Huawei, ZTE Look to Handsets for Growth
Huawei Technologies Co. Ltd. declared a 22 percent fall in first-half operating profit and a one-third lower margin, while rival ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) has just announced a 68 percent dive in profit. (See Huawei Increases H1 Sales by 4.5% and ZTE Reports 15 Percent Revenue Rise.)
But while the two Chinese vendors are showing the effects of the slowdown in spending, they've also been laying plans to diversify.
Huawei actually overtook market leader Ericsson AB (Nasdaq: ERIC) in top-line revenue. But rather than proving it's the new No. 1 in telecom gear, that's actually a tribute to its aggressive move into handsets. (See Huawei Snatches Ericsson's Crown.)
Huawei's devices unit did US$6.9 billion in sales, or 22 percent of total revenue, last year. In Gartner Inc. 's list of top handset makers in the second quarter it ranked sixth.
The privately held firm didn't break out any of its numbers in its interim result, so it's not known how many phones it shipped in the first half. But executives say they're aiming for $9 billion in device sales this year and $15 billion by 2015. (By comparison, Nokia sold $28.4 billion in phones last year.)
Less than two years ago, Huawei was considering a sale of its device group -- at that time a low-margin operation making white-label devices for operators.
But by late 2010, as the Apple juggernaut bulldozed its way through the industry, carrier customers were beating a path to Huawei's door demanding smartphones that allowed them to compete.
Huawei's execs canceled the sale, and the handset group was reborn as a unit focused on high-end products. When the firm restructured early last year, handsets became one of the company's three customer-focused business divisions -- Carriers, Devices and Enterprise.
The move is a landmark shift for Huawei into branded consumer business, but it's part of the company's calculated move away from the operator business. At a recent analysts' day acting CEO Eric Xu said carriers have put tight controls on network spending, and "it is not very likely we will see an increase in capex by operators in the future."
Huawei's approach now is to develop "anything that fills [network] pipes."
The devices group was off to a good start with a 44 percent increase in sales last year. Huawei’s other new division, the Enterprise group, boosted revenue by a healthy 57 percent, although at $950 million it represents less than 3 percent of the business.
However, the group has 20,000 staff and more than $6 billion in contracts signed. Executives say the attraction is the much larger market -- nine times larger than the carrier space -- and opportunities in the cloud and ICT convergence.
ZTE's handset focus
Huawei's smaller competitor ZTE has embarked on a similar transition, but it starts from a very different position.
Its first-half sales of $6.71 billion were just over two-fifths of Huawei's. Just on half of that was from China; by comparison Huawei does just a third of its business in China.
Huawei is strong in 3G, but ZTE has just 6 percent of the worldwide 2G and 3G markets and is betting big on LTE. It is also pinning its hopes on winning major contracts in Europe and North America.
Chinese telecom analyst Fu Liang says ZTE has learned the lesson that there is no money to be made in the emerging markets. "The true mainstream is in the developed countries," he said in an interview with China’s Talent magazine.
Apart from LTE, ZTE is looking to its branded handset business to break open the developed markets. It has been in that game longer than Huawei, coming in fourth in Gartner's second-quarter rankings -- behind Samsung, Nokia and Apple -- with 17.9 million units shipped.
Device sales, which rose 27 percent in the first half, now account for one-third of total revenue.
On the enterprise side, ZTE hasn't created a dedicated group as Huawei has, but sales to businesses grew 50 percent last year to 10 billion yuan.
Ovum Ltd. senior analyst Matt Walker says that for both Huawei and ZTE the challenge lies in mastering "the soft side of the device business," such as the user interface and building "an ecosystem of relationships."
He says the enterprise market is a bigger opportunity but also requires "a large, complex web of relationships with different channels. This needs to be built over time, and will require significant investments."
— Robert Clark, contributing editor, special to Light Reading