our products.
RLM: But do you see the possibility that, in the future, these companies could be running full communications networks, running mobile and fixed access networks and becoming the telcos of the future?
EX: That for them would be very difficult because web services companies are very asset light, while telcos are asset heavy. For the board of directors of an asset-light company to acquire an asset-heavy company… that is a decision that would be very hard to make. And even if a board did make that kind of decision, the whole business of running such an operation would be very difficult, given the big differences in costs and cultures and it would be a very tough decision also to build such a network themselves, especially the access network, both radio and mobile access.
RLM: Maybe cloud technology can ease the burden and help to bring this all together in the future?
EX: Even with cloud technology, that would not be enough to address the issues in the physical layer. Cloud technology is mainly at the IT layer, in computing and storage -- for the access, the mobile basestation will always be needed and the fixed access will always be needed. Those cannot be replaced or addressed by cloud technology.
Next page: Huawei as a video content aggregator
Huawei as a video content aggregator
RLM: An interesting development in Huawei's strategy in 2016 was the plan for Huawei to become a video content aggregator on behalf of customers. I understand this has already started in the Middle East. Is this something Huawei plans to implement across the world? And is this a way for Huawei to cement and lock in customer relationships by providing content, as well as networking technology, to service providers that offer video services to their customers?
EX: Firstly, even if we aggregate content and provide that to service providers there is no way we can lock in our customers. What we are doing in the Middle East is a kind of experiment in light of the issues that we have discovered in our industry. Whether that will be a global initiative has not been decided yet -- it depends on how this experiment unfolds.
For telecom operators to develop a video business there is one significant issue, which is the fragmentation of content. We have seen the whole landscape globally and we can see there are more than 1,000 providers of video content, 600 telecom operators and more than 100 content aggregators (companies like Netflix). For any single operator to engage in content [sourcing] is simply too complicated for them to deal with content providers and content aggregators.
From Huawei's point of view we hope to see telecom operators succeed in the video business and we have been thinking about how we can contribute and add value to address the content fragmentation issue and help the telecom operators succeed in the video business. This kind of [overall content aggregation] role is clearly needed -- if someone else can play the same role or address the challenge by playing a different role then Huawei would not need to do it, because at the end of the day that is not our business.
RLM: But it is now!
EX: As a matter of fact it isn't because we are not intending to make money from this business itself. The whole idea is to help operators to succeed in the video business and to address the industry problems. We do not intend to grow this into a standalone business. We want to play a bit of a role through appropriate investments in the video ecosystem to address some of the challenges that any single operator would find hard to resolve so that we can contribute to the growth of the video business across the industry.
In addition, for our smartphone and devices business, we also need to aggregate some content for Huawei's smartphone users so there is also some synergy there as well.
Next page: Growing pains and revenue targets
Growing pains and revenue targets
RLM: Huawei has become a very large company, very dominant and very influential in large parts of the communications industry. Is it reaching a point now where it's becoming hard to manage that growth and hard to manage the company. That was a very interesting New Year message that was sent out to the company, very publicly, on Huawei's website. Is this a sign that Huawei is becoming something of an unmanageable beast for the management team to handle?
EX: It's not that dramatic yet. [Laughter.]
EX: Indeed it is definitely a challenge to manage a carrier business, an enterprise business and a consumer business all at the same time. That would be a challenge for any company. For the carrier business we have a direct sales model and a direct delivery model. For the enterprise business we position ourselves as the product supplier -- we provide our products to our partners and they do the sales and delivery. And for the consumer business we need to use very powerful brand distribution channels and have a retail presence to bring our products into the hands of the consumers. From this perspective, all the three businesses are very different. The good news, though, is that we are using almost the same technologies across all three businesses -- that means we can build the same technology platform to serve three business segments. The main challenge we face from a management point of view is having the different sales channels. Our approach is to set up three groups that operate relatively independently from one another to be able to satisfy the different requirements and needs of the three different types of business and three different types of customers. The three groups have the delegation of authority to run and manage the businesses.
At the group level, at the executive level, the focus is primarily looking at human resources policies to see how we can motivate the entire organization across the three business groups. We also have the necessary governance and monitoring systems in place to manage the directions and boundaries of the different businesses.
Looking back, the three years between 2011 and 2014 were pretty tough from a management point of view but things are starting to get on track since 2015 and into 2016. In the future there will be challenges for sure but I think the position we are in today gives us the foundation to address and resolve those challenges.
If all three businesses continue to grow in a nice way, when it grows into a $150 billion to $200 billion business, we don't know what the company will look like -- every day is a new day and every day brings something new as we manage it. From the founder to every single person on the management team, every day is a new day because we don't have the experience from other companies of managing such scale.
Of course there is no way to predict what the future will bring so the focus now is to ensure that everything we do now, we do it well. So, and this is a traditional Chinese saying, once the car attempts to climb the mountain, then the road will unfold itself. [Laughter.]
RLM: So is there a target year to be a $150 billion turnover company?
EX: It is not going to be long. The founder Mr Ren already publicly raised this target for the team.
RLM: Within the next five years?
EX: Yes, it should be. For all the three businesses as we move forward, scale or pure size is not the top problem. The key is to manage the pace [of growth]… the target is not a problem.