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Huawei’s R&D spend sets it apart from its rivals, but it still has major challenges

In recent years, Huawei’s results announcements and annual reports have been in painful contrast with those of its main mobile network rivals, achieving growth and profits when Nokia and Ericsson have often been struggling for either. Another aspect that will make depressing reading for the European majors is revealed in its newly published 2017 report, which shows that it invested over 2.5 times more in R&D than its key competitors – which suggests it will only widen the gap between them.

The report shows that R&D investment rose to $13.8bn in 2017, up from about $11.8bn the year before. The Chinese firm has already pledged to spend between $10bn and $20bn a year in R&D from this year on.

Of course, it has a wider portfolio than Nokia and Ericsson, with more enterprise and data center activities, and a major device business, but the figures still make concerning reading for investors and customers of the rival firms. Ericsson did increase its R&D spending by 18.4% last year, but still only reached $4.5bn. Nokia spent $5.2bn, but that was slightly down on 2016’s figure.

Other highlights of Huawei’s full year figures, however, show that the company will not have everything its own way. Its R&D spending is still far lower than that of Google on $16.6bn in 2017 and only just ahead of Microsoft’s on $13bn, and Huawei has to consider those companies as rivals just as much as Ericsson and Nokia, given that it aims to play in cloud platforms and AI, and other areas close to the heart of the webscale firms.

And in its narrower telco networks space, for all the vendors, the market is increasingly price sensitive, and operators are determined, in 5G, to open up their supply chains to new suppliers and open source platforms, and to insist on multivendor networks. And they say they will spread their capex investment in 5G over many years, so their OEMs will not be able to rely on a big uptick in revenues this time around.

In 2017, sales at Huawei’s carrier group, which accounts for about half of its total, rose by only 2.5% compared to 2016, to CNY298bn Chinese yuan ($47.4bn), a steep fall-off after 24% growth in 2015-2016. It was the enterprise and device businesses which enabled Huawei to report an overall 16% increase in 2017 revenues, which reached CNY604bn ($96bn). Its net profit was up 28%, to CNY47bn ($7.5bn).

Other pressures on Huawei include an increasingly protectionist US government. Already effectively barred from critical infrastructure deals including tier one mobile networks, it has seen two smartphone deals, with AT&T and Verizon, fall apart and may have challenges in its enterprise business too because of US-China trade wars. Best Buy, Huawei’s biggest retail outlet in the US, is now planning to stop selling its handsets and other devices, according to recent reports.

Huawei’s huge spending on R&D will only intensify the fears of the US administration that it will lose the race in critical technologies, such as artificial intelligence and 5G, to China. Huawei says it will spend $800m this year on 5G alone.

“Over the next 10 years, Huawei will continue to increase investment in technological innovation, investing more than $10bn back into R&D every year,” said Ken Hu, Huawei’s rotating chairman, in a statement accompanying its 2017 results. “As we look to 2018, emerging technologies like the Internet of Things, cloud computing, artificial intelligence and 5G will soon see large scale application.”

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