Huawei Takes Global Networking Crown
Media are buzzing about the newly released annual results from telecoms equipment giant Huawei, though everyone is taking a different angle on the latest figures. Some are focused on the company’s return to strong profit growth, while others are highlighting its aggressive plans for the next 5 years. But my favorites are the headlines that trumpet Huawei’s ascendance to become the world’s biggest telecoms equipment maker, since it officially passed Sweden’s Ericsson (Stockholm: ERICb) in revenue terms last year. 
While winning the crown in a cutting-edge area like networking equipment is certainly a big accomplishment, I can’t help but make some comparisons to a similar recent rise for Chinese PC maker Lenovo (HKEx: 992). In that case, Lenovo passed previous global leader Hewlett-Packard (NYSE: HPQ) to become the world’s largest PC seller last year. But shortly later, Lenovo suddenly shifted gears and said it considered mobile device makers like Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930) as its main rivals, rather than PC makers like HP.
All this brings me back to the fact that the days where big telcos controlled access to communications could be nearing an end, as networking technology becomes more sophisticated and accessible to individual consumers and companies. That’s not to say that traditional telcos won’t exist for at least the next decade or more, though I do expect their spending to slow sharply as technology improves and becomes cheaper and more widespread.
All that said, Huawei certainly deserves some kudos for an annual performance that looks quite strong all around. The company’s profit jumped 34 percent to 21 billion yuan ($3.4 billion) in 2013, marking a second year of strong growth after the figure declined sharply in 2011. (English article; Chinese article) Revenue grew at a more modest 9 percent to 239 billion yuan, roughly the same as the previous year’s gains.
The company also gave quite a bullish target for the next few years, saying it aims to post $70 billion in revenues by 2018. That means it wants to nearly double its revenue over the next 5 years, which would require it to average annual growth in the 15-18 percent range. That certainly isn’t impossible, though it’s still a big increase from the last 2 years. What’s more, growth always becomes difficult to maintain as a company gets larger.
Huawei’s equivalent of $38.5 billion in revenue last year was enough to push it past Ericsson, which notched $35.3 billion in sales for 2013. Of course it’s worth noting that Ericsson is still squarely focused on selling networking equipment to big telcos, whereas such sales now account for just 70 percent of Huawei’s total. The remainder of its business is for networking equipment sold to corporate customers, and for consumer devices like smartphones. Both of those segments are growing much faster than traditional sales to telcos, which grew just 4 percent last year.
The smartphone gamble by Huawei and crosstown rival ZTE (HKEx: 763; Shenzhen: 000063) looks quite similar to strategies tried by older players Ericsson and Alcatel-Lucent (Paris: ALUA) in the past. Ericsson ended up putting its cellphone business into a joint venture with Sony (Tokyo: 6753), and recently sold out its stake to the Japanese firm. Likewise, Alcatel-Lucent sold its cellphone business years ago to China’s TCL (HKEx: 2618; Shenzhen: 000100).
So, what’s the bottom line in all of this new information? Most importantly, I have serious doubts about Huawei’s ability to hit its aggressive 2018 sales target, which is dependent on sharp growth in its smartphone and enterprise units. The company faces stiff competition in smartphones from a field of domestic rivals like Lenovo (HKEx: 992) and Xiaomi, many of which have much more experience with consumer devices. The company might post strong growth this year due to big new 4G spending by China’s telcos, but that growth is likely to slow sharply in the years after that.
Bottom line: Huawei is likely to post strong growth this year due to strong 4G spending in China, but could struggle after that as its newer smartphone unit faces stiff competition.
Related posts:
