Report: Huawei Grows Up
Huawei’s progress outside China over the past five years has been driven by an impressively broad product portfolio, but perhaps more so by its low pricing. The vendor reported 56 percent revenue growth in 2005 with overseas sales reaching nearly 60 percent of total sales. (See Huawei 2006 Target: $8 Billion.)
But, as the new report points out, Huawei's low prices have caused a price war that has put pressure on margins for everybody. That fact might make it harder for Huawei to manage some of the global competitive challenges it faces in the next few years. (See Telecom's China Syndrome.)
One of those challenges involves supporting foreign clients after the equipment has been sold, according to the report.
The report’s author, Heavy Reading chief analyst Scott Clavenna, says this hasn’t been a huge issue with Huawei’s customers in emerging markets like Russia or Thailand. But Western operators simply have different expectations for service and support.
"They are used to real heavy-duty professional services, where the vendor acts as a systems integrator, does some network planning, and does all the engineering, sales, and support,” Clavenna says.
Geography is also a problem in Western accounts, Clavenna says. “You’re getting a lot farther away from China, so trying to integrate back with the engineers at the headquarters in China is more difficult.”
Huawei’s low margins could begin to hurt its ability to provide thorough professional services to its foreign clients.
If Huawei can’t meet expectations in this area, its expansion could be slowed. Operators might opt for competing vendors despite Huawei’s low prices, Clavenna says. “It’s really no secret that that’s where they’ve run into problems in Western Europe, because at some point the operators don’t want just the cheapest gear in the world.”
Clavenna says pressure on margins might also strain Huawei’s R&D investments, which are already low compared to its competitors.
To make matters worse, Huawei will soon be facing new and stronger global rivals that have been formed by consolidation. These include super-vendors Lucent Technologies Inc. (NYSE: LU)/Alcatel (NYSE: ALA; Paris: CGEP:PA) and Nokia Corp. (NYSE: NOK)/Siemens AG (NYSE: SI; Frankfurt: SIE), which Clavenna says will just be getting their games on in the 2007-2008 time frame.
And that’s not all. Light Reading recently reported that regulatory changes in China may strip Huawei of some of the tax breaks and other subsidies it once enjoyed from the Chinese government. Because of China’s growing trade deficit, the country’s international trading partners and the World Trade Organization (WTO) have been pressuring it to reform tax refund policies that have benefited Huawei and other Chinese companies. China is expected to comply, although tax breaks for vendors in the telecom sector probably won’t be the first affected by the change. (See Pressure Piles on Huawei, ZTE.)
So is the end of Huawei’s march on the world in sight? Not exactly, says Clavenna, not yet. Huawei “has a lot going on in 2006” and will likely keep its forward momentum into 2007, he says.
For more information about the new Heavy Reading report, click here.
— Mark Sullivan, Reporter, Light Reading