Is There No Stopping Huawei?

Defying the odds
What makes it even more impressive is that Huawei remains locked out of opportunities in the US market, where policymakers deem it (and ZTE) to be a security risk and have discouraged service providers from using Chinese equipment. Vast R&D resources, the backing of the Chinese government, a low-cost business model and an increasingly sophisticated set of products and services -- all these help to explain Huawei's dazzling growth. But it is sustainable?

ZTE already seems to have felt a pinch in the first six months of the year, having reported an increase in CSP revenues of as much as 30% in 2015. And the outlook is not favorable. "The development of traditional telecom industries will be subject to stronger challenges in the second half of 2016, given the slowdown in global economic growth and increasing uncertainties," said the company in its latest earnings report.

After spending heavily on the rollout of 4G services thus far, Chinese operators are set to cut back on capital expenditure in the coming months. That is bound to hit both Huawei and ZTE, which have attributed much of their recent growth to this market. Elsewhere, CSP customers of the Chinese vendors have also been tightening their belts amid economic concerns. Europe may be heading for another recession.

Huawei has defied the odds before, however. A downturn could even play into its hands, driving more service providers to scout for competitively priced alternatives to European and US suppliers. And its chief rivals are in a pickle. Ericsson is currently leaderless, having parted company with previous CEO Hans Vestberg in July, and has become too "reactive" to market circumstances, according to Bengt Nördstrom, the CEO of consultancy Northstream . Correcting that will be a Herculean task. (See Ericsson Board Has Been Asleep at the Wheel – Consultant.)

As for Nokia, it has yet to prove it can make a success of this year's takeover of Alcatel-Lucent (NYSE: ALU). While that deal fortified Nokia's portfolio of fixed-line and IP products, sales and profits at Nokia fell more sharply than expected in the April-to-June quarter. Analysts frequently pointed out that integrating such culturally different businesses, with their overlapping interests, would be onerous. With further job cuts on the cards, that process has yet to run its course.

Even so, the telecom market is in a state of flux that is worrisome for all of the big suppliers. While 4G rollouts are tapering off, 5G is several years away from commercialization. New entrants and technologies from the IT world are threatening the established order. Like Cisco, Ericsson and Nokia, Huawei is being forced to adapt. No one doubts it will continue to be a major player in the future. But if others cannot close the gap during this period of transformation, Huawei could become a dominant force. For those who believe great rivalries are as important in business as they are in sport, that would be troubling indeed.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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