Telecom Titan

Huawei Technologies rises in global prominence as an innovative telecom equipment maker

By HU YUE

While the global telecommunications industry continues to reel from the worldwide recession,Huawei Technologies Co. Ltd.,China’s top telecom equipment manufacturer, is staging a swift and defiant surge.

The Shenzhen-based company announced on January 4, 2010 it had raked in more than $30 billion in sales in 2009, representing a robust increase of 28.8 percent year on year.

The private company did not disclose financial details about its specific businesses, but Ren Zhengfei, founder and president of the company, said its sales of both optical network equipment and professional services soared more than 30 percent year on year.

“We are on track to reach the target of $36 billion in total sales in 2010,” said Ren.

Huawei is now one of China’s fastest rising telecom providers.Throughout 2009, the company clinched a number of big telecom orders in China, where major mobile operators set out on a spending spree to establish thirdgeneration networks. The surge helped domestic markets account for 53.5 percent of Huawei’s total revenues, up from 25 percent in 2008.

Meanwhile, its combination of low prices, aggressive marketing and product quality have made it a welcome presence in overseas markets. According to data from the U.S. market research company Dell’Oro,Huawei’s global market share almost doubled to 20 percent by the end of September 2009 from a year earlier, making the company the second largest telecom equipment supplier after Ericsson.

The turbo-charged growth comes as telecom-related orders around the world dry up. The economic downturn has forced telecom carriers to cut back on expenses,leaving equipment makers in the doldrums.Canada’s Nortel Network Corp., one of the world’s largest telecom equipment makers, fi led for bankruptcy protection in the United States and Canada in January 2009,and other major vendors, such as Alcatel-Lucent S.A. and Cisco Systems Inc., are enjoying slower growth, if even that.

But analysts believe the downturn provided a powerful catalyst for Huawei to rival the established foreign vendors in their own backyards.

As telecom carriers become more price conscious, Huawei has made gains to win a larger piece of the shrinking global telecom pie, Zhang Yu, a senior analyst with the Beijing-based consulting firm BDA China Ltd. (BDA), told Beijing Review.

The mergers between Alcatel and Lucent and the joint venture between Nokia and Siemens gave Huawei sales opportunities it wouldn’t have been presented had there been more competitors in the market, he said.

Even in the United States, a market it has previously had trouble entering,Huawei is laying a solid foundation for future expansion. In August 2009,the U.S. wireless carrier Clearwire added Huawei to its supplier list of base stations and other key infrastructure parts under a three-year contract. This exemplifies how Huawei is moving beyond China and other emerging markets to tap into established markets in Europe and North America.

“It seems that Huawei has obtained substantial market traction that will be hard to slow,” said a research report of BDA. “But the company will have a long way to go before it poses a real threat to Ericsson.”

Huawei’s rise to telestardom has not been without risks. The appreciation of the renminbi against the U.S. dollar and other currencies led to a loss of $776 million in foreign-exchange settlement for the company in 2008. Worse still, their low-pricing policy put a squeeze on its profit margin, which remained at a low 6.28 percent in 2008, a sharp decline from 19 percent in 2003.

Meanwhile, rapid increases in accounts receivable are mounting pressures on Huawei’s balance sheet, forcing the company to take on short-term debts to support business expansions.

As an unlisted company, Huawei enjoys the flexibility to operate at lower margins without coming under shareholder pressure, but questions were eventually raised concerning the financial distress rippling throughout the management processes. The company’s average number of days’ sales in inventory, a measure of how long it takes a company to turn its inventory into sales, was more than 13 weeks in 2008, compared with 10 weeks for Ericsson and Alcatel-Lucent.

“We are grabbing bigger orders outside China these days, but sometimes even I have no clue whether they are making money,”said Ren at a corporate meeting in early 2007.

In response, Huawei in June 2007 initiated a sweeping restructuring plan in an effort to streamline corporate management and shore up its balance sheet. It farmed out non-essential businesses to focus on core products with higher added value, while strengthening the management of its supply chain and risk control.

While this helped the company set up a firewall against financial risks, what really set Huawei apart from its fellow vendors was a deep-rooted commitment to innovative technological competence and product quality.

To this day, the company insists on spending 10 percent of its revenues on research and development, which involves 43 percent of its 87,500 member staff. These stiff efforts have rewarded the company handsomely with a comprehensive product portfolio—from optical switching technology capable of maintaining tens of millions of lines through one fiber cable, to the SingleRAN (single radio access network),a wireless network that allows mobile operators to save costs by operating separate networks.

In November 2009, Huawei beat Ericsson and Nokia Siemens to score a deal with Norway’s largest telecom operator, Telenor ASA. Under the six-year contract, which includes services and maintenance, Huawei will provide the Norwegian carrier with telecom equipment based on fourth-generation standard,known as Long Term Evolution (LTE),which offers cheaper operating costs and supports faster data uploads and downloads for mobile devices.

“This is the biggest upgrade of the mobile network in Norway we have ever carried out,” said Ragnar Kaarhus, CEO of Telenor,who attributed the choice of Huawei to“technical quality and reliability of largescale operations.”

Goldman Sachs predicted that Huawei,with its world-leading LTE technologies,will bask in the glow of the worldwide transition to 4G. ■