A Good Year before a Difficult Year

Huawei report shows smartphone strength, but the network business is challenged

On 29 March, Huawei published its annual report for 2018. Huawei is a private company and isn’t obliged to publish its financial results on a regular basis, but it chooses to provide a glimpse into its business once a year.

Huawei had an excellent 2018 in financial terms. Revenue of $105 billion rose 19% in local currency. Operating margin improved from 9.2% in 2017 to 10.1% in 2018, and net profit margin was 8.2%. China accounted for 52% of the global revenue, Europe, the Middle East and Africa generated 28%, the rest of Asia–Pacific delivered 11%, and the rest of the world represented 9%.

Historically, Huawei has mainly been a network infrastructure business. But in 2018, its consumer division — consisting of mostly of mobile phones, but also including tablets, PCs, wearables and others — overtook networks to become the number-one source of revenue for Huawei, delivering $51 billion (48% of the total revenue), up an impressive 45% over the year.

Huawei had a stellar performance in a contracting mobile phone market, selling 206 million devices, jumping 35% from 2017. Huawei’s success was particularly visible in China, where it ended the year in pole position, leaving Apple with a huge decline and Samsung almost squeezed out of the market. In Europe, Huawei gained a solid position thanks to its P-series, Mate-series and Honor-branded devices. But if great products were enough to succeed in the smartphone market, many device makers of yesteryear would still be around. To get to its current status, Huawei spent years working closely with distribution channels and building its brands, and it wasn’t afraid to compete on price.

Huawei narrowly missed out on becoming the second-largest smartphone maker in the world in 2018: Apple finished the year with an estimated 208 million devices sold. But Huawei is clearly hungry for more. The consumer business is arguably more crucial to the company in 2019 than ever before, as the network business faces serious pressure.

Revenue from Huawei’s network business dipped 1% in 2018 to $43 billion. To put this in perspective, rival Nokia saw a drop of 3%, and Ericsson’s network business grew by 3% in the year.

But dark clouds loom over that segment, as Huawei’s 5G equipment has been banned from the US, Australia, Japan and some other markets on the basis of a claim that it poses a security risk: these countries believe that Huawei could be forced under Chinese law to collect information from its networks and provide it to the Chinese government. Although this is unfortunate for Huawei, these particular markets currently account for a small share of its revenue. The real threat it faces comes from the wider reputational damage and the uncertainty in Europe, which is one of its core markets.

In a more positive development, the European Commission recently chose to ignore a call from the US to ban Huawei from its mobile networks in the EU, but encouraged member countries to share more data about cybersecurity. In contrast, last week a UK government committee issued a warning on newly found security problems with Huawei equipment.

Huawei’s success in 5G is underlined in the report. The company reveals that it has already signed more than 30 5G commercial contracts with leading global network providers, and has shipped more than 40,000 5G sites to different markets around the globe. Its commitment to developing the technology is also reflected in the 2,570 5G essential patent families it has declared to ETSI.

However, one thing is clear: Huawei’s network business faces a major challenge in 2019. It is, of course, making a huge effort to defend itself, and has become a lot more open and engaged with the media. Unprecedentedly, the first page of the annual report is all about who owns, controls and manages Huawei, something that has been relatively opaque in the past. The company is owned by almost 100,000 of its 188,000 employees. Huawei goes on to explicitly say that “no government agency or outside organization holds shares in Huawei”.

Security, transparency and independence from governments is the main thread through the annual report, as Huawei tries to persuade the world to allow it to freely sell its 5G networks. But given the huge importance of data in all aspects of life, companies touching massive amounts of data — either handling it directly like Facebook and Google or offering equipment to do so like Huawei — will have to accept that governments will play a big role in their business in the future, just like they do in the energy sector. The game has become far too big and important and the rules are changing.

With all this in mind, Huawei is unsurprisingly focussing hard on its smartphone business. Last week, it launched its new P30 family of devices, which have already received plenty of positive feedback (see Instant Insight: Huawei Unveils P30 Series Smartphones). Furthermore, Huawei seems to be pushing hard to make these products a success, based on some of the highly competitive deals we’ve seen from operators as they launch the new devices.

Huawei’s chairman doesn’t pull any punches in the report, saying, “we will do everything we can to shake off outside distractions, improve management, and make progress towards our strategic goals”. This is a clear message that Huawei refuses to let its geopolitical challenges divert its focus from continuing to build its already formidable business. Whether it’s in network infrastructure or smartphones, Huawei’s rivals should be on alert.

You can access Huawei’s annual report by clicking here.