Two years ago, with typical fanfare at its annual analyst conference in Shenzhen, Huawei introduced an entirely new, fourth business unit that would challenge web giants like Amazon and Google in the market for public cloud services. But a search through Huawei's recently published annual report for 2018 turns up not a single reference to this cloud business unit in discussion of financial results.

Instead, public cloud sales have been lumped into revenues at the enterprise unit, according to a Huawei spokesperson, obscuring their contribution to headline sales. That enterprise unit has been a high-flying part of Huawei, with sales up 24% last year, to about 74.4 billion Chinese yuan ($11.1 billion). But it had been a RMB41 billion ($6.1 billion) business in 2016, well before Huawei announced its public cloud plans, and grew 47% that year.

If the public cloud unit accounted for all the additional revenues -- which is almost certainly not the case -- it would generate about $5 billion annually. That is roughly a fifth the amount that Amazon makes in this market each year, and less than Deutsche Telekom, Telefónica or Orange reports in enterprise sales. Yet burying the results in those of a separate unit will only arouse suspicion Huawei is trying to hide an underwhelming performance. Observers may be wondering if the engine of growth has turned out to be a faulty wheel.

Figure 1: Huawei's UK headquarters in Reading.

Thanks to the overall growth in enterprise sales, and a surge at the smartphone-producing consumer unit, Huawei was able to report a strong set of headline figures. And the world's attention is currently focused on a US-led campaign against the Chinese equipment giant, whose opponents say it threatens security, rips off intellectual property and violates trade sanctions. The cloud business is perhaps easily overlooked.

But Huawei's opportunity to repeat its carrier and consumer successes in the market for public cloud services has never looked great. In a market where size matters, Huawei may already have been too late to the game in 2017 to make any kind of meaningful public cloud impact -- let alone become a rival to Amazon.

Going solo
Huawei's public cloud strategy was neatly spelt out by David Wang, its president of network solutions, during a presentation in Shenzhen two years ago. "We will invest heavily in building an open and trusted public cloud platform, which will be the foundation of a Huawei cloud family," he said at the time. "This family will include public clouds we develop together with operators, and public clouds that we operate on our own."

A few months later, in September, Huawei was sounding even more gung-ho. It would invest half a billion dollars in its cloud platform over the next five years, it said, and seek to challenge Amazon and Google as a public cloud provider. The funding plans meant increasing the annual R&D investment in "industry clouds" by more than 50%.

Yet more than 18 months later, Huawei operates hardly any public clouds on its own outside China, Light Reading understands. At home, it has had to wrestle with competition from existing public cloud companies, squeezing profitability. A further complication is the sale of data center products to Alibaba, perhaps Huawei's main public cloud rival in China. Any big corporation would be understandably nervous about competing against its own customers. Indeed, such concern has even persuaded Ericsson, Huawei's biggest mobile networks rival, to overhaul its strategy so that it serves enterprises only in partnership with telco customers, and no longer through direct sales channels.

Figure 2: Huawei's Revenues (RMB Millions) Source: Huawei.

Huawei's difficulties may come as little surprise to long-time observers of the public cloud market. Success in that business is all about scale, and Huawei was starting from scratch in 2017 when the likes of Amazon had for years been acknowledged as "hyperscale" players. "Huawei is a bit late to the party," said one message-board commentator on Light Reading's website.

Way back in 2015, Neil Sutton, the vice president of cloud, strategy and public alliances for UK telecom incumbent BT, had ruled out competing against cloud services players for a similar reason. "I don't see us trying to take on Amazon," he told Light Reading at the time. "Unless you have global hyperscale, I'm not sure how profitable it would be." For Huawei, disrupting the public cloud market seems to have been much tougher than shaking up the network and smartphone sectors.

Next page: Cloud partners

Cloud partners
Internationally, Huawei continues to partner with operators on the development of public clouds. Describing this aspect of the strategy in 2017, Guo Ping, one of Huawei's rotating CEOs, predicted the cloud business would evolve in the same manner as airlines, with the formation of global alliances of service providers. The analogy was not wholly convincing. "I'm not sure airlines is such a great industry to model yourself on," said James Crawshaw, a senior analyst with market research firm Heavy Reading (a sister company to Light Reading), in a comment on Light Reading's website. "It is characterized by razor-thin margins and frequent bankruptcies."

The success of this partnership approach remains unclear. If Huawei is merely selling data center products to operators, much as Nokia does, it might be reporting revenues at its carrier unit, even if it classes them as public cloud business. Yet carrier sales last year fell 1.3%. That is hardly an auspicious sign for a vendor whose carrier business grew 21.4% in 2015 and 23.6% in 2016 -- before the public cloud unit was announced -- and 2.5% in 2017.

Germany's Deutsche Telekom, France's Orange and Spain's Telefónica are three major European telcos that have been widely reported as Huawei public cloud partners. But none has had much to say about the Huawei tie-up recently, possibly because of the security concerns that still surround the Chinese vendor. Asked this month about the status of the partnership, a Telefónica spokesperson said the Spanish operator did not want to make "official comments at this time."

While more forthcoming, Deutsche Telekom was keen to emphasize Huawei's non-involvement on the services side. In emailed comments, a spokesperson for T-Systems, the German operator's IT unit, said: "Huawei is indeed our hardware supplier for the Open Telekom Cloud. However, operation in our Biere data center, and the management of the cloud services and customers, is in the hands of T-Systems alone. And, of course, users access the Open Telekom Cloud via Deutsche Telekom's network."

Figure 3: Outside Orange offices in Paris.

Much like Deutsche Telekom, Orange buys data center products from Huawei, including servers and operating system software. But it does not let Huawei anywhere near the customers of Flexible Engine -- the brand name for the public cloud offering from Orange Business Services (OBS), its own enterprise unit. "The customers we have on Flexible Engine have a contractual relationship with Orange Business Services," says Cédric Prévost, the director of cloud security for OBS. "It is Orange that is operating the full services … Huawei is the technology provider, but it is not doing anything on the production platform."

All three European operators did hail double-digit growth rates in overall cloud revenues last year. But they are small fry compared with public cloud leaders. Deutsche Telekom made €5.5 billion ($6.2 billion) in overall IT revenues (outside the group), while Orange managed €7.3 billion ($8.2 billion). As for Telefónica, it reported €627 million ($703 million) from all cloud services. Those figures measure up poorly against the $25.7 billion that Amazon Web Services (AWS) recorded in public cloud revenues. And Amazon's revenues were up 47% on the 2017 figure.

Figure 4: Revenues in 2018 ($B) Source: Companies.

Even so, OBS now has around 3,500 cloud customers in total, and Flexible Engine has become one of its "flagship" offers, adding customers at a monthly growth rate of 14% or 15% in the second half of 2018, according to Prévost. So what explains the appeal of the service in a market where Amazon is a colossus?

One factor seems to be the concern among some organizations about data protection, driving them to seek out European as opposed to US providers. Deutsche Telekom has similarly insisted that entrusting data to a German firm compliant with Germany's strict privacy rules is safer than using a company from outside Europe. That message may have been well received in the wake of data scandals surrounding Facebook, and revelations about US spying on German soil aired by Edward Snowden, a National Security Agency whistleblower.

OBS also reckons the Huawei technology gives it performance-related advantages over AWS thanks to the Chinese vendor's growing expertise in artificial intelligence. "Huawei is not a follower, like it was a couple of years ago, but is starting to be the most innovative company around AI and GPU [graphical processing unit] integration in the servers, and it is doing this very quickly and in a very price-efficient manner," says Prévost. "Customers are really astonished by the performance they have on Flexible Engine compared with AWS."

Notwithstanding some initial analyst skepticism, Huawei's efforts to build a global alliance of cloud service providers are also driving interest among customers that want to operate in multiple regions, says the OBS executive. "When a customer signs a Flexible Engine contract it can deploy resources on peer platforms that exist on Huawei's technology," he explains. "So it is possible for a customer to deploy resources on Huawei's cloud in China, or in South America with Telefónica."

Next page: Security anxiety

Security anxiety
In conversations with the Chinese press, Huawei has recently talked up progress at the cloud business. Just this month, Zheng Yelai, its president, said Huawei would soon roll out its own cloud computing nodes, or "availability zones," in Brazil and Chile. It already has three such nodes in Singapore, three in Hong Kong and two in Thailand, he said, and began operating public cloud services in South Africa in December. To what extent partnerships with service providers figure in these rollouts is not clear. According to a Bloomberg report in February, Huawei has been working with "local partners" to provide cloud services in South Africa.

In the aftermath of the Snowden and Facebook scandals, anxiety about data violations involving overseas providers could certainly work to the advantage of local players. Unfortunately, in the current environment, the use of Huawei as a cloud partner could generate just as much concern. In what seems like a prescient bit of analysis from late 2015, analyst company Ovum (a part of the same Informa group to which Light Reading now belongs) said: "Deutsche Telekom's 'Made in Germany' approach resonates with German firms concerned about data privacy and security in the post-Snowden world. However, such 'emotional' appeals may lose their attraction given Open Cloud's reliance on a Chinese vendor."

The perception that Chinese vendors are unusually risky is one Prévost is trying to dispel. "We have had discussions with customers about this point," says Prévost. "We have strong cyber-defense expertise within Orange and we leveraged that when we built Flexible Engine. It is a risk that exists and we have countermeasures within infrastructure to deal with that risk, but we deal with it in the same way we deal with the risks posed by other third-party providers, like Cisco and Juniper. Even American servers are based on Asian chipsets."

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Such concerns are unlikely to be as prevalent in Africa, according to Guy Zibi, the principal analyst at Xalam Analytics, a market research company focused on China (and a sister company to Light Reading). In a blog on Connecting Africa, one of Light Reading's sister sites, Zibi says the nature of demand and the extent of cloud competition will be Huawei's main challenges in Africa. Whether Huawei will focus on targeting the enterprise directly, or decide merely to sell hardware and software platforms to operators, remains unknown. "Huawei Cloud will face formidable African competition from [Microsoft] Azure and AWS in the public cloud," he adds, pointing out that Oracle, IBM and VMware could also pose a threat.

Outside Africa, the difficulty of matching AWS pricing and building a successful developer community were similarly highlighted as Huawei's main challenges in Ovum's 2015 blog. "Launching Open Cloud services with Huawei may be a bold move by both Deutsche Telekom and Telefónica, or it may be a lost cause," said the analyst firm. "Ovum believes the risks are high." More than three years later, those risks seem no less significant.

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— Iain Morris, International Editor, Light Reading