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Huawei: New King of the CSP Market

Iain Morris

After years of staggering growth, Huawei is now the single biggest supplier of technology and related services to the global communications service provider (CSP) sector by sales, having overtaken Ericsson and its other Western rivals in 2015.

The Chinese vendor, which is still a privately-held company, recently announced audited financial results for 2015, reporting total group revenues of 395 billion yuan, about US$61 billion at current exchange rates. (See Huawei Profits Soar Despite Forex Hit.)

But not all of those revenues come from its CSP customers, as Huawei comprises three lines of business: the Consumer Business Group that makes and sells mobile devices and which accounted for about 33% of sales last year; the Enterprise Business Group, which generated about 7% of sales; and the Carrier Business Group, which sells goods and services to CSPs of all types around the world and which generated 59% of last year's revenues.

It's the Carrier Business Group that competes directly with the likes of Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK), Cisco Systems Inc. (Nasdaq: CSCO), ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) and many others to secure business from the CSPs and which has now become the clear market leader.

Data compiled by Light Reading, using year-average exchange rates to make the comparisons fairer, shows that Huawei's Carrier Business Group generated revenues of about US$37 billion in 2015, some way ahead of Ericsson, which generated total revenues of $29.3 billion.

Revenues in 2015 ($B)
Source: Companies, UKForex, Analysys Mason for Cisco figure.  Notes: Currency conversions have been carried out using year-average exchange rates. Analysys Mason's revenue number for Cisco includes an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services.
Source: Companies, UKForex, Analysys Mason for Cisco figure.
Notes: Currency conversions have been carried out using year-average exchange rates. Analysys Mason's revenue number for Cisco includes an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services.

In close third place, with revenues pegged at $28.6 billion, is the CSP business of Nokia, comprising Nokia Networks and the Alcatel-Lucent business acquired by the Finnish company earlier this year: While those operations were not integrated in 2015, we have combined their revenues for the chart above to create a direct competitive comparison. (See Ericsson Shares Tumble Despite Profit Growth and Nokia, AlcaLu Steady Ship on Costs Before Tie-Up.)

While Cisco does not break out CSP revenues, market-research company Analysys Mason estimates 2015 CSP revenues for the vendor at $11.1 billion, comprising an estimated $10 billion in network equipment hardware and $1.1 billion in OSS/NMS/SDP software and professional services. Gartner Inc. , meanwhile, estimates that Cisco generated revenues of $9.56 billion in 2015 from solutions specific to the CSP market. Those estimates put Cisco slightly ahead of the Carrier Networks business of fifth-placed ZTE, Huawei's smaller Chinese rival.

Revenue Development at Leading Vendors ($B)
Source: Companies, UKForex.  Note: Currency conversions have been carried out using year-average exchange rates.
Source: Companies, UKForex.
Note: Currency conversions have been carried out using year-average exchange rates.

Using the year-average conversions to US dollars paints a very clear picture of market dynamics, as shown in the chart above, which shows how Huawei's CSP business gained ground on Ericsson in recent years and then finally overtook the Swedish company in 2015.

It also shows how the two Chinese vendors, as they push ever more aggressively into international markets, have been attracting more and more business, particularly during the past three years. By contrast, the major Western vendors have been in decline in recent years.

Local currency analysis paints a slightly different picture
The picture is not quite so grim for Ericsson and Nokia/AlcaLu when their revenues as reported in local currencies are analyzed in the chart below, which shows positive momentum year-on-year in 2015.

Rate of Revenue Growth (Local Currency Units)
Source: Companies.
Source: Companies.

Yet it's still the Chinese vendors that catch the eye in terms of sales growth. Despite its scale, Huawei was able to boost Carrier Business Group revenues by as much as 21.4% in 2015 compared with the previous year, while ZTE recorded a 30.2% increase in CSP revenues over the same period. (Both, it should be noted, benefited from significant telco investments in China, where they continue to attract the vast majority of the network investments made by the three major operators -- more on that later.)

By contrast, and despite benefiting from favorable foreign-exchange movements, none of the big Western equipment suppliers managed so much as double-digit year-on-year revenue growth in 2015.

Ongoing scrutiny
The Chinese vendors, and Huawei in particular, have played a significant role in reshaping the CSP technology supply market in recent years and that, in turn, puts their business practices increasingly in the spotlight.

Accused of violating sanctions on Iran, ZTE was hit with an export ban by the US in early March. Executives involved in setting up so-called "shell companies," allowing ZTE to ship to Iran while evading US authorities, have been forced to quit as part of an apparent settlement. (See ZTE CTO Becomes New Boss in Reshuffle, ZTE CEO to Quit in US Export-Ban Dispute and US Lifts ZTE Export Ban – Report.)

And unlike their European and North American competitors, Huawei and ZTE have also been able to rely on support from state-connected banks in China to secure equipment deals under controversial "vendor financing" arrangements. That has become a feature of business dealings in Africa in particular, according to Thomas Neubauer, the vice president of business development and RAN solutions for software vendor Teoco Corp. "Huawei has non-transparent financial institutions behind it and that makes it tough [for us] to compete," he said during a conversation with Light Reading at the recent Mobile World Congress in Barcelona.

Even so, Huawei and ZTE have continued to win business with many of the world's biggest service providers as telecom networks become more software-based. Having once been lambasted as copycats selling gear at knockdown rates, they are now widely regarded as innovators in their own right.

For more NFV-related coverage and insights, check out our dedicated NFV content channel here on Light Reading.

Moreover, both companies remain locked out of network infrastructure opportunities in the vast US market, policymakers there having judged them to be a security risk because of their close ties to the Chinese government.

Despite this prohibition, Huawei has made inroads in rural areas and with smaller US carriers. Should a future US administration relax its stance toward Chinese players, the likes of Ericsson and Nokia -- not to mention a number of smaller vendors -- would have even more to fear. (See Huawei Still Striking Out With US Cable, Huawei's New Acting CEO Key to Global Expansion, Curing America's China Syndrome , Surprise! Sprint Still Has Huawei in Its Network, Huawei Working Hard for Rural Success and Are Huawei & ZTE About to Feel a Thaw in the Comms Cold War?.)

Next page: Tough global market, slowdown in China

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4/9/2016 | 5:56:14 PM
Re: Ericsson
How different is this to the soft loans Western governments were providing to western vendors to sell into China 20-30years ago, under the guise of foreign aid?
TV Monitor
TV Monitor
4/9/2016 | 5:54:07 PM
Re: Ericsson

State bank financing is legal and is done everywhere. For example, even a country as rich as UAE took a state bank financing when it bought $25 billion worth of nuclear power plants from Korea. Or look at Japan, which loaned $8 billion at a 0.25% interest rate(Yup, 0.25%) to be repaid over 50 years to sell its Shinkansen system to India. Heck, Chinese state banks provided a $12 billion loan in order to sell the Chinese bullet train system to Las Vegas-SoCal corridor project.

Just because the US doesn't do it doesn't make it illegal.
4/8/2016 | 8:44:21 PM
Re: Ericsson
It seems as though the Chinese vendors are getting an unfair advatange, working in challenging emerging markets and doing whatever they have to. I guess that's just part of doing business in some places, but I think the likes of Cisco would prefer to work within the realms of more legal sales strategies. Interesting to hear some of these shortcuts. 
TV Monitor
TV Monitor
4/8/2016 | 1:03:13 PM
Re: Ericsson

"Chinese State bank must be very proud."

Well, Chinese state-owned banks do this for missiles, bullet trains, and infrastructure too.
4/8/2016 | 12:50:06 PM
Re: Ericsson
Chinese State bank must be very proud.
TV Monitor
TV Monitor
4/8/2016 | 10:46:39 AM
Re: Ericsson

"is there any single post in which you mention *neither* 28 GHz nor Samsung?"

Sure, ones about women in telco.

Anyhow US 5G = 28 Ghz = Samsung. This formula stands because no one else has an operational 28 Ghz 5G system ready to go by 2020.

It's kind of stunning to see Ericsson's network business fall from grace so quickly, this is like witnessing the collapse of mobile division all over. Yet no one at Ericsson seem to be alarmed or even understand what kind of situation they are in right now, or what the future holds for them in 5 years.
4/8/2016 | 6:57:21 AM
Re: Ericsson
TV Monitor,

is there any single post in which you mention *neither* 28 GHz nor Samsung?

Expressing opinions in the posts makes them more interesting (and less annoying), compared to vulgar marketeering.

TV Monitor
TV Monitor
4/7/2016 | 2:32:41 PM
Re: Ericsson
Ericsson's future looks bleak.

According to Verizon's 5G test license filing to FCC, Ericsson doesn't have a functional 28 Ghz tech, they only have a 15 Ghz tech which happens to interfere with US military equipment and cannot be commercially deployed in the US. Samsung's going to be the king of 5G era in the US, with Ericsson pushed out to backend roles.

Huawei also doesn't have 28 Ghz tech either, but at least Huawei has China and Japan markets to look forward to.
4/7/2016 | 12:28:56 PM
Being in the global telecom competitive intelligence business, we are constantly doing primary research into competitors for our clients.

Ericssons main issue is not technology it's culture - where did/does the arrogance come from?
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