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Is There No Stopping Huawei?

Iain Morris
8/26/2016

Sore losers about finishing third for Olympic golds, the Chinese have put together their own medals table, based on overall awards, to suggest this ignominy never occurred. But no such chicanery is necessary when it comes to measuring success in the global market for network equipment and services. Appraising the results of its rivals over the first six months, Huawei must have felt like Jamaica's sprint relay team, crossing the finish line far ahead of the chasing pack.

As in that race, the gap between Huawei Technologies Co. Ltd. -- China's biggest vendor -- and its rivals has continued to widen. In local currency terms, Huawei's revenues soared by 40% in the first six months, to some 245.5 billion Chinese yuan ($36.8 billion), compared with the first half of 2015. Sales at Sweden's Ericsson AB (Nasdaq: ERIC) sank by 7% over the same period, to 106.3 billion Swedish kronor ($12.7 billion), while Finland's Nokia Corp. (NYSE: NOK) suffered a 10% decline, to about €12.3 billion ($12.8 billion), and saw revenues at its networks business fall by the same percentage, to around €10.4 billion ($11.8 billion). San Jose-based Cisco Systems Inc. (Nasdaq: CSCO) did a little better, generating $24.7 billion in sales over its February-to-July half, 1.6% more than a year earlier. (See Huawei Reports 40% H1 Sales Growth But Margins Suffer, Ericsson 'Doubles' Savings Goal as Sales Slump, Cisco Throws 5,500 Overboard on Cruise to Richer Waters and Eurobites: Nokia Plans More Cost Savings.)

Revenues in 1H 2016 in US$ Billions (Today's Exchange Rates)
Source: Companies. Note: Cisco sales are for the February-to-July period, actually the second half of the company's financial year.
Source: Companies. Note: Cisco sales are for the February-to-July period, actually the second half of the company's financial year.

If Huawei claimed gold for sales growth, then ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), its smaller domestic rival, took silver. Reporting its own figures earlier this week, the company flagged a 4.1% rise in operating revenues, to RMB47.8 billion ($7.2 billion). Viewed as a team, the Chinese double-act of Huawei and ZTE are putting the global titans of the equipment industry to shame. (See ZTE Gains Ground on Ericsson, Nokia in H1.)

None of these companies are directly comparable, of course. Huawei and ZTE have massive consumer-devices businesses that are contributing to their growth. Cisco competes mainly in the enterprise sector, while Ericsson and Nokia specialize in carrier network equipment. Yet to varying degrees, all of them have a stake in the communications service provider (CSP) market.

Rate of YoY Revenue Growth in 1H 2016 (Local Currency Units)
Source: Companies.
Source: Companies.

While that market accounts for almost everything that Ericsson and Nokia's networks business do, ZTE generated about 60% of its sales from CSP customers in the first six months. Its "carriers' networks" business was also the fastest growing of its three divisions (the others being "government and corporate" and "consumer"), reporting a 5.1% year-on-year increase in revenues. Cisco does not break out CSP revenues but is estimated by Analysys Mason , a market research company, to have made about $11.1 billion in 2015, about 23% of the $49.5 billion it earned in sales between February 2015 and January 2016 (its last financial year). Assuming the proportion remained the same, Cisco should have made about $5.7 billion from CSP customers between February and July.

Unfortunately, Huawei remains secretive about the details of its success until the end of its financial year. But it dropped a few clues about growth at its three divisions (which closely resemble ZTE's) in its end-of-July press statement. "We achieved steady growth across all three of our business groups, thanks to a well-balanced global presence and an unwavering focus on our pipe strategy," said Sabrina Cheng, Huawei's chief financial officer. "We are confident that Huawei will maintain its current momentum."

Steady growth. Current momentum. Huawei's carrier business grew revenues by more than 21% in 2015, when overall revenues rose by 37% -- a slightly lower rate than over the first six months of 2016. If first-half CSP revenues accounted for the same 59% of total sales they did in 2015, Huawei would have generated about RMB145 billion ($21.7 billion) in this market between January and June, or 63% of CSP revenues over the whole of last year. That is an impressive sum, by any reckoning. (See Huawei: New King of the CSP Market.)

Next page: Defying the odds

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SrSoftwa13168
SrSoftwa13168
10/13/2016 | 3:35:49 AM
Chinese pruducts???
Chinese products are cheaper but not as per quality. Cisco/Ericssons/Nokia has there own standards and ethics. CSP's who are using Chinese product will soon realize this thing..
winddkny
winddkny
8/30/2016 | 10:08:54 PM
Re: unfair competition
unfair competition!! who cares??

Dengism: It doesn't matter whether a cat is white or black, as long as it catches mice.
nobody_elsewhere
nobody_elsewhere
8/30/2016 | 10:28:27 AM
unfair competition
In my opinion this is an unfair competition, the Chinese companies dont follow the same rules of the game, while Chinese companies benefit from full government support and financial aid provided via easy loans with low interest rates (if any)  from their government's controled banks, the European and American companies obey to the rules of the stock market and answer to shareholders. It is also known that Chinese companies benefit from a relaxed legislation when it comes to copywrites violations, which eventually allows them to save big budgets that would have been spend on R&D and real innovation rather than copy paste development, contrary to the European and American companies that spend huge budgets on R&D and development 
sarcher60555
sarcher60555
8/28/2016 | 7:44:19 PM
Re: It's a lottery
Tried to write this response on my Amstrad PCW8512 Word Processor and post it here but it doesnt have a browser.
Mitch Wagner
Mitch Wagner
8/27/2016 | 6:28:07 PM
Triple threat
Huawei and ZTE's foothold in the consumer, enterprise, and CSP markets are particular strengths for them. Not since Microsoft in the 1990s can I remember a company with similar breadth, and even Microsoft only had the first two of those markets.

These markets synergize. Users like to use the same products in the office as they do at home, and vice-versa.
iainmorris
iainmorris
8/27/2016 | 4:14:25 AM
Re: Huawei sales growth comes from consumer elelectronics with negative margin
It is true that Huawei did report consumer revenues separately, and so there is more detail than suggested in the story. However, the detail also makes our assumptions look realistic. The RMB77 billion it made from devices accounts for about 32% of overall sales - about the same proportion of total revenues generated from devices in 2015 figures. It also means that carrier and enterprise together generated about RMB168 billion in 1H 2016. If RMB145 billion of that came from carrier - as we have suggested - then RMB23 billion would be from enterprise, which compares very favorably with the RMB27.6 billion Huawei made from enterprise over the whole of 2015. Of course, it's possible that enterprise grew even more sharply. But even if Huawei made as much in the first half as it did over the whole of 2015, it would still have had to generate some RMB140.5 billion from the carrier business -- about 60% of carrier revenues in 2015.
AlokT518
AlokT518
8/26/2016 | 8:41:33 PM
Re: Huawei sales growth comes from consumer elelectronics with negative margin
Please check the facts, as reported.

Huawei generated sales revenue of CNY245.5 billion  ( up 40% y-o-y ) in H1 2016.

Huawei Consumer Business Group generated sales revenue of CNY77.4 billion (up 41% y-o-y) in H1 2016.

Thus, Huawei's B2B business segment including Carrier & Enterprise have generated very significant growth too. The company's operating margin was 12%.

http://www.huawei.com/en/news/2016/7/Huawei-Announces-2016-H1-Business-Results
http://www.huawei.com/en/news/2016/7/HW-CBG-Announces-2016-H1-Business-Results

During its annual Global Analyst Summit in April, Huawei's Eric Xu has stated the target to double the annual revenue from B2B units to $80 billion by 2020.

http://www.lightreading.com/data-center/cloud-strategies/huaweis-carrier-enterprise-sales-could-hit-$80b-by-2020/d/d-id/722537

 
TV Monitor
TV Monitor
8/26/2016 | 7:01:29 PM
Huawei sales growth comes from consumer elelectronics with negative margin
Huawei's sales growth comes mostly from its consumer electronics division selling smart phones, tablets, and laptop to Chinese domestic market and third world countries. This product line carries negative margin and Huawei loses money on them.

Huawei's profitable division, the network equipment division, is seeing a slowing sales growth as Chinese carriers have completed building out their LTE networks and Huawei must pursue 3rd world markets that are still building out their LTE networks on cheap Chinese loan.

The biggest problem for Huawei in the long term is that Huawei and ZTE have zero experience with mmwave 5G, because Chinese military satelites use 28 Ghz band so Chinese government has no plans to deploy mmwave 5G in China and go Sub 6 Ghz 5G only. With no mmwave 5G deployment in China, Huawei and ZTE cannot compete in mmwave 5G market in the US, Japan, and EU, and may have to pursuade other 3rd world markets to adopt Sub 6 Ghz 5G instead of more global mmwave 5G, assuming they have 600 Mhz of spectrum available below 6 Ghz.(200 Mhz per each network, three networks).

So things aren't as rosy for Huawei as it looks assuming Huawei's balance book is as what it says, since cooking books is not uncommon in China. Huawei can't continue to grow forever.
James_B_Crawshaw
James_B_Crawshaw
8/26/2016 | 4:25:35 PM
It's a lottery
If only the UK government had allocated lottery money to the telecom equipment industry instead of sport then instead of lots of Olympic medals we could have bailed out Marconi and still be in the major league of network gear :)
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