Huawei’s Target of $150bn revenue by 2020 – Part 2

2016 financial results (continued)

Breakdown of Huawei 2016 and 2015
revenue by business group (RMB/$ millions), with RMB growth rate and share of
corporate sales:

Commentary

It is worth noting that while the
two numbers may not be exactly comparable Huawei’s $41.8 billion for its
Carrier Business in 2016 is about 60% larger than Ericsson’s $26 billion for
the same period. If Ericsson shrinks a further 6% in 2017 and Huawei grows by
17% Huawei will end up in nine months time about twice the size of its nearest
competitor, and this scenario is not too unlikely.

Ericsson is now going through the
kind of heavy restructuring from which companies almost never recover (since,
to frame a medical analogy, surgery, or cost cutting, applied under panic
conditions can often result in as much serious damage to healthy tissue as to
those parts that are its main target). It is certainly a remarkable
transformation in a relationship which only a couple of years ago was that of
two strong but equal peers.

It should also cause some concern
at U.S. majors such as AT&T and Verizon (forced by pressures from various
sources in the U.S., including some elements of the security services, from doing
any business with Huawei), who may see the possibility in a projected future
scenario that they could start to fall behind technically and commercially
because they were not allowed to do business with the world’s largest
communications equipment producer.

Looking at Huawei’s Enterprise
Business it also becomes clear why Cisco, despite its heavy year on year
investment in reputedly market-leading fast growing acquisitions, is having
difficulty even maintaining zero growth. The Huawei business was only founded a
few years ago and is already one of the largest companies in its field globally,
adding over $2 billion of new business every year. Whilst possibly half of
Huawei’s $2 billion annual addition may well come from new opportunities it has
created through technology development and custom engineering the other $1
billion is probably being filched from existing business at traditional
competitors, of which Cisco is the largest.

This level of competition is likely
to accelerate. In September 2014 Eric Xu, Huawei’s acting chief executive, told
The Wall Street Journal in an interview that Huawei was aiming by 2019 to build
a $10 billion sales level for its information-technology infrastructure
business, consisting mainly of computer servers, storage and data centre
management; two years later in September 2016 rotating CEO Guo Ping confirmed
that Huawei was dedicating $1 billion annually, or about 10% of its R&D
budget, to that particular initiative.

Breakdown of 2016 and 2015 revenue
by gross geographical region (RMB/$ millions), with RMB growth rate and share
of corporate sales:

Commentary

A geographical breakdown of revenue
by companies are often the least useful sets of information because they are so
broad and include very often such a disparate set of economies. In EMEA, for
instance, is it useful to include Saudi Arabia with Zimbabwe or the Central
Africa Republic, or within the Americas Haiti with Canada? However, some
relevant observations can be made on the above. The first and most obvious one
is that contrary to the idea of Huawei diversifying rapidly across the globe
and away from its home market, in practice in 2016 Huawei’s Chinese business
grew considerably faster than its business in the rest of the world. More
specifically, Huawei’s business outside China grew at around 25.4% from RMB
227,319 in 2015 to RMB 285,062, not much above half the 41% growth in China.
However, this is more consistent with at least part of reality than one might
think.

China’s growth in GDP in 2016
according to the IMF was 6.6%, compared to global growth of 3.1%, and is
currently predicated to grow at 6.5% in 2017 and 6.0% in 2018. Obviously that ratio
of 2 to 1 between China and the world as a whole is even better comparing China
with the rest of the world. So that 41% compared to 25.4% starts to look quite
logical. Also, Huawei is spending a great deal of money on R&D and it is
obviously fairly practical for the company to test this innovation at various
levels in its home market first. However, the counterargument is that looking
at the ratio of Huawei’s business to GDP for the various geographies for which
it provides revenue data those ratios vary dramatically.

Roughly speaking, the global
nominal GDP of just over $75 billion is split as far as the Huawei regions are
concerned $11 billion for China, $25 billion for EMEA, $27 billion for the
Americas, and $12 billion for Asia Pacific, plus other. Therefore Huawei does
about five times as much business in China compared to China’s GDP as it does
compared to the rest of the world, and in particular for the Americas the
disparity in the ratios is in the region of 15 to 1. That probably means both
that Huawei has an excessive share of its home market and could be at risk as
other Chinese companies develop an interest, often through partnerships with
western companies, and also that Huawei is still very underrepresented outside
China.