Huawei Is Digging In for a Long-Fight. And They Are Probably Going to Win. (pt 4 of 4)

Ok. My last take-away from my visit to Huawei HQ. Thanks if you’ve hung in this long.

Take-Away #5: Huawei Is Digging In for a Long-Fight. And They Are Probably Going to Win.

Chairman Liang Hua ended the press conference by saying they are both “fighting for survival” and “seeking growth”. That is a pretty accurate summary of the current situation.

They are managing the crisis but are also playing for the long-term. They are reinvigorating their culture. They are getting 5G installed in as many countries as possible. They are flooding money into R&D. And, perhaps most importantly, they are ending their dependence on US technology.

With the exception of semiconductors, I think most of this will end up working. I don’t have the expertise to assess their progress in semiconductors. Maybe in 3-5 years? I don’t know. However, I am optimistic they will have an operating system and developer ecosystem in place in a year or so. And overall, I think it’s a matter of time.

And once the crisis has passed, it will then come down to Huawei vs. Ericsson vs. Nokia in information and communications technology equipment. And this, in my opinion, is no longer a close fight.

  • In 2018, Huawei had 5x the revenue of Ericsson and Nokia (individually).
  • And even though 5x larger, Huawei was still outgrowing both. In 2018, Huawei was flat in carrier but had 45% growth in consumer and 23% in their enterprise business.
  • Huawei’s recently announced +20% growth for 1H reflected the big hit they took in Q2. But even this growth is dramatically higher than the shrinking sales in almost every division of Ericsson.
  • In 2018, Huawei had 10x the operating cash flow of Ericsson and Nokia (individually).
  • Huawei is also outspending both companies 3x in research and development.
  • And while Huawei is currently going into battle mode and ramping up R&D spending, Nokia and Ericsson are still both paying large annual dividends – and talking about focusing on profits before growth.

In my opinion, neither Ericsson nor Nokia is a serious threat to Huawei anymore. And I think Huawei is going to continue to outspend them in R&D, outperform them in sales / service and just continue to widen their lead over time. How can either company compete with the $150B Huawei is planning to spend on R&D over the next ten years? Over the next 3 years, I expect a re-invigorated Huawei to pull further and further away from the pack.

One caveat to the above statement.

This does depend on how this industry evolves. Telecommunications is currently transitioning from connecting people to connecting everything (people, devices, things). And this is where really where Huawei dominates (telco equipment and smart devices). However, communications networks are now being combined with the cloud and AI. The network is becoming smart. To use Huawei’s phrases, “ubiquitous connectivity” is now being combined with “pervasive intelligence”. It is not clear (to me) that the ICT equipment makers (and their carrier customers) will be able to extend from connectivity to intelligence. Huawei will likely face very different competitors as it tries to move into the intelligence aspects of the network. Huawei’s ultimate competitor in this may well be Cisco or Google, not Ericsson or Nokia. More on this in another article.

A final point (I promise).

Governments and politicians have lots of opinions about telecommunications right now. But none of them have any ability to actually build or operate such networks. When a government or carrier wants to upgrade their telco network, there are only a few companies they can actually call. So all the current rhetoric and posturing may not end up being that important.

That’s my take. More articles on this one the way.

Cheers, jeff

Thanks for reading, jeff

——

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