TELECOMS: Huawei Beefs Up IT Spending, Tie-Up Ahead?

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Bottom line: Huawei’s new push into IT services could do well due to the company’s strong background in telecoms products, and could see it form a major partnership in the area with a big global player.

IT services tie-up ahead for Huawei?

Networking equipment giant Huawei is continuing its diversification, with word that it’s planning a major push into the market for information technology (IT) services that could put it into direct competition with such giants as IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ). But perhaps more intriguing is the possibility that Huawei could form a major partnership with one of the big foreign names, amid a rise in such pairings due to restrictions on foreign firms under China’s new national security law.

Huawei began its life as a maker of networking equipment for big telecoms carriers, but more recently has tried to diversify as the global market for those products slows. It has pushed into networking equipment for enterprises, and more recently has found growing success with smartphones. But IT services has remained a relatively small portion of the business, expected to reach $2 billion in sales this year. That would be just a tiny portion of the 288 billion yuan, or about $45 billion, that Huawei posted in revenue last year.

According to the latest reports, Huawei is aiming to boost revenue from its IT services business by a hefty factor of 5 over the next 5 years, with a target of $10 billion annually by 2020. (English article; Chinese article) Huawei announced the figure at a cloud computing conference in Shanghai, adding that cloud computing and data services would be a big source of the future growth.

Huawei is only one of many domestic and foreign companies chasing the Chinese cloud market, with other domestic heavyweights like Alibaba (NYSE: BABA) and foreign names like Amazon (Nasdaq: AMZN) all looking for a piece of that business. Despite its lower profile, Huawei’s background as a telecoms company does give it some advantages over the others, since cloud services are designed around networking and storage equipment.

Huawei also announced a new partnership with US tech giant Honeywell (NYSE: HON) as part of its IT services push, though I expect that tie-up is mostly a supply agreement. But perhaps this big IT services push could soon produce another more significant tie-up like several others that we’ve seen recently between foreign tech giants and Chinese partners.

Pushed by National Security Law

A major force driving this wave of partnerships is China’s new national security law, which places heavy restrictions and other requirements on foreign IT equipment and services suppliers that sell to the government and big state-owned firms. Beijing has also made clear that it would prefer the big global names to form joint ventures with local partners if they want to continue selling their products and services in China.

Those pressures were probably a factor behind Hewlett-Packard’s decision earlier this year to sell a majority stake in its China-based H3C unit, a maker of networking equipment, to Beijing-based Tsinghu Unigroup. Intel (Nasdaq: INTC) also formed a major partnership with Unigroup last year, and IBM announced a major partnership with locally-based Inspur around that time. (previous post)

Huawei is largely seen as a solitary company that doesn’t form many major partnerships, though that’s not completely true. The company had an early joint venture making telecoms equipment with Germany’s Siemens (Frankfurt: SIEGn), and also partnered in a networking equipment joint venture with US player 3Com, which eventually became H3C and was acquired by HP.

While neither of those 2 joint ventures was hugely successful for Huawei, there’s no reason to believe the company might not try a new alliance as part of the bid to boost its IT services business. HP and IBM seem less likely as partners due to their previous commitments, but other names like Accenture (NYSE: ACN) and Dell could be candidates. Such a move could also give Huawei an important ally if and when it eventually tries to move into the lucrative global market for IT services.

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