2019 isn’t looking too bad for Huawei, yet

Tough journey ahead.
Tough journey ahead.
Image: Reuters/Dado Ruvic
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Huawei, the company most deeply entangled in the ongoing China-US trade fight, has had a pretty good first half year despite that unwanted status. But more uncertainty awaits in the second half.

The world’s largest telecom-equipment maker said Tuesday (July 30) its revenues rose 23% to 400 billion yuan ($58 billion) in the six months ended June 30, compared with a 15% rise in the same period last year. Its growing dominance in China’s smartphone business brought in more than half that revenue, earning more than 220 billion yuan, while sales revenue from telecom equipment to carriers raked in nearly 147 billion yuan.

Huawei managed to buck the decline in the smartphone market in the country in the second quarter—gaining domestic market share of close to 40%, and delivering more than 37 million phones in that period. The shipments helped it to surpass the other top four vendors in China: Vivo, Xiaomi, Oppo and Apple, all of whose market share dropped in the three months ended June, according to market research firm Canalys.

The US moves against Huawei in the last year may have added to its smartphone sales at home, where it’s seen as a national champion, representing the rise of Chinese tech giants in the last decade. After the arrest of its chief financial officer last December at the request of the US, there were patriotic calls within China for people to buy the company’s products, and reportedly even pressure from some companies on their employees to do so.

What’s also worth noting is the company’s growth in the contested segment of 5G networking, the technology that is expected to power things from robotics to self-driving cars. The company is behind two-thirds of the commercially launched 5G networks built globally, and secured 50 contracts in 30 countries as of June 30. The consumer and carrier business, of which 5G infrastructure is going to be an essential part, accounted for around 48.4% and 40.8% of Huawei’s revenues last year, respectively.

Despite the seemingly good figures for the period, the tech powerhouse warned today it could start to feel some pain from a US tech ban in May, which barred American companies from doing business with it on the ground of national security concerns.

“The US [ban] has had some impact on our development. But both the scope and extent of this impact is controllable. Our core products have not been significantly affected. Our customers still believe in us,” said Huawei chairman Liang Hua, adding that the company was “facing a tougher second half.” Earlier this year its founder warned the hit to revenue this year alone could be $25 billion.

Liang said the company would spend more on R&D this year to mitigate the impact, budgeting around $17 billion for it.

Following the tech ban, some US companies like Facebook stopped allowing its apps to pre-installed on Huawei phones, while the company also postponed a phone launch. A three-month grace period until August 19 has allowed some of Huawei’s long-time partners, such as Google, from which it licenses the Android operating system, to continue working with it. While the ban might not yet have had a substantial impact on the company, the lack of clarity on what happens next with it, coupled with continued intense scrutiny from the US and other countries, could hurt consumer confidence in Huawei phones, say analysts.

“The biggest uncertainty for the rest of the year, of course, is still whether the US tech ban will ease and to what extent. While it should not be a big problem for Huawei to continue selling equipment to global carriers, especially the infrastructure for building 5G networks as it is the leading player in this field, the challenge lies more in whether it can find alternative suppliers outside of the US, as well as if the company can keep consumers’ confidence untouched,” said Jia Mo, analyst with Canalys.

Echoing Jia, Kiranjeet Kaur, an analyst with IDC, said Huawei will need to get back the trust of consumers and even more so of its channel partners. ”While Huawei has been able to leverage its strong brand positioning in the home market to offset overseas slowdown, but overall the China smartphone market is not expanding so any further gains are not going to be easy for Huawei,” she said. China, the world’s largest smartphone market, has had nine consecutive quarterly falls in smartphone shipments including the latest April-to-June one, according to Canalys.

The 32-year-old Chinese firm now with 180,000 employees, founded by former People’s Liberation Army engineer Ran Zhengfei, has long faced concerns over its possible ties with Beijing from the US. But its real headaches started after a more hawkish Donald Trump took office as the US president in 2017.  The US commerce department in May placed Huawei on its “entity list,” effectively cutting the company off from large parts of its supply chain, and has lobbied allies not to use its equipment in their 5G networks. That was preceded by last year’s arrest of Meng Wanzhou, the daughter of Ren and the CFO of Huawei, in Canada on suspicion of violating US trade sanctions on Iran. Meng is currently out on bail and awaiting extradition hearings that will start next year.

The company could get a reprieve, though—after meeting with president Xi Jinping in Japan on the sidelines of the G-20 summit last month, Trump suggested Huawei’s problems could be dealt with through US-China trade talks. Trump met last week with the heads of some of the country’s largest tech companies, such as Google and Intel, to discuss a range of economic issues including a possible resumption of sales to Huawei.

But given the lack of firm details, coupled with a string of recent news reports that have added to concerns about the company’s trustworthiness, the road ahead will remain bumpy, say analysts. The Washington Post recently reported the company may have partnered with a state-owned firm to help North Korea build wireless networks, while an earlier Bloomberg report said Huawei employees worked with the Chinese military on some research projects. Huawei has said it has no business dealings in North Korea, and that it has not collaborated on research with the Chinese military.

Huawei reported a 19.5% jump in revenue last year to 721.2 billion yuan ($107 billion), joining the $100 billion club with firms like Microsoft and Alphabet for the first time.