Huawei: 'We don't compete on price'

Friday, March 2, 2018

Chinese telecommunications equipment manufacturer Huawei's growth curve has been nothing short of stratospheric, reaching revenues of US$92bn in 2017 compared to US$35bn in 2012. This has been largely due to its entrance into the consumer device market six years ago, where it is now in third placed in smartphones globally after Samsung and Apple.

But for many in the Western hemisphere the company remains something of a mystery. Its positioning in the US market has been hindered by concerns from the US government, which is suspicious of companies with ties to foreign governments in a security-sensitive sector like the telecoms industry. 

Huawei had a major presence at this year's Mobile World Congress in Barcelona, which was accompanied by a slew of product announcements around 5G, the cloud and consumer devices. BNamericas spoke to the company's VP of corporate communications, Joe Kelly.

BNamericas: Huawei has reached number three in the global smartphone race, despite not having proper access to the US market, where most consumers purchase their phones through an operator. Attempts to reach distribution agreements with carriers have been rejected over apparent national security concerns. What can Huawei do to overcome that?

Kelly: Our devices present no greater threat than those of anyone else. We take cybersecurity very seriously. We all share the same global production and supply chains. We don't really manufacture our own devices; they're manufactured by third parties. There hasn't been a shred of evidence that our devices or technology contain any problem. So if and when the US is ready to accept Huawei technology, we'll support that market. Until that time, we'll focus our attention on markets where we can achieve growth and are welcome.

BNamericas: Does Huawei receive money from the Chinese government?

Kelly: No. On occasion we receive R&D grants from the Chinese government, but also from the European Union and other governments; but so do our competitors. We get no advantages from the Chinese government, they have no ownership.

BNamericas: Why has Huawei targeted emerging markets?

Kelly: If you sell a network or a phone it doesn't matter where you're selling it. If you look at Huawei's history, the company initially avoided the big metropolitan areas where the established players were and focused more on rural parts of China. That enabled them to get scale and capability before moving back to the cities. We deployed the same strategy when we globalized, starting with emerging markets - where the established players weren't paying so much attention.

BNamericas: Chinese companies are renowned for being cost-efficient, which enables them to compete on price. Is that a fair assumption?

Kelly: That assumption no longer applies for two reasons. First of all, China isn't so cheap anymore. And two, everyone is manufacturing in China. We have common supply chains, so the advantages that Chinese vendors had 25 years ago are no longer there.

We don't compete on price. Sometimes we win business despite being more expensive, and sometimes we lose business on price. It's not about the numbers; it's about being flexible to do business in a different way: according to the customers' needs.

BNamericas: Did you encounter cultural challenges coming into Huawei from your communications and journalism experience in the UK?

Kelly: I handle international media. When I arrived five years ago Huawei wasn't really speaking to the media. I was brought in to help the company understand the western world, how to engage the media, making sure they know what we're doing. We've made a lot of progress.

It's partly about the brand and partly about trust. People don't trust what they don't understand and cultures are different. Are we a global company headquartered in China or are we a Chinese company going global? We're the former. We're also privately held. We aspire to the same level of transparency and governance a publicly traded company would be required to adhere to, and part of that is engaging with the media.

BNamericas: And what's the company's main message right now?

Kelly: 5G. We recently announced we would invest US$800mn this year on 5G. We don't expect to see mass market take up before 2020. But there's early demand and we have commercial solutions ready. We're launching end-to-end capability, which is everything from the network to the device.

We're in an evolving industry that never stays still. In smartphones it used to be about the device, now it's about wearables. 5G will bring a whole range of opportunities to the market.

We talk about the pipe, cloud and device. Maybe the device is a connected car. We sell connectivity modules to car manufacturers. This will lead to more intelligent transportation, which means fewer accidents due to the low latency of 5G, and less congestion.

I'm excited by this new world. It will make our lives more efficient and easier. It will help us to have smarter cities and better healthcare and make better decisions. It used to be a bank or retailer had an IT department. Now all companies are IT companies.

BNamericas: Is not being publicly traded important to Huawei's success?

Kelly: I think it is a big differentiator. We started investing in 5G in 2009. It was realistically going to be a 20-year investment cycle before seeing meaningful levels of return. If we were a publicly traded company that might be a difficult sell to the investors.

We make investment decisions based on what our customers want and our shareholders share that view; that you have to invest long term and be patient. I think there's a different mentality, we own the company as opposed to owning shares in the company.

When the business is growing, you see the returns for your shareholders. In 2017, we grew around 20%, while our competitors were declining 6-8%. We're winning market share all the time.

We invest a minimum of 10% back into R&D every year. When you have virtuous cycles, you invest more to sell more. With publicly traded companies, when the economy enters a downturn, the first thing they often do is look at where they can cut costs. We don't have that approach.

BNamericas: So patience and investing for the long term are key?

Kelly: We've entered markets knowing it will take us 3-5 years to get any footing. A lot of companies enter a market and if they don't get immediate success in the first year they pull out.

Patience is a Chinese characteristic. You have to earn the right to do this. In China what you've done in the past doesn't matter, you've got to build relationships. We've taken that Chinese philosophy to our overseas expansion.

One of the things that our CEO Ren Zhengfei talks about is avoiding getting complacent. Big tech companies can fail. Look at Nokia, Blackberry, Nortel. There may be some guys in Silicon Valley working on the new Facebook? We don't know. Ren tells us what happened in the past tells you nothing about the future. You should come to work every day fresh.

Sometimes legacy is great and sometimes it is a millstone. We focus on delivering what the customers want. We also don't stray too far from what we're good at. Huawei won't start making shoes. We're an ICT company. If we need specialist software, we won't try and build it all the time - we'll partner with somebody for it. We don't have much manufacturing, we outsource to Foxconn, like Apple.

BNamericas: What's the priority focus for Huawei, consumer or networks?

Kelly: Six years ago Huawei was mostly a carrier vendor. The device business was small and the enterprise business was fledgling. In our 2017 results, you'll see that the carrier business represents about 50% of revenues, devices around 40%, and the rest is enterprise.

That's a remarkable transformation in six years. We're number three in the smartphone market and in the carrier market, we're number one. In enterprise we're still quite small.

BNamericas: Do you expect that revenue mix to continue?

Kelly: It depends on what happens in each of the markets. It's hard to see us growing much more in the carrier space. In devices we grew 30% last year in revenue, but the units shipped in 2017 grew less than revenue, meaning we're selling more high-end devices. In the enterprise market, we're growing at around 40% per year.

The smartphone market is not for niche players. You need scale, which requires efficiency and revenue. You also have to invest in the brand and marketing - celebrity endorsements - if you want to stay in this market. You have to keep feeding the machine.

The carrier market is not so brand focused.

BNamericas: Your competition has also changed.

Kelly: In the carrier space there are only three traditional competitors left: Ericsson, Cisco and Nokia. Alcatel-Lucent was absorbed by Nokia, and Siemens pulled out of that market. We compete with Apple and Samsung in the device space and with HP and IBM in enterprise.

But less competition is not good. Carriers want choice, and less competition means losing your competitive pressure. 

BNamericas: Cybersecurity is a major concern worldwide today. Some say that hardware manufacturers are not being held liable for embedding security on their devices. Do you agree?

Kelly: We've been pressuring for years for a coordinated response to cybersecurity. No single company or country can solve it. The industry continues to build security into devices. With IoT you have more points of access. We invest a lot of time, effort and money on advanced security. We put artificial intelligence in our devices, networks and cloud. But it would be helpful if the world decided on a single global standard and response.

About Joe Kelly

Joe Kelly has served as VP of corporate communications at Huawei in China since 2012, and is in charge of  international and social media. Before joining Huawei, he was director of communications at BT in the UK, and before that, he was global director of PR for Marconi and head of communications for Europe for Xerox.

Originally from Donegal, Ireland, he started his career as a journalist, writing for a range of business newspapers in the US and the UK.

About the company

Huawei Technologies is a Chinese multinational networking and telecommunications equipment and services company, headquartered in Shenzhen, Guangdong, China. It is the largest telecommunications equipment manufacturer in the world, having overtaken Ericsson in 2012.

Founded in 1987 by Ren Zhengfei, Huawei initially focused on phone switches before expanding into telecommunications networks and consumer devices.

Huawei had over 170,000 employees as of September, 2015, around 76,000 of which are engaged in R&D. It has 21 R&D institutes around the world including in Colombia, Brazil and Chile.

From July-September, Huawei temporarily overtook Apple to become the second largest smartphone manufacturer after Samsung. It is currently number three. The company posted revenues of US$92bn in 2017.