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9 January 2020

India hands good news to Huawei, but Q4 results hit by sanctions

After all the tribulations of 2019, Huawei and ZTE started this year with some positive news as the Indian government allowed the Chinese vendors to take part in its upcoming 5G trials.

This is significant because of the potential size of the Indian market opportunity, even if at-scale build-outs are delayed by rows over spectrum costs, but also because India has been, for years, inclined to impose restrictions (though not outright bans) on Chinese suppliers.

As the huge country looks to build up its own telecoms equipment business, it might have been expected to align with the USA in the current trade and cybersecurity disputes, but it is likely to have listened to its beleaguered operators. Not only do these face another round of very high spectrum costs if the regulator does not modify its planned rules for this year’s auction, but they are still reeling from price wars, consolidation and the disruptive impact of Reliance Jio. They traditionally deploy networks at very low cost and being a reduction in supplier price competition might have been the final blow to their hopes of commercial viability in 5G.

India’s telecom minister, Ravi Shankar Prasad, said last week that all vendors had been invited to take part in the 5G trials, which will take place in test spectrum and will be far more than just technology tests. The government is positioning them as a way to help build up ecosystems and drive development of local devices and applications, well ahead of commercial launch.

So far, Huawei has a slot with two of the big three operators, Bharti Airtel and Vodafone Idea. These two will also conduct trials with Ericsson, and Airtel additionally with Nokia. Reliance Jio has applied to conduct 5G tests with its main 4G supplier, Samsung. All the operators could add further vendors to their list (for instance, Cisco and NEC were also included in the original list of invitations).

ZTE will also be hoping that the new clarity over the position of Chinese vendors in the 5G trials will lead to positions for its own equipment. It is the main supplier to state-owned operator BSNL (which will conduct its own tests at an unspecified date) and its president of global sales, Xiao Ming, was vocal last year in presenting India as a key target to offset pressures in western markets.

“India is one of our key markets. It is the second largest telecoms market in the world [after China] and ranks number one in the world in terms of data consumption,” he said at the time. “We are the main vendor for BNSL and Airtel and we also work very closely with Reliance Jio, although not yet in their radio access network. We already have a good position in India and increased our market share following the merger between Vodafone and Idea Cellular. That is a hugely positive sign for ZTE and we are hiring a lot of staff to support that growth.”

In Australia, whose government was the first to accede to US demands to ban Chinese vendors from 5G networks, the market has already felt the impact of that decision. The third MNO, Vodafone (VHA) was a Huawei customer in 4G and has been forced to change vendor for 5G, which makes for a more difficult and expensive migration, at least in the first, Non-Standalone phase.

The operator has signed a five-year contract with Nokia and says it will start offering 5G services in the first half of this year, and that its Huawei-supplied 4G network will remain completely separate from the new 5G one. That presents some expensive options – build 5G rapidly to cover the 4G footprint, in order to be able to wind down the legacy network; rip out the Huawei kit and replace with Nokia 4G equipment to support a SingleRAN and make full use of all the spectrum VHA owns; maintain two separate RANs with some kind of hand-off between them.

VHA’s CEO Iñaki Berroeta told local reporters: “At one point we were ahead on 5G roll-out and the decision led by the government to ban Huawei has definitely set us back 12 months. We have to catch up.”

Nokia has now tested and activated a group of 5G sites for its new customer in and around Paramatta, which will be the first VHA 5G market. The expansion of its dealings with VHA will be welcome in a market which is heavily geared towards Ericsson, the main supplier for both Telstra and Optus.

Situations like that in Australia appeared to have remarkably little impact on Huawei’s financial results last year, partly because of renewed growth in China and other Asian markets which are not susceptible to US pressures. But the vendor’s 2019 revenues have fallen short of its forecast, despite still turning in an 18% year-on-year rise to CNY850bn ($121.8bn), a far higher growth rate than its rivals will manage. However, the figures show a slowdown in the fourth quarter, which will be worrying for Huawei if it persists into 2020. In the first two months of 2019, the year-on-year growth rate was 30%, and across the first three quarters, it was still 24%. That signifies a sharp decline in growth in Q419, which has been attributed primarily to Huawei’s largest business unit, handsets.

This business has been hit by Google’s decision to withdraw support for Huawei devices with its Google Mobile Services suite for Android, forcing the company to seek to offer its own operating system and applications. That, in turn, has led to many operators outside China backing away from Huawei smartphones because of consumer demand for Google services such as Maps and Search.

Huawei had targeted shipments of 300m smartphones in 2019, compared to 206m in 2018, and was on target during the first three quarters. But in the last quarter, sales fell after it released its flagship Mate 30 Series without Google Mobile Services. Despite that, however, it shipped 240m devices in 2019, up 17% on the previous year, and keeping it in second place behind Samsung and ahead of Apple.