Huawei and ZTE resilient under pressure, buoyed by handset business

Huawei is under pressure on many fronts, amid accusations of cybersecurity and sanctions violations, and US pressure on its allies to impose bans on the vendor in 5G or critical infrastructure networks. However, the Chinese firm still managed to turn in full year sales growth that was miles ahead of its rivals’. While it reported a revenue leap of 19.5%, to cross the $100bn mark for the first time, Ericsson announced an increase in 2018 sales of 1%, and ZTE – also under pressure from the USA and other governments – suffered a fall of 12.4%.

ZTE’s year from hell – which included a temporary ban on buying components from US firms, a move that almost sunk the company – resulted in an expected full year loss of almost RMB7bn ($1bn), but the company said it is already on the way to a turnaround, and is predicting a return to profit in the first quarter of fiscal 2019.

Meanwhile, Huawei survived its own challenging year thanks in large part to its handset business, which is less susceptible to international sanctions (though the major US operators are generally refusing to sell its products now) – this division’s sales overtook those of carrier equipment for the first time in 2018. The whole group announced a net profit of RMB59.3bn ($8.66bn), up 25% on 2017, on revenue up 19.5%, to RMB721.2bn ($105.2bn).

By contrast, for full year 2018, Ericsson reported sales up just 1 % to SEK 210.8bn ($22.7bn) though it did reverse 2017’s huge operating loss of SEK34.7bn, with operating income of SEK1.2bn ($129m).

Meanwhile, ZTE said it is expecting a first quarter net profit of at least RMB800m ($119m), after 2018 results which included a 21.4% fall in revenue to RMB 85.5bn and a net loss of almost RMB 7bn ($1bn), compared with a net profit of RMB4.55bn in 2017.

Like Huawei, ZTE faces the risk of being excluded from 5G roll-outs in countries beyond the USA. In developed markets in Europe and Asia, this will make less difference than it will to the larger Chinese firm, since ZTE has had far less success with operators in those countries anyway. It is mainly focused on China and on emerging economies in Asia and Africa on the infrastructure side, though it sells its handsets worldwide.

ZTE said it invested 12.8% of its revenues in R&D in 2018, with a particular emphasis on 5G. It added that it was working with “30 global operators in 5G, with the shipment of Massive MIMO base stations reaching 10,000 and more than 400 NFV commercial and proof-of-concept cases worldwide.” Huawei has previously said it spent $800m on 5G R&D alone last year.

The larger firm has also made a strong start to the year, and says its revenues in January and February were up by as much as 30% on the same two months in 2018. But the trade and security wars with the USA and others are starting to impact its performance, especially on the cashflow front. Huawei has been stocking up on raw materials and components, and last year, despite the good revenue and profit figures, operating cashflow fell by 22.5% to RMB74.7bn ($11.1bn), while inventory leapt by 28% to RMB375bn ($55.9bn), accordin to the annual report.

Rotating chairman Guo Ping said Huawei had been forced to increase its inventory “to prepare for uncertainties” such as a possible ban on buying from US suppliers, like that previously imposed on ZTE. He told analysts that his firm had made a contingency plan several years ago in anticipation of possible moves of this kind by the USA.

The handset division’s sales were up 45% last year to RMB349bn ($52bn), as Huawei overtook Apple to become number two in the market after Samsung. And the enterprise division passed the $10bn mark for the first time, with sales up 23% to RMB74bn.

By contrast, the carrier business – once by far the largest – saw its sales fall by 1.3% to RMB294bn ($43.8bn), accounting for just 41% of the total. Huawei said this trend would reverse when 5G spending got into full swing, an assertion repeatedly made by Ericsson too. Huawei says it now has commercial 5G deals with over 30 operators and it has shipped more than 40,000 base stations.

Geographically, China accounts for 51% of total sales.