Many of you may be waiting and watching to see how the trade issues between China and the United States are resolved, and specifically its impact on Huawei. With current and future Telecom & Network infrastructure projects under consideration, what are the critical things to know when considering Huawei?
Despite all the political turmoil for Huawei, most of it originating out of the United States, the company has quietly become one of the largest telecommunications equipment manufacturers in the world. Huawei expects revenue of about $100 billion annually for the next two years, compared with $105 billion in 2018 including a $30B expected revenue loss as a result of these sanctions.
The bottom line is that Huawei must be seriously considered as an Enterprise network solution provider competing with your current incumbent suppliers. Huawei’s portfolio of hardware stacks up well against the biggest names in network infrastructure, most notably Cisco. They have several product lines that are similar to Cisco devices but have their own network hardware lines and IT solutions for different network demands.
NET(net) has experienced these opportunities firsthand. For example, working for the 3rd largest Food Retailer in Russia where Huawei displaced Cisco, which included Huawei’s statement that “they will not lose a deal on price”.
Huawei Background Information
For those of you that are not familiar with Huawei, this Chinese behemoth was founded by Ren Zhengfei. He worked in the PLA (People’s Liberation Army) in research of new technologies. After Ren was entrenched from the army, he moved to Shenzen and was employed as an electronic reseller. He formed Huawei in 1988 and 30 years has more than 185K employees.
Initially focused on manufacturing phone switches, Huawei expanded its business to include building telecommunications networks, providing operational and consulting services and equipment and manufacturing communications devices for the consumer market.
Huawei has deployed its products and services in more than 170 countries. Its networks, numbering over 1,500, reach one third of the world's population. Huawei overtook Ericsson in 2012 as the largest telecommunications-equipment manufacturer in the world, and overtook Apple in 2018 as the second-largest manufacturer of smartphones in the world, behind Samsung Electronics. In December 2018, Huawei reported that its annual revenue had risen to US$108.5 billion in 2018 (a 21% increase over 2017).
The company announced recently that it is taking the lead in the global 5G market and has secured 46 commercial contracts in 30 countries.
Besides its technology capabilities, Huawei is also in the news for another reason. Recently, the U.S. Commerce Department placed Huawei on its Entity List, effectively barring U.S. firms from selling them technology without government approval. The US government is concerned that Huawei could help China spy on US citizens by planting "back doors" in its telecommunications infrastructure gear or by reporting security vulnerabilities to Beijing. To date, the US Government has not yet provided proof to the general public on these stated concerns directly relating to Huawei.
About a third of Huawei’s suppliers are American, and with these restrictions, they are now likely to move towards making all components domestically. All of this contributes to China’s long term strategy of seeking technology independence by 2025.
It is not clear what the immediate impact will be. Huawei is a private company, so there is no stock price we can monitor to measure an immediate impact. Press reports suggest Huawei has inventoried a large stock of essential semiconductor chips. Some analysts estimate Huawei may be able to continue production for another nine months without purchases from the U.S. during this period. Whether Huawei could be removed from the Entity List is currently unclear.
Huawei SWOT Analysis
A SWOT Analysis conducted on Huawei leads to the following:
- Strengths include a High Level of Brand Awareness, Explosive Growth, Aggressively Priced, Highly Innovative and Strategically Aligned with other Tech companies.
- Weaknesses center around Insufficient Budget Limits, Perceived Low Product Quality, Developing Global Brand Recognition, Inefficient Organizational Structure and High Level of Employee Attrition.
- Opportunities include Improved Product Quality and Low Labor Cost leading to Higher Profit Margins, Benefiting from Government Incentives and Develop a Better Product Distribution Mix.
- Threats are Stiff Competition, Import and Export Tariffs and Restrictions and Product Image.
Operational Risk Management
First look at a few other factors to consider:
Economic Factors pertain to the economy of the country where Huawei is domiciled, such as changes in the inflation rate, the foreign exchange rate, the interest rate, the gross domestic product, and the current stage of the economic cycle. These factors, and their resulting impact on aggregate demand, aggregate investment and the business climate, in general, have the potential to make Huawei highly profitable, or conversely, likely to incur a loss.
Technological Factors can rapidly dismantle the price structure and competitive landscape of an industry in a very short amount of time. It thus becomes extremely important to constantly and consistently innovate, not only for the sake of maximizing possible profits and becoming a market leader, but also to prevent obsolescence in the future.
Legal Factors should be considered in your analysis to invest in Huawei as well. Huawei policies on their own are not enough to efficiently protect Huawei and its workers.
Once the decision is made to enter in a strategic relationship with Huawei, an effective and mature Operational Risk Management Framework is required to ensure supplier risks are controlled and managed. And not only at the time of purchase but also throughout the term of the agreement.
NET(net) has the experience and the capabilities to implement Strategic Supplier Management that not only focuses on developing SLA’s, KPIs and Contract Watchlist items but also on building out a Risk & Control Self-Assessment Framework (including 3 lines of defense) to ensure you stay on top of this strategic supplier.
Understanding the risk factors, and more importantly, having a plan to deal with issues when they arise given all the variables and market conditions, is the key to an optimal agreement and relationship.
If you would like to see a full report on Huawei, please contact us about receiving our latest brief.
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