The Dragon Readies for a Global Leap

Will geopolitical issues and concerns stymie the growth of Huawei globally? Will post-Snowden retributions from US lead to Huawei losing out on market share in the US and other developed economies? Will its sustained focus (at least till date) on the carrier segment only lead to deceleration, particularly when telcos across the globe are facing slowdown in business? Will its image as a Chinese company (other than security concerns, the perception of cheap, sub-standard equipment quality) hurt its ambition to become a global ICT major?

The answers to all these questions look to be in the resounding negative, going by the sentiments prevailing at the recent Global Analyst Summit of Huawei at its Shenzen Headquarters in China. And if sentiments should not be the sole yardstick in a hardcore business environment, the real proof of the pudding comes from some of the numbers presented during the Summit.

Sample some of these numbers: in 2013, Huawei grew by 8.5% to reach 239bn CNY ($39.5bn) from 220bn CNY the year before. This translates into a CAGR of 13% in 5 years. The net profit jumped by 8.8% tp 21bn CNY, up from 7.1% the year before.

While the carrier business at 166.5bn CNY (up 4%) was still the lifeline, both enterprise (15.3bn CNY with 32.4% growth) and consumer (57bn CNY with 17.8% growth) showed much faster traction. And while China at 84bn CNY (up 14.2%) contributed only 35% of the total revenues, rest of the world accounted for the remaining 65%.

How these numbers refute each of the concerns raised at the beginning may require a more detailed analysis? Though less in absolute numbers, the higher growth of the enterprise and consumer segments shows a marked transformation of Huawei into an ICT company from a communications technology vendor.

Channels Lifeblood for Enterprises

In his welcome address, William Xu, Huawei's Chief Strategy Marketing Officer said that ICT technologies represented by mobile broadband, cloud computing, big data analytics, the Internet of things and social networking will continue to reshape the world and Huawei is accordingly transforming itself to build a better connected world.

He added, "Against the backdrop of ICT convergence, Huawei has transformed and optimized our organizational structure to establish a new, more complete and well-rounded Products and Solutions group to develop innovative ICT products and solutions that will fully realize and leverage the competitive advantage Huawei has gained till date."

Paul Scanlan, President of Business & Network Consulting, Huawei provides further corroboration about this internal restructuring that has happened since 20th of February this year. The R&D set up for all sector except consumers has been homogenized under one entity. "The sales, marketing and delivery teams for carrier and enterprise businesses have been segregated. While the carrier continues to be a more direct business, the enterprise sales would be both direct and indirect (through channel partners) while delivery will happen more through system integrators."

Paul agrees that carriers themselves would continue to be some of the best enterprise customers too, the IT consumption by carriers would eventually be consolidated under the communications technology biz. In many cases, the operators themselves would act as the channel to market (for their enterprise customers), while in some cases there would be joint go-to-market for many deals with both operators and channel partners. Paul also stressed that Huawei would never impinge on competing agreements with partners for specific deals. "After all, they constitute 70% our lifeblood, and we will never disturb them."

Global Company, Local Workforce

Scott Sykes, VP, Media Affairs, Huawei, on other hand, focused more on positioning Huawei as a global company, albeit with a Chinese origin. He stressed on the fact that 65% of its revenues in 2013 came out on non-China geographies, and this, in turn, not just confirms its acceptance globally but also that Huawei has managed to leave behind a perception of being a low-quality Chinese manufacturer of telecom and IT equipments. The fact that this has been achieved in just 16 years (from 1987 to 1998 Huawei sold only in China) adds further impetus.

What gives further fillip to the fact that Huwaei aspires to be a global company today is their policy of having 95% local workforce in each country. "This helps the company understand the local dynamics much better and also helps in better cultural synergy," adds Paul. For example, in India out of 6000 workforce more than 95% are Indians. Local CEOs also lead to improved operational efficiencies; with the executive structures now put in place giving more regional independence becoming effective in April, the situation is bound to improve further.

Even within R&D there are local specializations which however have an impact globally. For example the 2500 R&D workforce in India (Bangalore) focuses on Java coding, the Russian team focuses on mathematical algorithms and the Canadian team on 5G. The Global NOC in Bangalore (only one outside China) addresses customers across the world.

No Security Threats from Huawei

The National Security Agency created "back doors" into networks maintained by the Chinese telecommunications company Huawei. The report comes from a document provided by the former NSA contractor Edward Snowden and disclosed by the New York Times and Der Spiegel. It added to embarrassment in US government circles, in light of an October 2012 US House of Representatives intelligence committee report which said US firms should avoid doing business with Huawei and another Chinese telecoms company, ZTE, because they posed a national security threat.

The Times and Spiegel reports said that in an operation code-named Shotgiant, the NSA gained access to the company's servers in Shenzhen, obtaining information and monitoring communications between executives. Among those whose emails the NSA was able to read was the president of Huawei, Ren Zhengfei. Huawei, which maintains operations in the UK despite all but ending its attempts to access the US market, due to government resistance, claims to connect a third of the world's population. It is also the world's third-largest maker of smartphones, after Apple and Samsung.

Notwithstanding the NSA allegations in US especially in the post-Snowden era, Xu expressed confidence Huawei, long hounded by U.S. lawmakers' accusations that it is a tool of Chinese state espionage, would not be negatively affected. "On the NSA ... it does not have a big impact on business growth," he asserted. The 1.4% decline in Americas revenue in 2013 (31.4bn CNY), is more due to US slowdown, rather than the NSA impact, asserts Xu. "But it has an impact on workloads, in communicating with and persuading current industry stakeholders (that products are secure), and that's more tiresome," he admitted. Sykes also admitted that with 65% of Huwei's revenues coming from outside China, the company to really indulge in what the NSA alleges is akin to committing ‘corporate suicide'.

What Lies Ahead

Xu also revealed at the Summit that the private company's system of rotating CEOs would end and Huawei eventually would be managed by a leadership team rather than an individual.While Xu gave no indication of when the new management structure would be in place, his comments shed some light on how the company intends to permanently replace powerful founder Ren Zhengfei, 69, as chief executive. "I can clearly tell everyone here that in the future the successor to Ren will not just be one person," Xu said.

Huawei introduced a rotating CEO system in 2011, where three top executives, Xu and deputy chairmen Ken Hu and Guo Ping, take turns as acting-CEO for six-month stints. Ren maintains his CEO title.

So what does this mean overall for the future? In the ultimate analysis, in the years ahead Huawei will be looking to move beyond the core carrier business and seize opportunities in enterprise as well as smartphones, which contributed the most to revenue growth in 2013.

Huawei expects its enterprise business revenue to reach $10 bn in five years, from roughly $2.45 bn in 2013.Its carrier business, where revenue growth is slowing, will shrink to 50 to 60 % of its total revenues in 2018, according to Xu, from about 70% last year.

Huawei's global service business, part of its carrier operations, is predicted to grow 17% in 2014, from 52 billion CNY ($8.34 billion) last year. The company also sees its investment in information technology to rise 14% in 2014, with a focus on 4G LTE and 5G high-speed mobile networks, and cloud computing, Fan Chen, vice president of accounting, said at the Shenzhen conference.

Huawei, the world's third-biggest smartphone manufacturer, booked 34% profit growth in 2013 and has targeted 2018 revenue to almost double the record reaped last year. The consumer smartphone business will primarily be driven by the channel, though Xu's assertion that Huawei would not focus much on traditional advertising medium might prove to be a spoke on its mission.

Branding enhancement is an on-going project for Huawei over the past few years. Shfiting from product-centric to consumer-centric is their highlight for this year.Open-channel retail-points have been playing an increasing role during Huawei's transition from a previous ODM / operator-centric business model to an OEM / own-branded business model. This year, Huawei will further solidify its global retail presence by setting up more branded shops, display zones and tables worldwide.

Rajneesh De

(rajneeshd@cybermedia.co.in)

The author was hosted by Huawei in Shenzen