Give Them Credit: Huawei's Growing
“That perception is simply wrong,” says Huawei spokesman Richard Lee from his office in Shenzhen, China. Lee says the company has made no secret of its desire to become a leading international player, but he rejects the notion that vendor financing is how Huawei will achieve its goal.
“You cannot say we are not trying to use the credit to gain market share, but that is not the central purpose,” Lee says. “It is hard to separate one from the other, but it is not specifically to gain market share from others.”
Yet when Huawei in December secured a $10 billion line of credit over five years from government-operated Chinese Development Bank (CDB), in addition to $360 million from 29 other banks in November, it announced the money would be used solely for "international expansion," and, at least in part, for the benefit of customers.
“Whether we will use the money for buyers’ credit, or how much will be used for supporting Huawei and how much will be used to support Huawei customers will depend on the situation," Lee says.
Aside from extending credit lines to carriers buying Huawei's gear, Lee says the money could be used for international marketing, customer support, and outside R&D.
Huawei’s definition of R&D is very different from that of its Western competitors. Most of Huawei's R&D spending doesn't go into developing new products; it goes into figuring out what individual customers really want, tailoring existing products to meet those requirements, and then building and testing trial networks. This is done by bringing the engineers from both sides together to collaborate on the solution.
Huawei can complete all this with surprising efficiency because its headcount includes an extraordinarily high proportion of (relatively low-cost) R&D people. Of its 22,000 employees, 45 percent are engaged in R&D.
Because of its ability to quickly customize equipment for carrier networks, Huawei contends that vendor financing isn't its primary advantage. In fact, Lee says “very few” Huawei customers currently are using Huawei financing for equipment purchases, and none of its European or North American customers. But that, he says, is not because demand is lacking.
“There is certainly a great need for buyers’ credit out there, especially in the developing countries, but we have to know that we can control the risk, and we need the guarantee from the third party, and the project must be strategic for Huawei,” Lee explains.
The first of the beneficiaries appears to be Hong Kong-based service provider Sunday Communications Ltd. Huawei in November announced it had extended a $160 million line of credit to the carrier for network equipment purchases. The debt will be paid back in part with Sunday's stock.
Arrangements of this sort are nothing new to Huawei. It has been successful in bringing together high-profile lenders and guarantors for at least two other operators in the past. The China Export & Credit Insurance Corporation, (Sinosure) has acted as guarantor for credit lines extended to Algeria’s Algerie Telecom ($28 million) and Brazilian telecom operator Telemar Group (NYSE: TNE) (for an undisclosed amount).
Both operators can use the credit for up to 85 percent of the commercial contract signed with Huawei. No other details on the terms of the arrangements, including the interest rates, are being disclosed by Huawei.
Huawei's financing strategy -- and its powerful R&D arm -- is hard at work. Lee says the company did $2.28 billion in international sales during 2004, compared with $1.05 billion in 2003; and the company is projecting more than $4 billion in sales outside China in 2005 with total sales topping $10 billion by 2008.
To outside observers, Huawei looks like a company getting its house in order for an international IPO (and a big one). (See Is Huawei Edging Closer to IPO?.) The company has recently restructured. Huawei spokespeople tell Light Reading its business and accounting practices are squeaky clean in every respect, but that it has a public-relations problem which, the company says, is the result of mud-slinging by worried Western vendors. (See Cisco Drops Huawei Suit and Huawei in Spying Flap.) Now Huawei is embarking on a PR and marketing campaign to fix its public image.
Vendors such as Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Ltd. (NYSE/Toronto: NT), whose margins are increasingly squeezed by the insurgents, are taking notice of Huawei. Both Nortel’s CEO Bill Owens and Cisco’s CEO John Chambers told investors and analysts last year that the Chinese are among the biggest threats those companies face now. Huawei has demonstrated its ability to leverage lower labor and R&D costs – not to mention what some analysts have called superior execution -- to quickly gain market share worldwide.
Most of Huawei’s $2 billion plus international revenue comes from customers in Africa, the Middle East, and Asia Pacific. Lee says the company is quickly becoming the market leader in southern Africa, while all the above territories are doing more than $40 million in sales every year. Chinese customers comprise the other $3 billion of Huawei’s annual revenue.
If Huawei's total revenue doubles, as expected, by 2008 it will leapfrog Nortel in worldwide sales and get within striking distance of market leader Cisco.
Vendor financing will play a role in Huawei's future growth, but a comparably small one, the company says.
“I want to stress that our people use extreme caution when extending credit to customers; we do everything based on international marketing norms,” Lee says.
“We do think we need to be very careful in this.”
— Mark Sullivan, Reporter, Light Reading