Huawei increased dominance in 2016 but profits under pressure

As Ericsson follows Nokia into a restructuring of its management team and product portfolio, Huawei’s 2016 results highlight one key reason why they need to change so urgently. The Chinese firm’s sales rose by almost one-third last year, a year when its two key rivals struggled with slowing markets and saw their revenues fall by about 10% apiece.

Indeed, Huawei made more revenue in 2016 than Nokia, Ericsson and ZTE put together (though it does have a broader product set including enterprise). But even Huawei faces the challenge of shrinking margins in the telco infrastructure space, reporting about the same net income as in 2015, after three years of impressive profits growth.

In 2016, overall revenues were up 32% on those of 2015, to CNY521.6bn ($75.7bn). Net income was flat at CNY37bn ($5.4bn), ending a three-year run in which profits were up by about one-third each time. There was also pressure on operating margins, which were 9.1% last year, down from 11.6% in 2015 and 12.2% in 2013. The annual report shows that Huawei has increased its spending, especially on R&D, which was up 28% year-on-year to CNY76.4bn ($11.1bn), as well as sales and administration, up 39% to CNY86.4bn ($12.5bn).

Huawei’s leadership is certainly not getting carried away with the firm’s growing market lead. As well as the squeeze on profits, the company is still excluded from strategic infrastructure projects in the US, and faces restrictions, in the name of security, in other countries too. In a Chinese new year message, CEO Eric Xu said the company must avoid “blind optimism and rhetoric about Huawei as an industry leader”, and cut back on “empty and extravagant marketing events and conferences”.

Then, at Mobile World Congress this year, he told LightReading that the carrier business, which accounts for 56% of revenues, would see a falling rate of growth for the next five years, acknowledging that event 10% a year would be a “stretched target”.

By contrast, however, enterprise and handset businesses are expected to grow by about 30% a year each, which Xu hopes will help to achieve a five-year target of doubling annual revenues from their 2016 level to $150bn in 2021. This indicates the benefits of Huawei’s diversified set of businesses – and a reason to be nervous about Ericsson’s new strategy, which has seen new CEO Börje Ekholm backing away from his predecessor’s diversification strategy and focus in on traditional areas of strength. One factor in that decision may have been Huawei itself, and the difficulty of competing in areas like telco cloud when the Chinese firm is far better established there.

In other words, Huawei has the same pressure on its carrier infrastructure business as its rivals – slow operator spending, the commoditization of network and shift to software-driven deployments, the hiatus before 5G kicks in – but it has more mature alternatives to fall back on.

In its 2016 report, the carrier business’s sales were CNY290.6bn ($42.2bn), up nearly 24% year-on-year despite Xu’s pessimism about this sector. Huawei said this growth came from its focus on digital transformation and helping carriers to adopt cloud, video optimization and IoT platforms.

The enterprise unit saw revenues rise by 47% to CNY40.7bn ($5.9bn), while consumer (mainly devices) contributed CNY179.8bn ($26.1bn), up 44%. Smartphone shipments were up 29% to 139m units, and Huawei is now the world’s third largest smartphone vendor after Samsung and Apple.

Regionally, China remains by far Huawei’s largest market, with sales up 41% to CNY236.5bn. This was also the highest growth rate of any region, reflecting the company’s home advantage as Chinese operators roll out significant 4G, cloud and other deployments. The second largest region was EMEA, up 22.5% to CNY 156.5bn; followed by non-China Asia-Pacific, up 36.6% to CNY67.5bn. Of course, the Americas is always hit by the US restrictions, and growth here was modest at 13%, to reach CNY44bn. Other markets added a further CNY17bn.

“Huawei was operationally healthy in 2016, with ample cash reserves, a solid and sustainable capital structure, and high resilience against risk,” said CFO Sabrina Meng. “In 2017, we will continue to boost the efficiency and quality of our operations to ensure solid growth.”