Huawei’s Real Foe: US Or Slow Growth?
Embattled telecoms equipment makers Huawei and ZTE (HKEx: 763; Shenzhen: 000063) have scored a victory in the US with a new trade ruling in their favor, providing an important show that they can get fair treatment in the market. But that win is largely symbolic, since Washington has already informally banned the import of the technology at the heart of the trade dispute. Instead of US trade barriers, it seems the true enemy of both Huawei and ZTE could be slowing growth, with media quoting a Huawei executive saying the company only expects to post average growth of 10 percent over the next 5 years.
All this shows that it’s easy for companies to blame factors like bureaucracy and government obstacles for hindering their growth. But at the end of the day, the networking equipment industry, which is the core business for both Huawei and ZTE, is one that’s quickly maturing. As a result, we may never see a return to the heady growth days of the last 2 decades when nations spent billions of dollars on building state-of-the-art telecoms networks.
From that bigger picture let’s return to the latest headlines that say the US International Trade Commission (ITC) has ruled in Huawei’s and ZTE’s favor in a year-old technology infringement case bought by 2 smaller companies, Phoenix Digital Solutions and Patriot Scientific. (English article; Chinese article) The ITC’s ruling follows a similar one earlier this year in the same case, meaning both Huawei and ZTE are free to sell their technology, which involves 3G wireless equipment, in the US.
It’s not completely clear from the reports if the technology involved is used in big networking equipment, or in the cellphones that have also become a major part of Huawei and ZTE’s business more recently. But if it’s the former case, which seems likely, then this ruling won’t have very much impact for either company. That’s because both Huawei and ZTE were banned by Washington from selling their networking equipment in the US last year over national security concerns. Still, this ruling does seem to show that at least on technology and other trade-related issues, Huawei and ZTE can be more confident that they will get fair treatment in the US and other developed markets in business disputes.
That could be an important development for the future, though it’s unlikely to help in the near-term as both Huawei and ZTE see a sharp slowdown in their overall growth. A Huawei executive in Europe, Western European vice president for sales Gaston Khoury, is being quoted by media saying the company expects its business to grow by an average of 10 percent annually over the next 5 years. (English article; Chinese article) He adds that much of that growth will come from the company’s newer cellphone business, and its unit that sells products to enterprises.
That revenue forecast is in line with the 11 percent growth Huawei posted in the first half of this year and the 8 percent growth for all of 2012. But it’s still far slower than the strong double-digit growth figures it recorded for most of the 2000s, when its rapid expansion transformed it into the world’s second largest telecoms equipment supplier behind only Sweden’s Ericsson. (Stockholm: ERICb).
I’ve noted before that the world may not be big enough for both Huawei and ZTE to survive in their current form, as the global telecoms equipment market is likely to stagnate in the years ahead. Other former high-flyers in the space such as Motorola and Nortel have both disappeared over the last 6 or 7 years, and I still think it’s possible that ZTE could eventually suffer a similar fate. That means that while political news may make more interesting headlines for these 2 companies, their real enemy in the long run could simply be dramatically slowing growth in global telecoms spending.
Bottom line: A US trade ruling for Huawei and ZTE represents a small victory for both, but their real enemy is a maturing global telecoms market.
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