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Networks & Infrastructure
Huawei thrives in hard times
Shows strong finish in 08, but remains cautiously optimistic about its future
by Lin Sun
While many companies are scrambling to survive in a down market, Huawei Technologies has emerged as a winner again by reporting that 2008 was yet another strong year.
Although Huawei is not publicly traded, the news may not create large enough a splash to perk up confidence, it is quite remarkable in a market reined by negative mood and glum predictions.
According to the Shenzhen-based company, contract sales in 2008 was $23.3 billion, up 45.6% from a year ago, while actual revenue was about $17 billion, up 36%. Perhaps more significant is 75% of the company’s sales came from overseas, compared to 72% in 2007. It is clear that Huawei is benefiting from the strategy of running against odds and relying on overseas sales for growth. Although Huawei does use low pricing to push out rivals, as some have complained about unfair game, it is not sufficient for sustaining long-term growth. Huawei pays close attention to customer issues: on time delivery and installation, training of local staff and in-country support. These issues are essential for success in emerging markets as Huawei is keenly aware.
India has emerged as the largest single market for Huawei. Contract sales in 2008 reached $2 billion, actual sales $1.3 billion, and a surge of 117% from 2007. Huawei entered the Indian market 10 years ago, but did not make large strides until 2005 due in part to local protection and it being an unknown player. But Huawei is a patient hunter and rarely wavers once it focuses on a particular target. By 2006, its Indian service provider sales rose to $200 million and the number was tripled a year later. Over the years Huawei has successfully sold equipment in wireless, optical transmission, core networks, and GSM and CDMA equipment to local Indian carriers including Reliance, Airtel, BSNL, and Tata Telecom.
However, it is not clear how much money Huawei made from the sales, because the company does not release profit figures for a particular country or sector. A company executive has admitted price is a very sensitive issue in India which forces equipment vendors to cut price and inevitably eats into profit. As for a region, Huawei has established a firm footing in Europe especially in wireless networks as sales jumped 250% in 2008.
Challenges ahead
So far Huawei seems unbeatable in an adverse environment, but the question is: can the company manage to drive growth forward? The answer, from top management, is cautiously optimistic. In an e-mail to employees delivering the good news, Huawei’s chairwoman Sun Yafang warned that complex economic situation would present a challenge in 2009; she predicted revenue would reach $30 billion this year which represents an increase about 29%, which will be the lowest growth rate for Huawei in the past five years (CAGR 45%).
Huawei does not offer specific assessment on risks, but industry consensus is the company is vulnerable when more than 70% of business comes from overseas which, in many cases, have different regulations and rules; the market in emerging countries can become volatile and unpredictable due to political, social and economic instability and customers’ ability to pay for the equipment after a contract is signed.
The Chinese National Development Bank, which offered a five-year US$10 billion loan to Huawei in 2004 in support of its overseas sales, published a report in late 2008 on lending risks. It revealed current lending policy had increased company reliance on bank loans and created a false impression on company’s debt in books. Many developing countries delay payment for as long as 12 months, which impairs Huawei’s cash flow and further increases its reliance on loans. According to Huawei, its debt-asset ratio has been rising steadily from 58% in 2005 to nearly 70% in 2007 as the company stepped up international sales. In the meantime, accounts receivable rose 45%, higher than revenue growth while cash flow fell 13%. Clearly, Huawei must keep pushing for new sales to offset risks.
A cautious outlook
Huawei has realized the risks it is facing and is trying to address the issue. One way is to slim down operations and stash more cash. Last year, Huawei tried to sell half of its handset division for $2 billion, but the plan was scratched amid economic woes. The other way, as most companies do during economic contraction, is cut their workforce. There are reports that Huawei may slash 5% of its employees this year and transfer 15% to overseas posts. If true, it will be the largest job shuffling in the company history.
Although Huawei remains bullish about growth prospects, its executives and employees admit there is a tough road ahead. And there is an intrinsic reason. After 15 years of rapid ascent, Huawei may have passed the “adolescence” phase and entered “maturity” where explosive growth will be replaced by incremental but steady growth. As the Chinese proverb says “there is no lasting winner as the tide keeps turning”, perhaps it’s time for Huawei to reexamine self-claimed “wild wolf” icon: sly, aggressive and with little regard to rules.
As every other company tries to survive under the current economic climate, competition turns ugly and brutal. During the recent CDMA2000 bid for China Telecom, Huawei beat all bidders by receiving the largest share (40%) in a market where it used to hold only 2%. It sounds fabulous, but the victory came with a hefty price: Huawei cut its price not only way below rivals’ offers but below cost. Huawei does this with an advantage, it has no consideration for regulators or investors, but it does affect the company in other ways; besides rising debts and accounts receivable, profit margin dropped to 5% in 2007 from 14% in 2003 and operating profit to 7% from 19% during the same period. As a result, growth of profit is not in proportion with revenue despite repeated wins overseas and at home. How to build a stronghold while maintaining growth will be the biggest challenge for Huawei this year.
Lin Sun has more than 20 years of experience in the Chinese telecom industry. Contact him at lsun@chinanex.com.
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