TBR
T E C H N O L O G Y B U S I N E S S R E S E AR C H , I N C .Huawei
NETWORK BUSINESS QUARTERLY
SMSecond Calendar Quarter 2011
Second Fiscal Quarter 2011 Ended June 30, 2011
TBR OUTLOOK ‐ POSITIVE TBR SCORE (0‐10 SCALE)
4.83
Publish Date: Sept. 8, 2011
Author: Ken Hyers ([email protected]),NMP Senior Analyst Content Editor: Scott Dennehy, NMP Senior Analyst
TBR
©2011 Technology Business Research, Inc.Contents
Company Analysis
3
TBR Position
4
Executive Summary
6
Strategy Overview
8
Corporate SWOT Analysis
9
Scenario Discussion
12
Financial Model Strategy
16
Go‐to‐Market & Product Strategies
19
Alliance & Acquisition Strategies
20
Geographic Analysis
21
Resource Management Strategy
22
Appendix
Company Data Models
22
Income Statement
23
Balance Sheet
24
Revenue Model
25
Geographic Model
26
Operating Expense Model
27
Forecast Model
28
Financial Graphs
30
Go‐to‐Market & Resource Graphs
31
Acquisitions Table
32
Strategic Alliance and Partnerships Table
34
Product Announcement Table
37
Customer Deals Table
48
Facilities Table
50
Management Table
51
About TBR
TBR
TBR Assessment
Company Strategic Objectives
Huawei experienced healthy revenue growth in the first half of 2011, albeit slower than in 2010, which was strong due to international sales. The company reorganized its business units to focus on opportunities in cloud services and infrastructure and a strategy it has informally dubbed “Cloud‐Pipe‐Devices.” The Cloud‐Pipe‐Devices strategy enables Huawei to deliver cloud‐ready equipment, software and services from the cloud to the network and to mobile devices, which it intends to market to network providers and directly to enterprise customers. TBR believes that by pursuing cloud services, Huawei will increase higher‐margin services and equipment sales. In doing so, however, it will be more difficult for the company to dominate the way it has as equipment supplier. Deliver cloud solutions to enterprises and network operators Huawei will offer its cloud solutions directly to enterprise and network operators, who will then market the cloud solutions to their own customers. Focus on the enterprise sector for new growth The enterprise, and particularly SMEs, lie at the center of Huawei’s cloud solutions strategy. With significant experience providing voice, video and data solutions to fixed and mobile operators, Huawei believes it can deliver many of the same services to enterprise customers, using a cloud platform it dubs Huawei SingleCLOUD. The SingleCLOUD platform is intended to meet SMEs’ needs for a private cloud solution and to provide a public cloud solution for network operators. Become a top‐five global handset vendor by 2013 Huawei intends to become the fifth‐largest handset manufacturer, by units shipped, by 2013. That would place the company behind Nokia, Samsung, LG and RIM but ahead of Apple, Motorola and Sony Ericsson – a goal TBR believes is ambitious but achievable.Revenue growth will slow as Huawei focuses on the enterprise market
through the remainder of 2011
TBR Position
10% 20% 30% 40% 50% 60% $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 2007 2008 2009 2010 2011 Est. In M ill io n s US D HUAWEI PROFITABILITY AND GROWTH Total Revenue Gross Profit Operating Profit Year‐to‐Year Revenue Growth SOURCE: TBR ESTIMATES AND HUAWEI TBRTBR
©2011 Technology Business Research, Inc.TBR believes Huawei will exceed its 2011 revenue growth projections as
4G network contracts and an enterprise focus on cloud drive sales
TBR assessment of Huawei’s strategic outlook
Key takeaways Financial: Huawei will beat its revenue growth projections by at least 50% in 2011.Go to Market: Huawei intends to become a top‐
five leader in Android handsets by 2013, but the company will face challenges as other vendors fight to retain share. Resource: Huawei’s focus on end‐to‐end cloud solutions for enterprises and telcos is a direct result of its reorganization in early 2011 and its new structure of four core businesses: Carrier, Enterprise, Devices and Other. Strategic outlook • Huawei expects to grow revenue by 10% in 2011, down from 26% in 2010. The company attributes the decline in growth to the reorganization of its business and to lower domestic revenue as China’s operators largely complete their network buildouts. TBR believes Huawei’s revenue growth guidance is unduly conservative, and while it will not achieve 2010 levels, it will achieve revenue growth of at least 15% to 18% in 2011. • Huawei’s mobile device strategy will concentrate on developing Android smartphones for the mass market. TBR believes Huawei is well‐positioned to develop mass market smartphones by leveraging its extensive internal R&D capabilities and outsourcing production to ODMs, such as Foxconn. Huawei is developing a broader product portfolio, creating devices for specific market segments including young fashion‐conscious consumers and professional users. Its devices, including tablets, for professionals are part of its Cloud‐Pipe‐ Device strategy and will be used by enterprise customers for delivering productivity apps to mobile workers. • Huawei’s private cloud strategy for SMEs is to deliver distributed IT through the cloud so that services and functions are no longer localized and are instead available on a distributed basis to employees in multiple locations. On the telco side, Huawei sees itself delivering public cloud solutions for operators that do not have the resources or experience to deliver cloud solutions themselves. In developed markets the target telcos will be Tier 2 operators, such as Leap or MetroPCS in the U.S., while in emerging markets the solution will be offered to a wider group of operators.
Executive Summary
C2008 C2009 C2010 C2011 Est. 10.0% 12.0% 14.0% 16.0% 18.0% 5.0% 15.0% 25.0% 35.0% 45.0% Op e ra ti n g Ma rg in Year‐to‐Year Revenue Growth HUAWEI FULL YEAR REVENUE AND OPERATING MARGIN RESULTS AND TBR PROJECTIONS TBR SOURCE: TBR ESTIMATES AND HUAWEITBR
Huawei’s financial metrics score is no longer inflated by above average
revenue growth, exposing a weak balance sheet
Key ■Represents an area where Huawei is currently challenged versus peers ■Represents an area where Huawei is outperforming its peers ■Represents an area where Huawei is neither significantly outperforming nor underperforming its peersExecutive Summary
VENDOR PERFORMANCE COMPARED TO PEERS IN TBR’S NETWORK BUSINESS QUARTERLY VENDOR BENCHMARK Huawei has the weakest days sales outstanding metric among its peers due to its liberal credit policies. Huawei routinely accepts IOUs from customers to boost sales and encourage investment. TBR believes this practice could weaken Huawei’s balance sheet if cash‐strapped operators struggle to pay back outstanding debt. FINANCIAL METRICS TBR Score Company Figure Average in Class Standard Deviation/2 Revenue Growth Yea r‐to‐Yea r 4.52 13.2% 15.3% 4.3% Revenue/Empl oyee 3.24 $ 248,920 $ 417,045 $ 95,270Gros s Ma rgi n 5.31 41.0% 38.8% 7.0%
SG&A a s % of Sa l es 4.99 17.0% 17.0% 2.8%
R&D a s % of Sa l es 6.89 9.0% 13.3% 2.3%
Opera ti ng Ma rgi n 6.83 14.7% 8.1% 3.6%
Da ys Ca s h Outs ta ndi ng 3.86 74.00 127.90 47.19
Tota l As s et Turns 6.87 1.23 0.95 0.15
Current Ra ti o 4.00 1.61 1.90 0.29 Debt/As s ets 3.24 0.60 0.47 0.07 Return on As s ets 8.91 15.8% 6.4% 2.4% Return on Equi ty 10.00 48.2% 14.5% 6.5% TOTAL AVERAGE TBR SCORE GO‐TO‐MARKET & SERVICES METRICS TBR Score Company Figure Average in Class Standard Deviation/2 Network/Comm. Equi pment Ma rket Sha re 5.61 14.0% 11.6% 4.0%
Mobi l e Phone Ma rket Sha re 3.73 2.7% 10.0% 5.8%
Da ys Sa l es Outs ta ndi ng 1.00 135.63 68.84 16.70
TOTAL AVERAGE TBR SCORE RESOURCE MANAGEMENT METRICS TBR Score Company Figure Average in Class Standard Deviation/2 Inventory Turns /Yea r 4.22 7.05 8.45 1.80
Fi xed As s et Turns /Yea r 6.40 21.00 15.73 3.75
TOTAL AVERAGE TBR SCORE 5.31
5.72
3.45
TBR
2Q10 3Q10 4Q10 1Q11 2Q11 Fi na ncia l Model Stra tegy: 6.01 5.96 6.00 5.74 5.72 Go‐to‐Ma rket & Servi ces Stra tegi es : 3.68 3.79 3.60 3.38 3.45 Res ource Ma na gement Stra tegy: 5.45 5.79 5.80 5.39 5.31 TOTAL AVERAGE TBR SCORE: 5.05 5.18 5.13 4.84 4.83
TBR
©2011 Technology Business Research, Inc.
Function
Key Strategies
TBR Assessment
Overall Build on initial success in North America to become a key supplier to network operators. Grow business in India by localizing presence. Employ three‐pronged security strategy to allay U.S. concerns. ► ► ► : Huawei has yet to land an equipment contract with a Tier 1 operator in the United States, though the vendor is finding success among Tier 2 and 3 companies. ; With security clearance in hand, Huawei can realize the full potential of its extensive resources in India, which include a skilled local workforce and domestic manufacturing and R&D assets. ; Huawei’s plan includes establishing a national security committee headed by Huawei CTO Matt Bross, using third‐ party test labs to check Huawei’s source code and using U.S. citizens to deliver and install Huawei equipment. Financial Grow sales 10% in 2011 by focusing on enterprise customers. Invest 10% of revenue in R&D. ► ► ; Huawei is focusing on enterprise customers for cloud services as it attempts to enter new higher‐value market segments. ; TBR expects Huawei will continue to keep its R&D spend steady at 10% of revenue in 2011. This reflects the need to maintain heavy investment in new technologies as it continues to move from a low‐cost to a high‐value business model.
Huawei will have a difficult time penetrating the U.S. telecommunications
market, even with a new strategy to quell security concerns
Strategy Overview
TBR
Function
Key Strategies
TBR Assessment
Go to Market Establish leadership position in 4G (WiMAX and LTE). Leverage Android to gain traction in smartphone and tablet markets. ► ► ; Huawei is positioning itself to become a leader in TD‐LTE, the 4G technology of choice for Chinese operators. The vendor aims to double its commercial LTE contracts from 18 in 2010 to 36 in 2011 and expects LTE‐related revenue to become a meaningful contributor to overall revenue by 2014. ; Selling low‐cost Android‐powered devices via carriers will help Huawei quickly gain market share in smartphones and tablets. The low‐end smartphone space is one where Huawei thrives, due to the company’s low‐cost operating structure and resistance to pursuing expensive advertising programs. R&D and Delivery Establish R&D centers in strategic cities to leverage local talent pools. Invest heavily in India to capitalize on growth opportunities as the country modernizes and expands its mobile networks. ► ► ; Huawei operates R&D centers near the headquarters of most of its major customers in markets worldwide, which allows it to work closely with customers and be more responsive to their requests and needs. ; Using a localization strategy, Huawei is creating a stronghold in India while improving its reputation with the Indian government.
Huawei will focus on developing low‐cost Android smartphones as it
attempts to become a top‐five global handset vendor
Strategy Overview
TBR
©2011 Technology Business Research, Inc.Corporate SWOT Analysis
Huawei will face growing challenges as it focuses on delivering cloud
services to enterprises and service providers
Corporate SWOT Analysis
Strengths • Leader in 4G technologies by number of contracts • SingleRAN platform is a key differentiator for winning contracts in developed regions • Able to provide vendor‐linked financing through ties to state‐run banks in China • Low operating costs support low‐cost pricing strategy • Extensive installed base of Tier 2 and 3 telecom operators in emerging markets Opportunities • Develop TD‐LTE technology for the Chinese market • Use strategic partnerships to build expertise and enter new markets • Utilize Service Delivery Platform to establish Web 2.0 leadership • Establish a foothold in the North American market • Develop lower‐cost, high‐end smartphones to grow share in Western markets Weaknesses • Increasing size brings a challenge to maintaining historical efficiency • Relatively small managed services base • Ties to Chinese government could limit international investment opportunities • Lack of United States presence Threats • Nokia Siemens prioritizing market share gains over profitability puts downward pressure on contract pricing • The reshuffling of the Chinese telecom industry could dampen Huawei’s growth prospects in its home market • A tighter monetary policy by China could limit Huawei’s domestic growth • Huawei intends to become a leading cloud supplier but will face strong competition from other vendors and telcosTBR
Huawei Symantec virtualization strategy lays the groundwork for building
the converged datacenter network
Scenario Discussion: Virtualization strategy sees joint venture work with key hypervisor vendors
Scenario SWOT Assessment Strength: Huawei Symantec is a hardware‐ focused company and is not tied to a specific management software vendor. Weakness: Huawei Symantec’s multivendor strategy risks alienating its strongest partner, VMware. Opportunity: Huawei Symantec is positioning itself to be a viable player in the emerging virtualization space. Threat: Huawei is a new entrant in a space dominated by Cisco and crowded by other leading vendors. • Huawei Symantec, a joint venture between the two companies, announced at VMworld a comprehensive strategy for optimizing its datacenter infrastructure for virtualized environments. The move is part of an overall strategy to combine networking, computing, storage, and software solutions from various vendors. This is very similar to the strategy pioneered by Cisco with its Unified Computing System architecture and mirrored by other best‐of‐breed suppliers that are following Cisco’s lead. • Huawei Symantec, which makes storage and network security solutions, announced a new strategy that intends to optimize its datacenter infrastructure for virtualized environments. Core to the strategy is working with all key partners in virtualization. • Huawei Symantec as a equipment vendor does not develop its own management software, instead turning to virtualization management software partners. While VMware is an important partner, the joint venture is working with multiple companies that offer hypervisors for managing datacenters. • To support its virtualization strategy, the company introduced Huawei Symantec Power Steering for VMware 1.0, which is a suite of plugins for managing the JV’s storage systems from administrators vCenter consoles. • Huawei Symantec sees its unique value proposition coming from the fact that it also offers security solutions, and is able to leverage its total stack from a security and networking perspective.Scenario Discussion
TBR
©2011 Technology Business Research, Inc.
Scenario Discussion
Huawei is moving its smartphone portfolio upmarket to become a leading
Android handset vendor
Scenario Discussion: Huawei introduces higher‐end smartphones as it moves into new markets
Scenario SWOT Assessment Strength: Huawei already has a strong presence in many markets as a supplier of low‐end and operator‐branded devices. Weakness: Huawei has little experience as a high‐end device maker, and its brand is not well known in Western markets Opportunity: If Huawei can “crack the code” in developing high‐end but less expensive smartphones, it will rapidly gain market share. Threat: The Android smartphone market is crowded and it will be difficult for Huawei to gain share. • Huawei is looking to become a high‐end smartphone developer. It hopes to leverage its expertise as a volume producer of low‐cost mobile devices to produce highly capable smartphones at a price point that undercuts those of competing devices from leading OEMs, such as HTC, Motorola and Samsung. • Huawei already has a number of Android devices on the market, such as its iDEOS smartphone, but to date these devices have emphasized price over bleeding‐edge capabilities, have generally lagged competitors in terms of components and software, and have generally appealed to more cost‐conscious consumers that are buying their first smartphone. • While Huawei’s goal is to move beyond its status as a fast‐follower, imitating popular smartphones from competitors, and become a genuine developer of innovative devices, its latest flagship offerings, such as the Vision smartphone, continue to follow a path blazed by other manufacturers in terms of hardware. • The Vision, despite a 1 GHz Snapdragon processor and Android 2.3 OS, is neither first to market with the Gingerbread OS nor can it match dual‐ processor offerings from leading Android OEMs. Where it differs is in introducing Huawei’s concept of a cloud‐based phone, in which apps are hosted in and downloaded from the cloud. • TBR believes Huawei’s efforts to bring more advanced devices to market at a lower price‐point is a winning strategy as the mass‐market phone‐buying public in Western markets looks for lower‐cost devices that do not sacrifice functionality. Huawei Vision SmartphoneTBR
Huawei’s goal is to provide all aspects of cloud delivery, from platform
to device to apps
Scenario Discussion
Scenario Discussion: Huawei intends to become a leading cloud‐delivery supplier
Scenario SWOT Assessment Strength: Huawei is able to offer elements and equipment for all aspects of cloud networks. Weakness: Huawei has a small market presence in one of the most important cloud markets: North America. Opportunity: Huawei can leverage deep partnerships with IT providers, such as IBM, to drive its enterprise‐focused strategy. Threat: Potential customers will turn to better known vendors, such as Cisco. • Huawei believes that over the next decade, IT apps will replace voice services and web technology will replace public‐switched telephone networks. Based on a distributed computing architecture, this structure will result in lower costs and greater competitive advantages for network providers that embrace cloud delivery. Huawei intends to become a leading provider of all aspects of cloud delivery, from platforms to apps. • Huawei will take two approaches to delivering cloud solutions, offering them directly to enterprises as well as to network operators that will then market the cloud solutions to their own customers. • Huawei’s private cloud strategy for SMEs is to deliver distributed IT through the cloud so services and functions are no longer localized and are instead available on a distributed basis to employees in multiple locations. • On the telco side, Huawei sees itself delivering public cloud solutions for operators that do not have the resources or experience to deliver cloud solutions themselves. In developed markets the target telcos will be Tier 2 operators, such as Leap or MetroPCS in the U.S., while in emerging markets the solution will be offered to a wider group of operators. • On the device side, Huawei introduced a handset, its Vision smartphone, that stores users’ content, including applications, photos, videos, and music, in the cloud. Customers can store up to 160 GB of content on the cloud and can access that content as needed. A weakness of this strategy is that it requires high‐speed/high‐bandwidth 4G networks to support content downloads, but the Vision handset only supports 3G networks. Source: Huawei
TBR
©2011 Technology Business Research, Inc.Revenue Performance and Strategies
2011 Est. Revenue: $31 billion • In 1H11, Huawei reported revenue of CNY 98.3 billion, or $15.2 billion, amounting to growth of 11% year‐to‐ year. • Huawei was able to weather economic turmoil in developed nations and fears of a double‐dip recession by expanding its enterprise offerings and increasing device shipments by over 40%. 2011 Revenue and Growth Outlook • TBR expects Huawei’s revenue to reach $31 billion for 2011 – an increase of 13.2% year‐to‐year – as growth will span all geographies and segments, with the exception of optical. • Device sales growth will accelerate in 2H11 as the distribution of low‐cost Android smartphones and tablets expands to the mass market in developed markets.TBR believes Huawei will continue to grow revenue due to the appeal of
its low‐cost consumer devices
Financial Model Strategy
38.2% 39.7% 39.6% 41.9% 41.0% 9.7% 12.9% 14.1% 15.8% 14.7% 0% 10% 20% 30% 40% 50% 2007 2008 2009 2010 2011 Est. HUAWEI GROSS MARGIN & OPERATING MARGIN Gross Margin Operating Margin SOURCE: TBR ESTIMATES AND HUAWEI TBR $12,840 $18,071 $21,821 $27,381 $31,000 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% $‐ $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 2007 2008 2009 2010 2011 Est. In M ill io n s HUAWEI REVENUE AND YEAR‐TO‐YEAR GROWTH Revenue Year‐to‐year Growth TBR SOURCE: TBR ESTIMATES AND HUAWEITBR
To maintain momentum in LTE sales, Huawei has launched new microcell
products designed for the North American market
Segment Revenue Performance and Strategies
Wireless $9.5 billion • Huawei has achieved considerable success in winning 4G contracts but has not won the most lucrative contracts due to being essentially shut out of the U.S. Tier 1 market. • Huawei is betting that its microcell solutions will prove appealing to 4G operators. Huawei points out that its small‐cell solutions are ready for market now, while competitors’ more advanced solutions are still in the testing phases. TBR believes that while Huawei does have a time‐to‐market advantage, the small‐cell market will not see significant growth until at least late 2012, at which point solutions from competitors will be available. Fixed $1.8 billion Huawei has established a narrow lead in terms of revenue in the broadband CPE market as the shift to FTTH continues on the basis of contract sales in China, Latin America and the Middle East. Optical $5.3 billion Huawei’s T‐series launched in North America in 1H11, giving the company a new option as it seeks to win metro and core optical transport equipment contracts.Financial Model Strategy
$3,980 $5,602 $6,328 $8,500 $9,500 $1,400 $1,446 $1,527 $1,750 $1,800 $2,190 $3,176 $5,193 $5,286 $5,265 $1,200 $1,265 $1,527 $2,400 $2,800 $1,965 $2,792 $3,644 $4,900 $5,635 $2,106 $3,790 $3,600 $4,545 $6,000 $0 $8,000 $16,000 $24,000 $32,000 2007 2008 2009 2010 2011 Est. Re ve nu e in M il lio n s HUAWEI REVENUE BY SEGMENTHandset Service & Software Data Optical Fixed Wireless
SOURCE: TBR ESTIMATES AND HUAWEI TBR 0% 10% 20% 30% 40% 2007 2008 2009 2010 2011 Est. HUAWEI REVENUE COMPOSITION
Wireless Fixed Optical Data Services & Software Handset
SOURCE: TBR ESTIMATES AND HUAWEI
TBR
TBR
©2011 Technology Business Research, Inc.Data remains a fast‐growing business for Huawei as the company pushes
deeper into the enterprise IT segment
Segment Revenue Performance and Strategies
Data $2.8 billion • Huawei continues to launch new products, such as its AR G3 Access Router, as it focuses its attention on the enterprise market. • As part of its expansion into the enterprise IT space, Huawei is introducing a line of servers, low‐end switches, security, VoIP and storage products in 2011. TBR believes the move will position Huawei to directly compete with Cisco’s low‐end switching business. Service & Software $5.6 billion Huawei continues to see strong growth from rollout, maintenance, professional and managed services, but it has yet to win the kind of mega‐deal won by leaders Ericsson, NSN and Alcatel‐Lucent. Handset $6 billion While continuing to expand into the low‐end smartphone market, Huawei is introducing higher‐quality flagship devices to improve brand recognition.Financial Model Strategy
‐20% 0% 20% 40% 60% 80% 100% 120% 2007 2008 2009 2010 2011 Est. HUAWEI YEAR‐TO‐YEAR SEGMENT REVENUE GROWTHWireless Fixed Optical Data Services & Software Handset
SOURCE: TBR ESTIMATES AND HUAWEI TBR $21 $27,381 $1,000 $50 $400 $735 $1,455 $31,000 $22,500 $24,000 $25,500 $27,000 $28,500 $30,000 $31,500 2010 Revenue
Wireless Fixed Optical Data Service & Software Handset 2011 Est. Revenue R ev enue (in $ M ill io ns ) HUAWEI 2011 SEGMENT REVENUE GROWTH SOURCE: TBR ESTIMATES AND HUAWEI TBR
TBR
Expense Performance and Strategies
2011 Est. Operating Expenses: $26.4 billion Cost of Revenue $18.3 billion • TBR believes cost of revenue will grow 14.9% in 2H11, outpacing revenue growth. • Gross margin will fall 90 basis points in 2H11 to 41% due to competition from other low‐cost Android smartphone vendors and pricing battles with NSN in the telecom infrastructure space. SG&A $5.3 billion • TBR estimates total 2011 SG&A will grow 15% year‐to‐year as Huawei increases sales headcount and marketing spend to support its mobile device releases. • Total 2011 operating margin will be 14.7%, a 110‐basis‐point decrease from 2010. In 1H11, Huawei reported operating income of CNY 12.4 billion, or $1.9 billion. R&D $2.8 billion TBR believes Huawei’s 2011 R&D spend will be 14% higher than 2010 as the company invests in cloud computing and continues innovation around TD‐LTE.Huawei continues to invest in sales staff and TD‐LTE technology ahead of
commercial rollouts in China in 2012
Financial Model Strategy
$7,937 $10,890 $13,188 $15,920 $18,290 $2,350 $3,236 $3,538 $4,583 $5,271 $1,284 $1,511 $1,953 $2,448 $2,790 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 2007 2008 2009 2010 2011 Est. In $ M illi on s HUAWEI OPERATING EXPENSESResearch & Development SG&A Cost of Revenue
SOURCE: TBR ESTIMATES AND HUAWEI TBR 0% 10% 20% 30% 40% 50% 60% 70% 2007 2008 2009 2010 2011 Est. HUAWEI OPEX AS A PERCENTAGE OF REVENUE
Cost of Revenue SG&A Research & Development
SOURCE: TBR ESTIMATES AND HUAWEI
TBR
©2011 Technology Business Research, Inc.TBR Assessment of Huawei’s Telecom Network Infrastructure Segment
Strategy • Huawei 4G sales are bolstering the company’s position as the second‐largest infrastructure vendor. While Huawei continues to win contracts in Europe, North America (the world’s largest telecom market) remains closed to Huawei due to concerns within the U.S. government and with companies that the government does business with that Huawei software and equipment may compromise the security of U.S. communications networks. • As a result, Huawei continues to be left out of Tier 1 operator contracts in the United States, making it difficult to pass Ericsson as the world’s leading vendor by revenue. Establishing more R&D centers, adding employees, and growing handset share in the U.S. may help ease regulators’ fears. • TBR believes Huawei has placed itself in an advantageous position for the long term. The small 2G and 3G deals it is winning from operators in developing markets will likely lead to upgrades and expansions in the coming years as consumers adopt smartphones and increase their data usage. Key Developments • Huawei secured 4G buildout contracts with Genius Brand, M1, and Manitoba NetSet. o Huawei is rolling out an LTE network for Genius Brand, a joint venture between Hutchison and Hong Kong Telecom. The network will support download speeds up to 120 Mbps and cover the entire city. Huawei will deploy 2,000 base stations throughout Hong Kong, providing customers with faster internet speeds, access to wireless applications, and the ability to stream mobile content. o In the course of a two‐phased project, Huawei will build a WiMAX network for Manitoba NetSet, providing 5,000 households in rural Canada with broadband internet access. Huawei will prepare the network for a transition to LTE by deploying its SingleRAN solution. o M1, a mobile broadband and communications provider, awarded Huawei a five‐year, S$280 million contract to build Singapore’s first nationwide LTE network. Huawei’s end‐to‐end LTE solution includes installation of base stations and Evolved Packet Core equipment.Go‐to‐Market & Product Strategies
With the U.S. 4G market largely closed to Huawei, the company is looking
to China for major contracts
TBR
TBR Assessment of Huawei’s Devices Segment
Strategy • Huawei remains in the back of the pack in terms of device revenue but has ambitious plans to continue to introduce new mass‐market Android devices in both emerging and developed markets through 2011, which will lead to substantial market share gains in 2H11. • Huawei is working to sell 60 million mobile phones in 2011 – twice as many as 2010 – of which 20% to 25%, or 12 to 15 million, will be Android smartphones (up from just over 3 million in 2010). If Huawei is successful in shipping this many smartphones, it will achieve its goal of becoming a top‐five smartphone vendor. • Huawei is targeting the mass‐market late‐adopter segment of smartphone customers. These are first‐time buyers of smartphones that are looking for low‐cost entry level smartphones and that expect to pay no more than $100 to $150 for a new device • While leading Android smartphone vendors such as HTC, Motorola and Samsung are not targeting entry‐level smartphone buyers, ZTE, which hopes to become the second‐ largest smartphone vendor within the next two years, is on a direct collision course with Huawei. TBR believes ZTE will be able to leverage its greater experience in developing low‐cost handsets to outpace Huawei in overall smartphone sales. Key Developments • Huawei introduced the Vision smartphone, which features a 3D user interface and runs Android Gingerbread 2.3 OS. The Vision boasts Bluetooth V2.1 technology, high‐speed internet, and messaging capabilities. Available in September, the Vision also includes a 5‐ megapixel camera and 720p video recording. • The E392 USB modem is the first device capable of connecting to FDD and TDD LTE, as well as GSM and CDMA networks, making it a truly global device. Most operators are deploying FDD LTE, due to their possession of paired spectrum, but China Mobile, the largest operator in China and an important Huawei customer, will deploy TDD LTE. The E392 will be available in 3Q11. • The MediaPad is Huawei’s 7‐inch tablet featuring built‐in Wi‐Fi, GPS, and front‐ and rear‐facing cameras. The MediaPad offers a 217‐pixels‐per‐inch touch panel, a dual‐core 1.2 GHz Qualcomm processor, and Android 3.2 OS. The slate weighs less than one pound and is just one‐half‐inch thick.Go‐to‐Market & Product Strategies
Huawei’s plans to become a top‐five handset vendor will put it in direct
competition with both traditional OEMs and Chinese rival ZTE
TBR
©2011 Technology Business Research, Inc.Go‐to‐Market & Product Strategies
TBR Assessment of Huawei’s Services and Software Segments
Services • Huawei opened a new Network Operations Center in Madrid to support the operation and management of telecommunications networks, an area in which Huawei is far behind Ericsson and Nokia Siemens. The Madrid NOC will service customers in Spain and Western Europe, as Huawei commits to improving its share of service contracts and beefs up capabilities to attract customers. The new NOC will provide network surveillance, corrective and preventive maintenance, security management, and IT platform management for several network technologies, including UMTS, GSM, and optical. • Huawei’s underdeveloped service base received a boost from a GSM provider in its home country. In May, Huawei secured a contract to provide managed services for over half of China Unicom Shanghai’s base station sites, covering 11 districts within Shanghai. Huawei will be responsible for maintenance of the GSM network, including preventive, planned, and corrective services. While Huawei is chasing revenue in overseas markets, the domestic Chinese market still provides a strong base for service contracts. Software • Huawei is working to expand its offerings to enterprise customers. The company is specifically pushing its cloud and datacenter solutions, which are seeing adoption from companies in a range of verticals, including healthcare and government, due to Huawei’s price leadership. Additionally, Huawei has shipped 1,000 Telepresence solutions, including 500 in 1H11, bringing it into competition with Cisco. • Huawei launched India’s first commercial mobile number portability (MNP) solution for IDEA. Huawei’s MNP solution is based on the signaling transfer point technology. In the process of implementing the solution, Huawei migrated 470 sets of equipment without interruption of services. • Huawei provided China Telecom with an intelligent optical distribution network (iODN) solution to China Telecom’s fiber‐to‐the‐home deployment. iODN uses eID technology to automate deployment and management within the optical distribution network.Huawei is attempting to come from behind in the services space while
making a play for the enterprise with cloud and datacenter solutions
TBR
Huawei looks to leverage alliances and partnerships to add to its
capabilities in areas where its expertise is limited
Alliance Strategy
TBR Assessment of Huawei’s Alliance Strategy
Alliance Strategy • As Huawei has extended its capabilities across a wide spectrum of the telecom space, from equipment to software to services, it continues to enter new areas where its experience and reputation are weak, seeking partnerships if needed. • Huawei Symantec is one of the most visible partnerships, with the joint venture helping the company become a serious contender in the security, storage and networking segments in North America. In July, the joint venture announced a new channel program, dubbed the Wingman Partner Program, that provides partners with marketing, sales, and educational resources to help drive sales and business development. • Huawei is looking for alliances in the area of M2M, where it recently proposed a partnership program for M2M standards, signed a $1.4 million deal with Telus in June to establish a research lab at Carleton University in Canada, and teamed with Deutsche Telekom to develop M2M solutions and applications in 2010. Key 1H11 Alliances Nucleus Connect Nucleus Connect and Huawei will collaboratively study 10G GPON (Gigabit Passive Optical Network) technology. The two companies will leverage their research on Fiber to the Premises network technology to increase bandwidth and uplink and downlink speeds within Nucleus Connect’s Next Generation Passive Optical Network. Phones 4U U.K.‐based retailer Phones 4U will sell two of Huawei’s Android handsets in its retail locations in 4Q11. Phones 4U will carry the Huawei Blaze and Vision smartphones, which cater to the youth segment of the market. Both companies will invest in marketing and launching the devices. Simms International Simms International will roll out the Huawei Enterprise Advantage Partner (HEAP) program, a strategic endeavor to increase partnerships with Australian businesses. Through HEAP, Huawei will attract value‐added resellers, systems integrators, and technology suppliers to its partner network.TBR
©2011 Technology Business Research, Inc.TBR expects strong growth in all of Huawei’s geographic regions,
resulting from its push to ship 60 million mobile phones this year
Geographic Analysis
Geographic Performance and Strategies
North America $750 million Government intervention continues to keep Huawei from securing Tier 1 contracts in the U.S., but with device launches and network buildout deals from Canadian operators, TBR believes Huawei will grow North American revenue 71.2% in 2011. EMEA $11.6 billion Huawei now places its brand on handsets in Europe, after previously making only carrier‐ branded devices. The company is having success with low‐cost Android smartphones in Europe and mass‐market feature phones in MEA. APAC (ex‐China) $6.6 billion Huawei’s feature phones are strong sellers in India and other emerging Asian markets. The company is taking significant market share from Nokia, the longtime regional leader. The MediaPad tablet, at a lower price than competitors, is poised to become a hit in this market. China $9.9 billion Growth in China will turn positive in 2011, rebounding from a weak 2010 that saw the 3G investment cycle end. Looking toward 2012, Huawei has positioned itself to be a major player in the 4G LTE investment cycle. CALA $2.1 billion TBR believes CALA revenue will increase 18.4% in 2011, as Huawei expands its mobile device offerings to include more smartphones. $3,595 $4,518 $10,147 $9,583 $9,920 $3,799 $5,743 $3,843 $5,887 $6,597 $900 $1,539 $923 $1,780 $2,108 $4,399 $6,040 $6,500 $9,693 $11,625 $146 $231 $408 $438 $750 $0 $11,000 $22,000 $33,000 2007 2008 2009 2010 2011 Est. Re ve n ue in M illio n s HUAWEI REVENUE BY REGIONNorth America EMEA CALA APAC (ex‐China) China
SOURCE: TBR ESTIMATES AND HUAWEI TBR ‐50% 0% 50% 100% 150% 2007 2008 2009 2010 2011 Est. HUAWEI YEAR‐TO‐YEAR REVENUE GROWTH BY REGION
China APAC (ex‐China) CALA EMEA North America
SOURCE: TBR ESTIMATES AND HUAWEI
TBR
TBR
Huawei focused on expanding operations in the West, appointing new
executives and opening several facilities
Personnel Changes • TBR estimates Huawei had 120,000 employees worldwide as of June, an increase of 10,000 from the end of 2010. • In May, Huawei hired former Samsung and Nokia mobile device executive Mark Mitchinson to head its U.K. mobile device marketing and sales operations. Mitchinson will be responsible for expanding sales in the U.K. and Ireland. • John Suffolk was named global cybersecurity officer, effective Oct. 1. Suffolk was previously the CIO of the U.K. government. He will report to Huawei’s CEO and oversee the company’s expansion deeper into the consumer and enterprise security markets. Investments/R&D Focus • Huawei opened an R&D center in Silicon Valley that will focus on next‐generation communications solutions. Huawei’s seven R&D facilities and eleven branch offices in the United States employ 1,100 people. • Despite Huawei being forced to divest 3Leaf, the company remains open to smaller U.S. acquisitions. Huawei opened communications with the U.S. government and encouraged an investigation into its operations, though the government has not yet taken the offer. • Huawei opened a Network Operations Center in Madrid to provide managed and professional services to Spain and Western Europe.Resource Management Strategy
66,002 68,000 59,000 9,000 11,500 23,000 4,200 4,500 8,000 7,300 9,800 18,500 1,000 1,200 1,500 40,000 60,000 80,000 100,000 120,000 2008 2009 2010 HUAWEI HEADCOUNT BY REGIONNorth America EMEA CALA APAC (ex‐China) China
SOURCE: TBR ESTIMATES AND HUAWEI TBR $159 $207 $230 $249 $258 $‐ $50 $100 $150 $200 $250 $300 2007 2008 2009 2010 2011 Est. R e ve nue In T hous a nds HUAWEI ANNUAL REVENUE PER EMPLOYEE SOURCE: TBR AND HUAWEI TBR
