Huawei Follows ZTE to Lower Profits 继中兴之后华为利润也降低

By newsdoug on April 24, 2012

China’s reputation as a land of copycats seems like a fitting backdrop for the latest earnings from telecoms equipment leader Huawei, which has mimicked crosstown rival ZTE (HKEx: 763; Shenzhen: 000063) in reporting sharply lower profits as each makes a big push into the new product areas. The earnings report must come as a mild shock to Huawei watchers, who were used to seeing the company notch strong profit growth in the last few years as it became China’s first tech exporting superstar. The company’s profit last year tumbled by 53 percent to 11.6 billion yuan, even as its revenue grew 12 percent. The profit decline marked a sharp turnaround from 2010, when Huawei posted 30 percent profit growth on a 24 percent rise in revenues. (previous post) The latest results look quite similar to ZTE’s, whose profit also plunged 37 percent last year as its revenue grew 23 percent. (previous post) The companies’ parallel results shouldn’t surprise anyone too much, as both are facing similar challenges for their core telecoms equipment business. On a broader basis, both have seen sales slow due to the weak global economy. The companies are also facing stiff resistance in some of the world’s most developed and lucrative markets, such as the US and Australia, where politicians are blocking their entry over suspicions that both are spying arms of Beijing. The 2 companies have responded similarly to the challenges they’re facing, both looking to new product areas to offset slowing sales for their networking equipment. Both are making an especially strong push into cellphones, with ZTE’s chairman saying on Monday his company’s smartphone sales would double this year as part of its aggressive expansion campaign. (English article) The slight difference in the 2 companies’ strategies, and possibly the reason for Huawei’s relatively worse performance to ZTE’s, seems to be focus. Whereas ZTE has quite definitively placed its future bets on cellphones, Huawei seems to be spreading its bets around more, announcing other initiatives in areas ranging from cloud computing to information technology (IT) services. Investing in a wider range of options may be a safer route because obviously not all new initiatives will succeed. But it’s also more expensive, as each new area requires development of new products, as well as sales and support infrastructure. From my perspective, I have to say that I slightly favor ZTE’s focused approach, as it is clearly determined to become a handset leader and is quickly building a global reputation as a maker of inexpensive, quality products. But as I’ve warned previously, betting so heavily on one area could also eventually bankrupt ZTE if the company doesn’t quickly build the business into a strong profit center over the next 2 years.

Bottom line: Huawei’s profit slide and slowing revenue growth parallel that of ZTE, as both invest heavily to diversify beyond their core networking equipment business.

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