Huawei Eyes Super Sales Growth

Despite some well-publicized setbacks, Huawei Technologies Co. Ltd. is continuing to polish its image. The company that wouldn't return press calls years ago is now endeavoring to show incumbent carriers around the world that it is trustworthy, by opening itself up to media and analysts.

In its efforts to appear less secretive, the employee-owned, privately held vendor is making known its sales goals, R&D commitments, and other figures. The motive, besides appealing to Western operators, likely involves preparing the field for an international IPO (see Is Huawei Edging Closer to IPO?).

The company's numbers tell a compelling story. For one thing, they confirm Huawei's aggressive approach to sales and its remarkable efficiency in manufacturing. Even as it finds itself in the crosshairs of more and more North American and European vendors, the company is looking to post year-over-year sales gains of about 30 percent.

Specifically, the vendor is predicting it will hit sales of $5 billion this year, with about $2 billion of that coming from outside of China. Huawei reported sales of $3.83 billion in 2003, when it invested 12 percent of that amount in research and development.

The company is well on its way towards that goal, with $2.2 billion in orders during the first half of 2004, according to RBC Capital Markets analyst Mark Sue, who visited the company's headquarters recently.

"Evident by its well-organized tours offered to customers and media, Huawei is making a concerted effort to improve its image," Sue wrote in a note to clients on Monday.

Behind the slick tours, though, the secret to Huawei's success is cheap labor -- a benefit that eventually rises to the top line. "Huawei will often discount its products 15 percent to 30 percent vs. its competitors," Sue writes, "but due to its cost structure, Huawei may have similar gross margins."

While 12 percent of Huawei's revenues go to R&D, some 46 percent of Huawei's 22,000 employees are focused there, Sue reports. "Whereas a Western vendor may be able to affordably send one engineering representative to a customer, Huawei can send 4 or 5 at a comparable cost."

Will Huawei's R&D manpower matter outside of China? You bet. Huawei says 80 percent of its massive R&D workforce is deployed in software development -- a crucial piece of the rapid service provisioning and opex savings that carriers crave.

"Huawei's R&D costs can be as low as 30 percent that of competitors," Sue writes. "Consequently, Huawei may continue to price aggressively, especially as it attempts to build initial footprints at large carriers."

— Phil Harvey, News Editor, Light Reading

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