Huawei’s business has been hit by international sanctions, but the world needs Huawei more than it realises, says IMD Business School’s Mark Greeven.
LAUSANNE, Switzerland: Huawei has launched their best phone yet, the P40 Pro+, but few outside of China are willing to buy it.
It is hands-down the best phone in the world, featuring best performance in terms of battery life, speed, and of course the unrivalled Leica cameras with clever artificial intelligence (AI) software that can remove unwanted passers-by or reflections from photos. Such features are generations ahead of any of the P40’s global competitors.
Yet, Google blocking its services on Huawei phones – following the US government barring American companies from doing business with the Chinese company in 2019 – makes it cumbersome for most users.
While Chinese owners of Huawei phones are not particularly interested in using Google’s services, a few overseas users have circumvented the block by sideloading Google Mobile Services – that is, installing and running the software through unauthorised means. This doesn’t annul a user’s warranty, but most users appear to avoid that not entirely legal solution.
2020 is not only the year of an intensifying trade war, it has also seen smartphone sales decline by 20 per cent in the first quarter as a result of the coronavirus crisis.
But even before the pandemic, global consumers were finding high-end phones less appealing, amid a plethora of cheap options ranging from Oppo and Vivo to the increasingly sophisticated Xiaomi phones.
In other words, 2020 is shaping up to be a rough year for Huawei for selling smartphones. This depresses their business prospects as their consumer business accounts for 55 per cent of their total revenue as of 2019.
So, what are Huawei’s business prospects and how do geopolitics hamper these?
HUAWEI’S GAME PLAN
Huawei is betting large on 5G infrastructure and is one of nine global providers of base stations (a radio receiver or transmitter that serves as the hub of the local wireless network). It also has significant stakes in cloud computing and smartphones.
And these bets are certainly not wrong: Each of these have comfortable market sizes and growth ratios.
After consulting a wide variety of public sources and industry experts, I estimate the global markets for 5G infrastructure, cloud computing and smartphones to be worth US$240 billion, US$400 billion and US$300 billion by 2025 respectively.
Currently the most mature of the three is cloud computing but even that still has a compound annual growth rate (CAGR) of 20 per cent over the next 5 years, followed by smartphones’ 33 per cent CAGR and 5G infrastructure with over 50 per cent CAGR.
Huawei has thus grown to be the world’s biggest telecommunications equipment supplier. Since it started building 4G networks in Europe in 2009, it expanded to over 170 countries.
Many countries across Europe, Africa, the Middle East and the Americas have set up 5G infrastructure with at least some Huawei equipment.
But Huawei’s 5G infrastructure business has been strongly challenged by regulations in the US and Europe.
The US has excluded Huawei’s equipment from their 5G infrastructure and on Jun 30, formally designated the telecom giant as a national security threat.
The UK has reportedly decided this week to get rid of Huawei equipment in their network altogether – a shift from earlier this year, when a limited role was left open for Huawei.
Huawei doesn’t hold all the cards in the telecom industry either – it still lags behind US companies in manufacturing semiconductor chips. Taking advantage of this, Washington on May 15 banned all manufacturers from shipping chips with American technology to Huawei without a US government license.
In response, Huawei is looking to buy chips from other companies like Samsung and reinforcing their own chipmaking capabilities, but it remains to be seen if these moves are sanction-proof.
But, the knife cuts both sides. Huawei’s decades-long research and development investment have paid off – not only does it make cutting-edge smartphones, it has become a global leader in 5G technology and standards.
Even with a boycott on their 5G base stations and infrastructure, foreign companies need to pay hefty fees to use Huawei’s intellectual property. Huawei is integral to the 5G industry because of it owns much of the core technology and the means for implementing them.
So important that several major European carriers spoke out against the US ban on shipping American chips to Huawei, for fear of tearing up the global supply chain and halting innovation in telecom equipment.
So important that on Jun 15, the US Commerce Department allowed American companies to work with Huawei on 5G standards, out of fear of US tech being sidelined and Huawei taking an even further lead on 5G technology.
I can only come to one conclusion: The world needs Huawei.
But does Huawei not need the world? With China as a home market representing a big piece of the total 5G base station pie, Huawei could turn inwards.
At home, the lack of Google services is also not a problem for 800 million smartphone users. As a matter of fact, China’s localised ecosystem of superapps is more attractive than Google services, often to the envy of foreign users.
Huawei’s 2019 annual report showed more than 60 per cent of total revenue coming from the Chinese market – an early sign that the telecom giant is drifting from a globalised revenue pattern.
We should not jump to conclusions. Perhaps we overestimate the impact of US and European markets for Huawei.
Indeed, markets such as Indonesia, Malaysia and Pakistan are attractive for their sizeable populations and are more receptive to doing business with China. I would not be surprised to see quiet but steady growth of Huawei in these markets, both in 5G infrastructure and smartphones.
Under the radar of global press, Beijing is promoting these markets for Chinese business and investment through the Belt and Road Initiative.
Perhaps the most interesting field to watch is Huawei’s cloud computing business. The global market for cloud computing is large and still rapidly expanding. The growth of cloud is driven by the rapid increase in Internet usage worldwide, especially in Asia, where businesses are going online and need high-performance infrastructure to support their operations.
But competition is heating up for Huawei’s cloud business. Alibaba and Tencent are major players not only in China, but increasingly so in Southeast Asia. We also find Amazon Web Services and Microsoft competing on that same turf – both are among the largest cloud vendors in the world.
CHALLENGED BUT RESILIENT
2020 is a challenging year for all businesses but Huawei has been hit especially hard – even though it continues churning out cutting-edge smartphones like the P40 Pro+.
The company is tapping on the most relevant value pools for customers with 5G and cloud, but its profit margins will be challenged by geopolitical conditions.
Huawei is certainly challenged but also appears resilient through decades-long preparedness. It is perhaps more important to the world of technology and innovation than headlines suggest.
Even the Trump administration agrees that we cannot completely ban Huawei.
Mark Greeven is Professor of Innovation and Strategy at IMD Business School in Switzerland and Singapore.