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Huawei looks to dial a different number

When Washington indicated to Huawei in February 2011 that it would not approve a key deal by the Chinese group, the company declined its offer to withdraw and instead invited the US government to conduct a further in-depth investigation.

Two years later, Huawei’s defiance has turned into resignation. Eric Xu, executive vice-president and one of the three men who jointly run the company as rotating chief executives, stunned analysts last week when he told them the company was “not interested in the US market any more”.

Huawei’s about-turn throws a spotlight on the question of how much further the Chinese company’s rapid rise can go as long as it remains largely blocked out of the world’s most important telecoms market.

In 10 years, Huawei increased its revenue from US$2.7bn to more than US$35bn in 2012 and grabbed a dominant share of many segments of the global telecoms infrastructure market. Along the way it displaced rivals such as Nortel, Motorola, Alcatel-Lucent and Nokia Siemens Networks to be the second largest by revenue and is breathing down the neck of industry leader Ericsson.

But in the US, the company has hit a brick wall. Politicians and security experts allege that the past of founder Ren Zhengfei as a former Chinese military official makes Huawei likely to help China compromise US telecom networks. As a result, less than US$2bn of the company’s 2012 revenues came from the US.

“Indeed you have to ask, ‘What is next for Huawei after this?’ ” says Bryan Wang, China country manager at Forrester Research.

Huawei’s answer is a focus on markets where it has a chance. “Considering the situation our company currently faces in the US, it would be very difficult for the US market to become a primary revenue source or a key growth area for our carrier network business in the foreseeable future,” says Roland Sladek, a company spokesman.

“The reality is that, while we will always remain committed to our customers, employees and the local communities in the US, Huawei is shifting its focus on the carrier network business side to the stronger growth markets such as Europe.”

European governments have not raised security concerns of the kind that are holding Huawei back in the US, allowing the Chinese company to firmly establish itself as a major supplier to leading carriers such as Vodafone and T-Mobile. The UK intelligence and security committee is due to give an assessment of Huawei’s role but is not expected to brand the company a threat.

Huawei has 7,500 employees in Europe, already outnumbering its 1,800 headcount in the US. It has stopped hiring in America but plans to increase its workforce in Europe over the next five years to 13,000.

Over the past 16 months, the company announced the establishment of four new research and development centres in Italy, the UK, Finland and Ireland, and promised to spend US$2bn on investment and procurement in the UK by 2017.

Huawei deployed 32 of the current 60 commercial networks in Europe for LTE, the newest-generation mobile technology. This month, the company announced a contract under which it will manage Vodafone’s mobile and fixed-line networks in Spain for the next five years, and a US$1bn deal under which it will build and manage the LTE network for Italy’s third-largest operator, Wind.

Analysts therefore see the decision to hold back in the US as realistic. “They are becoming more pragmatic overall,” says Mr Wang. Huawei has also adjusted its strategy on the new businesses that it hopes will make up for slower growth in the maturing carrier network market.

Apart from selling network infrastructure gear to operators, the company now increasingly targets consumers with mobile devices such as smartphones and is building up an IT and telecom products and services offering for enterprise customers.

By 2017, the company expects the carrier network business to fall from the current 70 per cent of total revenue to 60 per cent, the consumer business to grow to 25 per cent and the enterprise segment to 15 per cent.

“This would make Huawei the world’s third-largest mobile device vendor with revenues of US$13bn-US$14bn; that is reasonable in a smartphone market which will become more fragmented and less dominated by Apple and Samsung,” says Mr Wang.

In the enterprise business, Huawei has slashed its target from creating US$15bn in annual revenue by 2015 to US$10bn by 2017. The enterprise business group’s headcount has fallen from 20,000 to 18,000.

“We now understand much better how this business works and therefore have a clearer idea of what we can achieve,” says William Xu, the unit’s chief executive.

Huawei has tightened the unit’s geographic spread. “We will focus on China, Europe and 26 other countries which account for 90 per cent of the global enterprise market,” says Mr Xu. The company has aborted attempts to build enterprise operations on the back of an existing strong carrier business in markets such as Nigeria and Egypt.

The new pragmatism has also led to a narrowing of sales channels. Huawei now concentrates on selling enterprise products through carriers, IT services firms and specialist distributors rather than trying to engage enterprise customers directly.

The company has still a long way to go in the enterprise market. “They are not on anyone’s list as a supplier right now,” says William Fellows, vice-president at 451 Research in London. He adds that the troubles in the US carrier network market are likely to affect the enterprise business, where Cisco, one of Huawei’s oldest and most bitter rivals, is the dominant player.

That is a market Huawei cannot afford to miss. With revenues forecast to exceed US$700bn this year, the US will be by far the world’s largest market for enterprise IT services – bigger than all European markets taken together, according to Forrester. Japan is a distant second with US$250bn in revenues forecast for 2013, and China is expected to surpass US$100bn, ranking third.

And yet, this could be the year Huawei’s enterprise business takes off. Says Mr Fellows: “Before, they spent a [lot] of money marketing products that weren’t available yet, but now things are getting ready.”

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