neXt Curve attended Huawei’s Annual Report event where rotating chairman Ken Hu presented the company’s results for 2020 which was a challenging year with a global pandemic and a US-China tech war. How did Huawei fair during a difficult year? How has their “survival strategy” evolved? How is the company poised to grow in a 2021 of persistent global uncertainty and US-China relations that don’t look like they will get any better anytime soon?
On March 31, Huawei hosted their Annual Report 2020 event. Ken Hu, Rotating Chairman of Huawei presented the company’s 2020 results and hosted a substantial Q&A session for world media and analysts. neXt Curve was in attendance to gain insights into the state of Huawei’s business and the company’s prospects in what promises to be a tumultuous 2021.
The last three years have been a challenging time for Huawei as the United States targeted the company with particular focus as it instituted a trade and tech war against China. Tensions have escalated through a series of tit-for-tat measures from both sides. Tensions culminated through the course of 2020 with the advent of the “Clean Network” campaign conducted by the US State Department under Secretary State Mike Pompeo launched early last year and the rapid expansion of the Entity List and sanction policies by the US Department of Commerce under Wilbur Ross which dramatically restricted US firms from supplying components to China without a license.
While US tech firms such as AMD, Intel and Qualcomm and others have largely been successful in securing licenses to supply Chinese technology companies including Huawei, the US Department of Commerce’s denying Huawei’s HiSilicon access to leading-node semiconductor fabs such as TSMC and Samsung prompted Huawei to spin-off the commodity and mid-tier Honor brand smartphone portfolio to a consortium of Chinese investors in November of 2020. This move would allow the business unit to continue to source from the US suppliers under new ownership and management.
How did Huawei fare given the black swan that was the pandemic and innumerable headwinds that challenged the company in 2020?
Resilient but not unscathed
Huawei’s consolidated 2020 revenues proved resilient clocking in at 136.7 billion USD which was a 3.8% increase over 2019. Impressive growth considering the difficult global market environment last year. The company was able to best their 2019 revenue but were not able to match or exceed the growth rate of 19.1% over the previous year.
These are not the growth numbers that Huawei has become accustom to in recent years. The Carrier Business Group grew at an anemic 0.2% to 46.4 billion USD which came in the middle of the tempered growth or lack thereof experienced by its peers Ericsson (5% increase) and Nokia (5% decline). However, the results were solid considering Huawei had suffered a number of 5G contract losses through the course of 2020 due to the “Clean Network” campaign which prompted several markets in Europe and Asia to dramatically restrict or even phase out the use of Huawei equipment and software in their networks over the coming years.
The Consumer Business Group managed to grow 3.3% to 74.1 billion USD despite a slowdown in sales in the EMEA, APAC and LATCAM markets as Huawei handset sales were limited due to lack of access to Google’s Mobile Services. Going forward, the results of the Consumer Business Group will certainly be structurally impacted by the sale of Huawei’s Honor smartphone business. It had been the growth engine that elevated the BG’s top line contribution to 54% of Huawei’s total revenue in a few short years.
Regionally, China was the bright spot for Huawei growing at 15.4% YoY to a massive 89.7 billion USD thanks to the aggressive investments in 5G deployments by Chinese mobile operators and brisk domestic consumer device sales during the pandemic. The China market made up 65.6% of Huawei’s total revenue. However, other regions saw declines led by LATCAM (-24.5%). More significantly, the EMEA region, which made up 20.3% of Huawei’s total revenue, fell by 12.2%. Europe hit Huawei’s top line particularly hard due to flagging smartphone sales and 5G deal losses across the region despite a strong start going into the year with over 90 5G contracts as of February 2020.
Enterprise was a bright spot for Huawei in 2020
While Huawei’s Carrier and Consumer BGs succumbed to a multitude of difficulties that challenged the company in 2020, the Enterprise BG revenue grew by 23% YoY to 15.4 billion USD which was a dramatic acceleration over the BG’s moderate 2019 growth performance of 8.6% over the previous year. This result is not surprising given the heavy consumer and enterprise pivot toward digital commerce and service consumption modalities from media streaming to online shopping and delivery.
The strong performance of the Enterprise BG was attributable to HUAWEI CLOUD. The cloud business unit achieved revenue growth over 100% in 2020 and is the second largest cloud provider in China capturing 17.4% of the market according to Canalys. HUAWEI CLOUD was started in 2017 and has become an important part of Huawei’s AI and edge computing strategies putting Huawei in a unique position among ICT vendors.
In a short time, HUAWEI CLOUD has managed to expand its ecosystem and footprint significantly. It currently has over 19,000 partners who have joined the HUAWEI CLOUD Partner Network (HCPN). Huawei claims that over 1.6 million developers are developing applications on HUAWEI CLOUD which currently hosts over 4,000 applications on its marketplace. As of today, HUAWEI CLOUD operates 45 availability zones in 23 regions around the world.
Huawei’s improving enterprise chops are being channeled into their 5GtoB (5G to Business) strategy that focuses on closing the industry modernization gaps that can be addressed by 5G-enabled applications. 5GtoB essentially bundles Huawei’s broad portfolio of IT and CT technologies, products and services including cloud into industry solutions geared toward helping operators to expand their value proposition for enterprise customers. The company claims to have signed more than 1,000 5GtoB project contracts across over 20 industries with notable citations in the mining, healthcare, ports and manufacturing.
We expect that Huawei will continue to invest in the expansion of its cloud and enterprise IT offerings as it diversifies its portfolio to deal with the slower growth of its carrier business and growing threats to its consumer electronics business. Given that China was least affected economically by the global pandemic and continues to invest in the modernization of its economy across industries, Huawei should experience some welcome tailwinds in China as the Big 3 operators continue to aggressively invest in their 5G transformation and work with their enterprise customers to drive digital transformation and business resiliency.
Huawei staking its claim as a technology company
The annual report presentation was prefaced with a good deal of talk about Huawei’s role as an industry innovator and inventor of ICT technologies. Huawei touted its portfolio of 100,000+ active patents and their expansive contributions to global technology standards and open consortia. They also highlighted their staggering 21.8 billion USD investment in R&D last year equivalent to 15.9% of the company’s total revenue.
In recent years, Huawei has increasingly asserted itself as a leader in ICT technologies and invention claiming that it is one of an elite few if not the 5G technology leader. While there are may prevailing debates about who is leading the “5G technology leadership race”, which is often conflated and confused with “5G leadership race” in terms of maturity of 5G network deployment, coverage and quality of service, Huawei is undeniably a force to be reckoned with on the IP front regardless of the ranking method, and their ability to invent and innovate not to be trivialized.
In March of 2021, Huawei announced that it will levy a licensing fee on smartphone manufacturers to access and practice the company’s 5G patent portfolio. With the loss of the bulk of its future smartphone revenue with the sale of the Honor line, Huawei’s pivot to technology licensing provides an offsetting, high-margin revenue stream that also helps them maintain presence in the market. We can expect Huawei to continue developing smartphone innovations through it’s premium P-Series line which it continues to hold in its Consumer BG product portfolio.
It will be interesting to see if Huawei ramps up its licensing business across other categories such as the 5G RAN and emerging edge cloud computing (MEC) as a part of its survival strategy. More extensive and substantial licensing of their IP could help Huawei maintain some form of presence in 5G infrastructure markets they are being shut out of. It will also help Huawei monetize their growing IP portfolio supplemented by the over 3,000 5G innovation projects that the company engaged in with operators and enterprises in China and across the globe in 2020.
Seamless AI Life – for survival and reinvention
HarmonyOS and HMS (Huawei Mobile Services) have come a long way in the 18 months since they were introduced in September of 2019. HarmonyOS has quickly proliferated across the Huawei device portfolio with HMS becoming the third largest app ecosystem globally. While these might not seem like huge achievements given the outsized global marketshare of Apple’s App Store and Google Play, they are. China remains a massive and important market for any global technology vendor and is the growth market for most if not all US tech majors.
Huawei’s “1+8+N” strategy (1 mobile phone user + 8 smart devices + N IoT devices) aims to take the focus off of hardware and onto smart living solutions and experiences for five scenarios – smart office, fitness & health, smart home, smart travel and media entertainment. Huawei has made significant progress in 2020 to bring Seamless AI Life experience to the car with its HarmonyOS for Intelligent Cockpit which is one of the three operating systems supporting Huawei’s new Connected Car Architecture (CCA).
HarmonyOS and HMS are centerpieces of Huawei’s Seamless AI Life strategy to pivot to a “ubiquitous” computing model based on a “distributed OS”. This transition is akin to moving from today’s two-tier mobile computing model (smartphone-to-cloud) to a more multi-tier, shared computing model across Huawei portfolio of “1+8+N” devices. Huawei expects over 300 million devices to run Harmony OS in 2021. HMS now has a community of over 2.3 million registered developers with a critical mass of more than 120,000 apps.
While the wholesale rearchitect of the consumer computing paradigm may seem farfetched, Huawei is one of the few companies in the world that could pull off such a feat. With its fast-growing installed base of more than 1 billion devices and over 730 million smartphone users, Huawei has the scale and gravity to make a significant rethinking of mobile computing happen. They also have the captive China market to incubate such a transformative strategy. Huawei’s HarmonyOS and HMS may also make traction in other markets outside of China that are not as dependent on US tech properties such as Twitter, Google and Facebook face increasing regulatory headwinds for a growing number of antitrust and privacy issues especially in Europe.
If Huawei is able to realize new economics through their “1+8+N” mobile computing model, the company will be well positioned to bring more efficient and cost-effective digital infrastructure and personal computing solutions to their growth markets in LATCAM, EMEA and Asia. This could result in lower cost smartphones that will not depend on the most advance chips manufactured on the leading node du jour. This survival strategy would not only support Huawei’s stated mission to promote digital inclusiveness across the markets it serves but also yield some competitive advantage through innovations sourced from the necessity to think very differently.
Huawei has been clearly forced to reinvent itself over the past three years as the company has faced significant headwinds due to souring relations between the United States and China. Huawei has demonstrated that it can quickly adapt and respond to a challenging global market environment. Its business results for 2020, while historically modest, is a testament to the company’s resiliency, agility and ingenuity. It is adopting new business models and making rapid portfolio changes that seem to have been effective in shoring up its overall business during these difficult times.
Huawei’s rebranding as a technology company is indicative of an accelerated shedding of its legacy as a hardware company. It is an essential transformation of the company’s identity substantiated by some real business model changes backed by a formidable portfolio of IP assets and R&D chops that the ICT industry, competitors and partners alike will need to reckon with going forward.
Huawei is banking on its scrappy, “always-hungry” culture to foster an alternative paradigm for mobile computing that will play to the advantages of Huawei as one of the few ICT technology vendors that has industry leading businesses and ability to execute in 5G, enterprise cloud and consumer electronics. Of particular note is Huawei’s exploration of mobile computing models that address the deficiencies and inefficiencies of today’s conventional smartphone/device-centric model. For this purpose, Harmony OS and HMS will take on increasingly important roles in Huawei’s reinvention as it strives to survive in 2021 and beyond.
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Managing Director, neXt Curve
April 5, 2021
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