Huawei's communications service provider (CSP) business is on course to be more than one and a half times as big as Ericsson by 2018, according to the companies' own projections.
The part of China's Huawei Technologies Co. Ltd. that caters to CSPs (its Carrier Business Group) last year overtook Ericsson AB (Nasdaq: ERIC) to become the world's largest supplier of network products to operators, generating sales of about $37 billion compared with the $29.3 billion made by Ericsson (based on an analysis using historical year-average exchange rates). (See Huawei: New King of the CSP Market.)
At an analyst summit in China earlier this week, however, Huawei indicated that sales from its CSP and enterprise divisions combined could nearly double between now and 2020, rising from about $41.4 billion in 2015 to as much as $80 billion. (See Huawei's Carrier/Enterprise Sales Could Hit $80B by 2020.)
The Chinese vendor also told analysts that sales from the enterprise division alone would grow from about $4.4 billion last year to roughly $10 billion in 2019. Assuming that rate of growth continues, Huawei would make $12.3 billion from enterprise sales in 2020.
The implication is that Carrier Business Group sales will account for $67.7 billion of Huawei's revenues in the same year.
Ericsson, meanwhile, expects its own "core" revenues to increase at a compound annual growth rate (CAGR) of between 1% and 3% between 2015 and 2018, with sales from its "targeted growth areas" rising at a CAGR of 10% over the same period.
The targeted growth areas accounted for about 18% of total revenues last year, according to Ericsson, or about $5.3 billion.
If Ericsson were to hit the upper limit of its 1-3% forecast and achieve 10% CAGR in its "targeted" sectors (and assuming constant currency rates), its revenues would grow from $29.3 billion in 2015 to $33.2 billion in 2018.
By that date, Huawei's Carrier Business Group revenues will have risen to $53.2 billion -- about 1.6 times those at Ericsson -- if its growth is as the company expects.
This projection is all the more remarkable considering that Huawei is still locked out of opportunities in the vast US market, where government authorities that deem it to be a security risk have pressured major telcos not to use its equipment or services.
The sales growth would also occur over a period when networks are likely to undergo a radical transformation, as service providers invest in New IP technologies such as SDN and NFV as they plan for the challenges and opportunities of a 5G world.
The possibility of Huawei pulling this far ahead of its biggest Western rival during a time of such upheaval and innovation will be troubling for Ericsson's investors, especially considering the Swedish company's newish partnership with Cisco, which seems aimed partly at countering the Huawei challenge. (See Cisco + Ericsson: From Soup to Nuts.)
Finland's Nokia Corp. (NYSE: NOK) also hopes recent dealmaking will help it stand up to Huawei. Following this year's takeover of Alcatel-Lucent (NYSE: ALU), Nokia is now almost as big as Ericsson in revenue terms (based on 2015 numbers). But the Finnish vendor declined to provide any firm sales guidance when announcing 2015 results, instead promising to share detailed targets when reporting figures for the first quarter of 2016. (See Nokia, AlcaLu Steady Ship on Costs Before Tie-Up.)
Of course, there is no guarantee Huawei will realize its revenue ambitions: Doing so would require the company to increase sales at a CAGR of 12.9% over the next five years, having seen them rise at a slightly lower CAGR of 12.4% between 2011 and 2015 (using historical year-average exchange rates).
That will be a tall order given the slowdown that analysts expect to see in Europe and Asia this year. In China, for instance, where Huawei has been the main beneficiary of carrier spending on 4G network rollout, all three of the big mobile operators have flagged plans to reduce capital expenditure in 2016. (See Tower Sales Boost China Telecom Profits and China Mobile Flags Concerns as Profits Dip.)
But Western rivals are likely to be hit hardest by these spending cuts, and Huawei has continued to attract business from major European carriers such as the UK's BT Group plc (NYSE: BT; London: BTA), Spain's Telefónica and Telecom Italia (TIM) . Moreover, a future Clinton administration in the US might adopt a friendlier stance towards Chinese players, opening up fresh opportunities in North America. (See Are Huawei & ZTE About to Feel a Thaw in the Comms Cold War?.)
In addition, and as Nokia's acquisition of Alcatel-Lucent has shown, the scale, revenue-generating potential and market presence of any company can be dramatically altered by M&A activity: Ericsson has not been shy during the past decade of striking multi-billion-dollar takeover deals in order to enter new markets and create new sales opportunities. (See Ericsson to Buy Telcordia, Ericsson Offers $2.1B for Redback and Ericsson Offers $1.4B for Tandberg TV.)
Light Reading emphasizes that numbers included in this story are based largely on its own (somewhat rudimentary) calculations using a mixture of historical and current exchange rates plus headline guidance from Ericsson and Huawei: They should not be regarded in any way as investment advice.
— Iain Morris, , News Editor, Light Reading