Huawei: Manufacturer or Telco? 华为要做电信运营商？

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Chinese telecoms equipment giant Huawei is trying all kinds of tricks to jump-start its flagging growth in the face of a global slowdown and political obstacles in the West, but its latest move in the Middle East that will see it become a network operator looks a bit desperate to me, and also quite risky. The latest deal comes against a backdrop of slowing growth that has seen Huawei’s revenue increase less than 20 percent last year, ending years of much stronger gains.

Part of that slowdown was inevitable since the global market for telecoms infrastructure is limited, and Huawei is now the world’s second biggest player, only behind Sweden’s Ericsson (Stockholm: ERICb). Huawei and crosstown rival ZTE (HKEx: 763; NYSE: 000063) have also recently run into the added obstacles of protectionism in Europe and the US, where politicians are investigating the companies for receiving unfair state subsidies and also for posing a potential security threat.

In the face of such slowing growth and political resistance, Huawei and ZTE have turned to other product areas in bids to jump-start their growth. Both have invested heavily in building up their smartphone businesses, and Huawei is also investing heavily in developing cloud-based computing products and services. (previous post)

Now with this latest Middle Eastern deal, it looks like Huawei not only wants to build networks but also operate them, putting it in competition with big names like Vodafone (London: VOD) and China Mobile (HKEx: 941; NYSE: CHL). According to media reports, Huawei is in discussions that would see it manage fixed-line networks for 2 Gulf region telcos, Etisalat of the United Arab Emirates and Saudi Arabia’s Saudi Telecom. (English article) A Huawei executive said the company is also in talks with other regional operators for similar deals.

The reports don’t provide more specifics, but presumably Huawei is agreeing to operate the networks after building them for both Etisalat and Saudi Telecom. We saw a variation on this kind of deal recently, with ZTE paying to help build a wireless network in the Congo in Africa. ZTE was later looking to exit that investment, with reports last year that it was planning to sell its 51 percent stake to France Telecom (Paris: FTE).

It’s not uncommon for companies to help to build and finance projects in order to sell their products and services. But such a strategy is always a bit risky, as it costs big money for investment to finance projects and build new management teams, and there’s no guarantee of any quick or easy exit from such investments.

In this case, it’s not even clear that Huawei is even thinking of these network operation contracts as a short-term investment designed to get more sales for its core networking equipment business, or as a long-term new business area. But if it’s really thinking of entering the network operating business, regardless of its motivations, I would strongly recommend against such a move since it has little or no experience in that kind of operation and history has shown that hardware manufacturers seldom make good service providers.

Bottom line: Huawei’s foray into network operating services looks like a way to sell more of its telecoms equipment, but is likely to create long-term problems for the company.

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