Have Devices Overtaken Networks as Huawei's Biggest Unit?

In what seems like a fierce rebuke to its critics, China's Huawei has trumpeted a sales figure of $108.5 billion for 2018, up from revenues of $92.5 billion a year earlier, with Huawei claiming a 21% increase in sales. (See Huawei Expects 2018 Revenues of $108.5B.)

Even if Huawei Technologies Co. Ltd. hadn't faced a security backlash in several countries in the second half of the year, that would be impressive. Ericsson AB (Nasdaq: ERIC) reported virtually no year-on-year change in revenues for the first nine months of 2018, while sales at Nokia Corp. (NYSE: NOK) were down 5% (although it claims to have seen zero change in constant currency terms). Even with a major improvement in the final quarter, their performance would look shabby alongside Huawei's. (See Where Huawei Fears to Tread, How the West Can Hurt Huawei, Nokia Warns of Job Cuts in €700M Shake-Up and Ericsson Corruption Scandal Sullies Strong Q3.)

Yet, as they puzzle over Huawei's earnings update, their real interest will not be in the Chinese vendor's headline sales figure, but in how much of its growth came from the networks market they contest. And while Huawei has yet to provide any breakdown of results, available data and market sentiment suggests its revenue gains were fueled largely by sales of consumer devices, which Ericsson and Nokia gave up on several years ago.

Take Huawei's performance in 2017, for starters. While revenues that year were up nearly 16%, the increase was driven mainly by device sales. Huawei's consumer business, which makes end-user gadgets, reported revenue growth of nearly 32%, to about 237.2 billion Chinese yuan ($34.6 billion, at today's exchange rate). Although Huawei's enterprise arm managed an increase of more than 32%, it remains far smaller than other units, generating just RMB54.9 billion ($8 billion) in revenues for 2017.

So what happened at the networks division that competes against Ericsson and Nokia? Its sales rose only 2.5%, to around RMB297.8 billion ($43.4 billion). That is much better than either Ericsson or Nokia managed, but it is just a fraction of the headline increase. And it is certainly not the kind of growth that gets executives dancing a New Year's conga around the boardroom table. (See Huawei Shrugs Off Challenges With Surge in H1 Profit.)

The other big clue Huawei has provided is the detail about unit shipments. In 2017, Huawei shipped a total of 153 million devices, some 14 million more than it sold in 2016. Last year, unit sales hit 200 million, representing an increase of 47 million from 2017.

Average selling prices seem likely to have risen, too, as Huawei pushes into the yuppy end of the market. A very rough calculation, which ignores sales of other types of device, shows that Huawei's consumer business made about RMB1,551 ($226) in revenues for each smartphone it sold in 2017. The corresponding figure for 2016 was just RMB1,294 ($189).

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In July 2018, market-research firm IDC reportedly said that Huawei had seen major growth in the "$600 to $800 segment," thanks to its launch of high-end handsets like the P20 and P20 Pro. If revenues per smartphone sold rose by the same percentage last year as in 2017, the figure would be RMB1,859 ($271). At today's exchange rate, that would leave Huawei with about $54.2 billion in revenues from its consumer business.

This would mean just $54.3 billion came from Huawei's carrier and enterprise divisions -- up from about $51.4 billion in 2017 based on exchange rates at the end of that year.

Of course, all of this is pure speculation. Without any increase in that crude metric for revenues per smartphone sold, Huawei would have generated about $45.2 billion at its consumer business and as much as $63.3 billion from the carrier and enterprise units. In that case, carrier and enterprise sales would be more than 23% higher than in 2017, a sharp improvement on the 6.5% sales increase at these units between 2016 and 2017.

What cannot be denied is that Huawei is increasingly reliant on its devices business for sales. If it has not already happened, the devices business seems on course to overtake the networks unit as Huawei's biggest revenue generator, with the Chinese vendor now producing high-end handsets to rival the very best from Apple Inc. (Nasdaq: AAPL) and Samsung Electronics Co. Ltd. (Korea: SEC).

Indeed, given the network restrictions that some countries and operators have already imposed on Huawei, the devices business may end up as an even more important engine of growth for the company this year. Unless the attention of the world's regulators and security watchdogs turns to Huawei's smartphones, that is.

— Iain Morris, International Editor, Light Reading

iainmorris 1/3/2019 | 3:16:52 AM
Update First paragraph has been updated to indicate that Huawei is claiming a 21% increase in sales last year.
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