By Claude Barfield
In recent days, Chinese telecom giant Huawei has celebrated the return of Meng Wanzhou, daughter of Huawei founder Ren Zhengfei and Huawei’s former cheif financial officer who was detained for three years in Canada after charges of violating a US ban on business deals with Iran. Freed last September after a compromise deal with US authorities, Meng has now been promoted to one of Huawei’s three rotating chairmen. Ren had previously stated that his children would not lead the company after his retirement, but recent setbacks seem to have caused a dramatic change in plans—most particularly that the company is being “slowly strangled” by a successful ban on advanced semiconductors.
To review, Meng led Huawei’s closely watched annual meeting on earnings and future plans. Admitting the company had been “under a lot of pressure” in recent years, she stoutly argued that “this has made us more united and has made our strategy more clear.” In 2021, Huawei’s revenue fell 29 percent to about $100 billion, depressed by a steep decline in smartphone sales and decreasing revenue from its core business of selling baseline equipment to telecom operators. Profits for the year, however, rose by a record 76 percent, largely fueled by the sale of Huawei’s mobile phone unit to a government-backed consortium.
Despite Meng’s upbeat optimism, realities behind the current numbers portend daunting challenges for the company. On the plus side, Huawei is aware of threats to its core equipment business and is touting a shift to software and a strong investment in cloud computing services, which are not dependent on the high-end chips and tools blocked by the US. Though yet a small player worldwide, Huawei has emerged as a large competitor in the Chinese cloud computing market with a 17 percent market share, behind Alibaba’s 33 percent. Further, though Huawei’s cloud business grew by over 30 percent in 2021 (to $3.2 billion), it is still dwarfed by international cloud computing giants such as Amazon Web Services, which logged $62 billion last year.
Huawei has always prided itself on technological prowess, backed by huge investments in research and development (R&D) and engineering talent. In juggling its pressed finances this past year, it maintained high R&D spending and did not cut its technical workforce. It could do so, however, by shedding significant parts of the company and cutting employees who staffed its well-regarded services, particularly for baseline telecom (i.e., 4G and 5G) equipment. In the future, something’s got to give; Huawei cannot keep up high spending on R&D and service staffing without drastically cutting into its profit margins, undercutting its highly regarded service backup, or more generally jeopardizing its future by shedding corporate functions. Further, there are real doubts that the thousands of excellent R&D hardware engineers can easily be converted to software geniuses.
Still and all, more than 80 percent of Huawei’s revenue comes from network products and gadgets, so the center of gravity will remain on hardware for 5G wireless equipment (and, later, for 6G). Here the picture remains bleak—at least for the immediate future. A small bright spot, and holding action, is found in the company’s success in supplying highly sophisticated 5G private networks in a variety of industries—such as shipyards, coal mines, chemical factories, and other industrial sites—with the aim of automating labor-intensive or dangerous industrial processes. In 2021, these projects in China generated some $1.2 billion—or about a third of world production, more than the revenue in Europe and North America combined.
But all of these maneuverings are dwarfed by Huawei’s inability to defend against the US ban worldwide on advanced chips and tools under the so-called “entity list” administered by the US Department of Commerce. As a portent of things to come, in 2021, Huawei sales to telecom operators fell 7 percent while those of its rivals—Ericsson and Nokia—rose. As Stefan Pongratz of the Dell’Oro Group notes, Huawei remains the largest player in the worldwide telecoms equipment market, but this is the result of its near-monopoly position in the giant Chinese market. Outside of China, Nokia and Ericsson are essentially tied for market share with 20 percent each. Huawei trails at 18 percent.
Going forward, the US advanced chip and equipment ban will take an ever-increasing toll as Huawei runs out of the chip stockpile it amassed in anticipation of US action. (Chinese companies are years behind on producing these advanced chips.) Thus, though some knowledgeable US trade experts expressed great doubts about the aforementioned bans (not least because of their understandable distrust of then-President Donald Trump’s erratic trade policy), for the near and intermediate future, the policy—carried on by President Joe Biden—seems to be paying off.
Another factor not explored here is how Huawei, like other companies, could be dragged into the Russia-Ukraine conflict.
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