What’s going on with Huawei these days?

lIn recent days, Chinese telecom giant Huawei has celebrated the return of Meng Wanzhou, daughter of Huawei founder Ren Zhengfei and former Huawei finance director, who was detained for three years in Canada after allegations of violating a US ban on business deals with Iran. Released last September after a compromise with US authorities, Meng has now been promoted to one of Huawei’s three rotating chairmen. Ren had previously stated that his children would not run the company after retirement, but recent setbacks appear to have drastically altered plans — most notably that the company is “slowly being strangled” by a successful ban on advanced semiconductors.

To review, Meng led Huawei’s close annual meeting on earnings and future plans. She admitted that the company has “been under a lot of pressure” in recent years, but she argued strongly that “this has made us more united and our strategy clearer.” In 2021, Huawei’s revenue fell 29 percent to about $100 billion, weighed down by a sharp decline in smartphone sales and declining revenues from its core business of selling basic equipment to telecom operators. However, profits for the year rose by a record 76 percent, thanks in large part to the sale of Huawei’s mobile phone unit to a government-backed consortium.

Despite Meng’s optimistic optimism, the reality behind the current numbers predict huge challenges for the company. On the positive side, Huawei is aware of threats to its core equipment business and is advocating a shift to software and a strong investment in cloud computing services, which do not rely on the high-end chips and tools provided by the US. are blocked. While still a small player globally, Huawei has emerged as a major competitor in the Chinese cloud computing market with a 17 percent market share, behind Alibaba’s 33 percent. Further, while Huawei’s cloud business grew more than 30 percent in 2021 (to $3.2 billion), it is still eclipsed by international cloud computing giants such as Amazon Web Services, which posted $62 billion last year.

Huawei has always prided itself on technological prowess, backed by massive investment in research and development (R&D) and engineering talent. Juggling the tight finances of the past year, it maintained high R&D spending and did not cut back on its technical staff. However, it could do this by divesting key parts of the business and cutting employees manning its highly regarded services, particularly for basic telecom equipment (ie 4G and 5G). In the future something must be given; Huawei cannot sustain its high expenditure on R&D and service personnel without drastically cutting profit margins, undermining its highly regarded service backup, or more generally jeopardizing its future by shedding business functions. Furthermore, there are real doubts that the thousands of excellent R&D hardware engineers can easily be turned into software geniuses.

Still, more than 80 percent of Huawei’s revenue comes from networking products and gadgets, so the focus will remain on hardware for 5G wireless equipment (and, later, for 6G). Here the picture remains bleak – at least for the foreseeable future. One bright spot, and lasting action, can be found in the company’s success in delivering highly advanced 5G private networks across a variety of industries — such as shipyards, coal mines, chemical plants and other industrial sites — with the goal of expanding labor automation. automate. intensive or hazardous industrial processes. In 2021, these projects in China generated about $1.2 billion, or about a third of world production, more than the combined sales in Europe and North America.

But all these maneuvers pale in comparison to Huawei’s inability to defend itself against the US’s global ban on advanced chips and tools on the so-called “entity list” administered by the US Department of Commerce. A harbinger of things to come, Huawei’s sales to telecom operators fell 7 percent in 2021, while those of its rivals – Ericsson and Nokia – rose. As Stefan Pongratz of the Dell’Oro Group points out, Huawei remains the largest player in the global telecom equipment market, but this is the result of its near monopoly position in the gigantic Chinese market. Outside of China, Nokia and Ericsson each have a 20 percent market share. Huawei follows with 18 percent.

Going forward, the ban on advanced chips and equipment in the US will take an increasing toll as Huawei runs out of chips, pending US action. (Chinese companies are years behind in producing these advanced chips.) Although some savvy US trade experts expressed strong doubts about the above bans (not least because of their understandable mistrust of then-President Donald Trump’s erratic trade policies) , and the intervening future appears to be paying off the policies pursued by President Joe Biden. Another factor not explored here is how Huawei, like other companies, might be dragged into the conflict between Russia and Ukraine.

This piece was originally published by the American Enterprise Institute.

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