Thank God we did. Never has there been a better time to see firsthand what's up at Huawei's headquarters. This is a company with ambition, hubris, resilience, and at least one entertaining irony. Below is a recap.
What we knew before getting on the plane:
- Huawei is more responsible for telecom equipment consolidation than anything you'll read in vendors' press releases. Its aggressive pricing and exhaustive product menu have brought down suppliers left and right. Consolidation may just be another word for attrition, thanks to Huawei.
- Huawei outmaneuvered everyone in emerging markets. By offering soup-to-nuts, at embarrassingly low prices, it was able to get its arms around a wealth of carriers outside of China and start its international expansion in earnest, often under the radar of its Western rivals.
- Huawei has an amazingly cheap talent pool: salaried engineers at $12,000 per year.
- Huawei was out in front of ZTE by a mile.
The flight was as bad as you'd think. Non-stop Newark to Hong Kong: 16 hours. Walking to my seat, a man, unprompted by me, boasted of his ample supply of Ambien. After reading the papers over the past month, I figured I might see him eating his pillow in his sleep, so I wasn't envious. Fellow analyst-traveler Rick Thompson and I were separated by seven or eight rows, so I had to make do with some single-serving friends (see: Fight Club) – a nice married couple of lawyers from DC heading to Vietnam on vacation.
I planned to catch up on my reading, but ended up talking, flipping channels, and rubbing my eyes in anguish. One upside: We flew over the North Pole, which, when the clouds parted, looked exactly as one would think. Then we flew over Siberia, which was as Siberian as you could possibly imagine: leafless trees, tundra. It looked about as inhospitable to dissidents and thieves as you've been led to believe.
Over Beijing, Mr. Ambien walked by, on his way to the bathroom, looking utterly ruined, ten years older in 14 hours, and I gave him a satisfied smile.
Hong Kong was sweltering, with more ozone than oxygen in the air, and not quite as exotic as I had hoped. We took the ferry from Kowloon to the center of town to find dinner and drinks, but we were far too disoriented to find what we wanted, so we ended up slogging between blocks of bars catering to Australian tourists or American military on shore leave. Much later, we found a little place in Kowloon for pizza and margaritas, our hopes for a night of scorpion bowls and fried duck abandoned on the steaming streets.
A driver, sent from Huawei, drove us from the hotel into mainland China, to our hotel in Shenzhen – a five-star with luxurious rooms, boasting a bathroom any New Yorker would kill for. That is, until one reads the little note by the faucet, unapologetically announcing that the water is non-potable. Back to that later.
Huawei headquarters is impressive as hell. One building, the R&D center, looks Jeffersonian, a modern Monticello elongated over three or four acres in neoclassic harmony. The main building, where we disembarked, used soaring glass and steel to the greatest high-tech effect. We were impressed. Naively, we may have been expecting, or even wishing, to see a real telecom sweatshop – perhaps a bunch of concrete buildings searing under the hot sun, filled with underage drones bent over PCBs, aligning fibers 18 hours a day, with one bathroom break.
But no, this wasn't like working for Nike; it was beautiful. The elaborate lobby opened onto a product exhibition space – a visual Telecom 101 for anyone new to the industry. It soon became obvious to me and Rick that Huawei makes everything. It has the product lines of Cisco, Alcatel, Nokia, and Ericsson combined. It has set-top boxes, core routers, mobile handsets, long-haul DWDM transport systems, and softswitches. At some point, you can't take it all in, so you have to just pick a spot – say, the handsets – and make do.
Huawei is a company that learns from its mistakes. It seems analysts grumbled about the leanness of information in its last few analyst events, so this year they poured it on, handing out thick binders with detailed data on each company segment, with last year's numbers, 2006 projections, product roadmaps, and customer success stories. This was more information than we'd received at any other analyst event – a very positive opening move. The highlights included:
- An astonishing 56 percent year-over-year growth in 2005 sales.
- For the first year ever, overseas sales were nearly 60 percent of total sales.
- Big wins in Western Europe.
- No plans to merge with other major suppliers.
- No near-term plans to enter the U.S. market (admitting it lost out to Ericsson at T-Mobile USA).
- Worrisome profit erosion (18 percent operating margin in 2004, 14 percent in 2005; gross margins falling by 9 percent between 2004 and 2005).
- A statement that Huawei would no longer be competing solely on price, and laying the blame for recent price wars at someone else's feet (with no sense of irony, at all).
- Reiterating that Huawei was satisfied with the 3Com joint venture for enterprise networking, and indicating that it would introduce Ethernet gear for service providers so as not to compete directly with 3Com.
- No plans to reduce the size and scope of the product line, even if it may be seen as a liability when pursuing Western operators, which often express a preference for technology leaders and systems integrators.
- Lots of activity in standards bodies, especially for NGN specifications – though its IMS story is a bit less well defined.
- Lots of talk about IPTV, but a real coherent product story was hard to find; instead, Huawei seemed to be embracing the "ecosystem" model for now.
We heard from each area of the company, and each had impressive growth figures, Tier 1 customer wins, and a positive outlook to share. The optical group has been building backbones for large operators around the world and has quietly taken the global market share lead for the long-haul DWDM market; while the datacom group has shipped enough core routers to rank third behind Juniper and Cisco. In the mobile market, Huawei is playing both sides of the fence, with WCDMA and CDMA2000 gear shipping around the world in volume. What do you say when you hear all this in six hours? Damn: They are en fuego.
Reality set in when we got back to the hotel – you know, the one without drinkable water. At the bar, watching a jazz-samba-greatest-hits band, Rick said, "You know, they may be like this hotel. All glitz on the surface, but you peel it back a layer or two, and you've got a crummy water supply."
Ray Le Maistre's bearish China story (see Pressure Piles on Huawei, ZTE) hadn't been published yet, but just talking to some other analysts and local financial types, we were starting to sense that something wasn't quite right with all those numbers. James Crawshaw, a Contributing Analyst for Light Reading Insider, drinking responsibly, said ZTE was in even worse shape. As the night wore on, the bar got more interesting. We heard at least seven or eight languages being spoken. There was a sense, for about an hour, that this hotel bar was the place to be in Shenzhen – that all those newly built roads, lined with palm trees along many stretches, led here. Yet, looking around, it wasn't quite working. No one was really dancing, and the music moved incoherently from one upbeat style to another.
The next day we got to meet with individual product managers. The optical team was dynamite – an enthusiastic group of engineers eagerly asking questions and describing new product innovations. They're not so sanguine on ROADMs, but they do love Ethernet, DWDM, and OTN, and they're working on new platforms for the aggregation and metro transport network to take advantage of these technologies. Their strength, they said, was in chips, not all-optical devices, so OTN and Ethernet would take precedence over ROADMs or wavelength-selective switches. As with every other optical vendor we've interviewed in the past two years, Infinera's name came up. Yes, they said, they were worried/envious; and yes, they would pursue integration to reduce the cost of optical transport.
In the IPTV session, Huawei's team was grilled with questions; yet as earnest as their answers were, they seemed evasive. Huawei has IPTV customers, to be sure, but it just didn't compare to a conversation with Alcatel's IPTV folks, who will convince you they have it completely nailed.
When we got to IMS, my eyes glazed over, but that's not Huawei's fault. Colleagues better schooled on IMS than I commented that the picture looked similar to that for IPTV – Huawei has ambition there, and is rapidly developing the technology to stay on par with the rest of the supplier community, but it cannot be considered a leader in the space as yet.
In the datacom session, the talk was about the carrier Ethernet market, Huawei's growing share and broadening product line, and the eventual integration with optical platforms. We also heard about a new class of multifunction B-RAS Huawei is working on, which sounded interesting. On routing, it has focused a great deal on IPv6 and high availability, and it has scored some wins building national backbones for operators in emerging markets.
I won't even describe the flight back in detail. All you need to know is that it was endless torture, with heaping portions of bizarre, brutish seatmates, utterly lacking in empathy. Safe at home, I decided a Heavy Reading report was in order. I began gathering input on Huawei's various areas from all of our analysts and compiling them into one handy package.
The result, just published, is a report called Remade in China: Huawei and the Future of the Global Telecom Market. It breaks Huawei down into its constituent parts – except for handsets and set-top boxes, with which I couldn't be bothered. Looking at the submissions of the Heavy Reading team, nearly everyone's analysis fell among the same lines:
- Good product, better than you'd think – but not necessarily a technology leader in the space.
- Western European operators are making the move to Huawei, but their experiences have been uneven, especially around sales, support, and professional services.
- Price competition isn't quite as rough as last year.
- Huawei is learning from its mistakes, so counting it out is folly.
- The company has joined the club of major suppliers, and is experiencing just how tough it is in the largest markets.
- Huawei isn't going anywhere, because China won't let it.
— Scott Clavenna, Chief Analyst, Heavy Reading