Huawei banks on Carrier market position, Enterprise Data Center and Devices to grow


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Huawei’s rotating CEO Eric Xu humbly opened the company’s 11th annual Global Analyst Conference, telling 400 financial and industry analysts that Huawei, the world’s second-largest telecom supplier with 150,000 employees located in more than 170 countries, is a company of limited capacity. This means the company must focus its strategy on domains where it can be most effective. Xu said Huawei’s strategic
focus will be on Information and Communication Technology (ICT) infrastructure from a data flow perspective — meaning Carrier and Enterprise infrastructure and Consumer Devices, but not the information or content itself.

This document is a special commentary featuring analyst opinion on Huawei's banking on their market position, enterprise data centers and devices to grow.

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Huawei banks on Carrier market position, Enterprise Data Center and Devices to grow

  1. 1. TBRT ECH N O LO G Y B U SIN ESS RESEARCH , IN C. TBR EVENT PERSPECTIVE Huawei banks on Carrier market position, Enterprise Data Center and Devices to grow Huawei Global Analyst Conference 2014 Shenzhen, China, April 23-25, 2014 Michael Sullivan-Trainor, Networking and Mobility Practice Executive Analyst ( Geoff Woollacott, Engagement Services Engagement Manager/Senior Analyst ( Ezra Gottheil, Devices Practice Principal Analyst ( TBR Perspective Huawei’s rotating CEO Eric Xu humbly opened the company’s 11th annual Global Analyst Conference, telling 400 financial and industry analysts that Huawei, the world’s second-largest telecom supplier with 150,000 employees located in more than 170 countries, is a company of limited capacity. This means the company must focus its strategy on domains where it can be most effective. Xu said Huawei’s strategic focus will be on Information and Communication Technology (ICT) infrastructure from a data flow perspective — meaning Carrier and Enterprise infrastructure and Consumer Devices, but not the information or content itself. Xu’s statement was in stark contrast to previous strategic announcements themed around growth without limits. Last year, Huawei announced it was expanding from Carrier to Enterprise while addressing the Consumer market through devices. The change in tone may be attributed to the sober reality that Huawei’s rapid worldwide growth cooled off from years of double-digit revenue expansion to 8.5% growth in 2013. The Carrier group remained the driver and contributed about 70% of the revenue, but exhibited slowing growth at 4% year-to-year. While Enterprise grew 32%, it only accounted for 6.4% of revenue; Consumer Devices grew about 18% and produced nearly 24% of revenue. Huawei expects to continue to grow faster than the Telecom market, but its mature market position, second only to Ericsson’s, requires growth to come from taking business from competitors rather than
  2. 2. TBR from its previous geographic penetration strategy — clearly a more difficult task. The goal to diversify by making Enterprise a $10 billion business and gaining a top position in devices also remains, but doing so challenges Huawei’s market approach, which remains grounded in the Carrier business. Carrier While Wireless remains the largest business unit within Carrier at 32% of revenue, Global Technical Services (GTS) has begun to catch up at 31%. GTS is expected to comprise half the Carrier business as the market shifts from network equipment rollout to network quality and efficiency. Huawei also possesses a strong position in fixed networks, which provide 27% of Carrier revenue. Its weakness remains software, which is combined with Core networks to deliver only 10% of Carrier revenue. Nevertheless, Huawei’s total portfolio supports a strong market position within the 50 largest global carriers (not including the U.S., where Huawei is banned by the government from selling network infrastructure to Tier 1 operators). Huawei expects that, through innovation and success against competitors, it will be able to attain a greater share of this business. Innovation for Huawei means taking a leadership position with its customers and within the industry, including the dual requirements of capacity expansion — what Huawei calls its “pipe” strategy — and increasing service provisioning and customer response agility by transforming telecom networks through Cloud technologies, namely network function virtualization (NFV) and software-defined networking (SDN). GTS is critical to both these technologies, and the company is pursuing simultaneous paths that expand physical network optimization as well as prepare for software-mediated virtual network architecture. Huawei’s abundant resources — despite what Xu said and evidenced by its growing R&D spend — are positioning the company strongly to lead or at least operate at a peer level among the top suppliers in 5G, small cells, fixed broadband, core routing, optical transport, and backhaul and virtualization. Huawei’s Softcom architecture is a good example of this capability. Announced two years ago as part of the investment and expansion into cloud and data center (servers, storage and network) solutions, Softcom has quickly become critical to SDN and NFV initiatives as well. The architecture specifies (and Huawei has a product to fit each category) a comprehensive redesign of the network, converting physical infrastructure elements to cloud technology to gain efficiency while also integrating with and leveraging legacy physical assets. Huawei’s early focus on Softcom enables it to lead or respond strongly to operators’ new interest in SDN and NFV with a complete solution. The company is involved in many proofs of concepts with operators for these technologies and is leading or deeply engaged in the major standards groups involved as well. Despite its resources, however, Huawei has not been successful with software. Efforts to correct that issue include Huawei’s digital transformation strategy, which is building an ecosystem of developers and operators around its service delivery platform. In addition, the company is making OSS and BSS investments — most notably, Huawei quietly acquired Fastwire, a small inventory management firm in
  3. 3. TBR Australia, to fill a gap in its portfolio. The company rarely makes such acquisitions, but the move, combined with internal efforts to package the other OSS tools it uses in its own managed services, provides a productized OSS offering that should strengthen Huawei’s position. Another major thrust is Customer Experience Management, which uses Huawei’s SmartCare platform and is an even more comprehensive software and services solution that drives operator strategies to improve quality of services and reorients to more customer-centric business models. While the Carrier business lacks software momentum, the company is moving forward to address its gaps, and TBR believes Huawei has a leading position in the key next-generation requirements of operators — high capacity networks available in all scenarios and markets combined with faster, more efficient service delivery infrastructure based on cloud (NFV and SDN). Enterprise Data Center Xu’s opening remarks planted the seeds of what appears to be the long-term play Huawei intends to run as it pivots from Carrier to Enterprise. Already, the company has gained traction in the data center, rapidly growing revenue from a small base and establishing itself as the third-largest supplier in China. As Huawei’s strategic proposition, the move into the cloud via Softcom in Carrier to support NFV/SDN migration will be coupled with a simultaneous build out of best-in-class converged infrastructure for both the carrier and enterprise data center. This best-in-class technology will resonate with the enterprise verticals in addition to the horizontal appeal Huawei bets heavily on for Cloud deployments. The rest of Huawei’s Enterprise presentations during the event gave clues into how Huawei intends to build out its go-to-market and service delivery strategies to enter the enterprise technology sector at a time when even dominant vendors are being caught off guard by the rates of commoditization and transition. The basic blueprint appears sound with some building blocks in place. Specifically: 1. Huawei has the sell-through and sell-to services program elements in place to ensure adequate break/fix coverage as the company scales out the business operation. Hank Stokbroekx, VP of service marketing for Huawei Enterprise Business Group, co-founded a small SMB and has the necessary channel knowledge to help Huawei build trust in the market with the necessary players to scale the business, provided the manufactured products meet the requirements. Enterprise Service partners now stand at 1,100, up 95% year-to-year in 2013, while certifications grew 62.8% to 13,443. More importantly, Support e-subscribers increased 240% to 158,000. Rapid access to technical information will be critical to any service delivery strategy relying on partners in the unforgiving consumerized IT world. 2. Huawei has the beginnings of a solutions marketing organization to assemble the requisite application bundles and utilities for permission to play. The focus starts with the usual suspects
  4. 4. TBR of healthcare, financial services and government, in addition to the obvious leverage point of the deep Carrier knowledge. Still, Huawei will have to have a horizontal hook, and the presentation by Edwin Diender, CTO of the Unified Communications and Collaboration (UC&C) product line, told a very good story around UC&C being the glue that will hold together work collaboration. Coupling cost takeout with improved business process functionality struck a good chord, as it will leverage Huawei’s technology layers coming from the communications space, which, when bundled as an office productivity solution, could provide the necessary hook to swing over into the Enterprise. If a discordant tone was rung, it was the deep focus on the technological speeds and feeds of the bare metal iron server hardware underpinning the infrastructure. In the rapid commoditization of the hardware underlying the cloud, entering the market with little more than the price and performance value proposition will be a stiff challenge. That said, converged infrastructure, cost-effective scale-up and scale-out strategies may well resonate with customers. The Service Provider and Managed Service Provider spaces will be looking for highly automated, cost-effective infrastructure solutions as the commoditization pressuring these small business operating models accelerates at rates few have accurately forecast. The following will be things to watch for as Huawei pivots its focus to the Enterprise: 1. Early product quality. If the early product quality falters, the market will not be quick to forgive. 2. Services timeliness. Scaling out the global delivery network while relying on partners will still require adequate voice support for timely call resolution in these days of “always on” expectations. Growing pains that adversely impact the profitability of Huawei’s partners will have them quickly seeking a different supplier for their bare metal iron. Devices Huawei has been selling devices directly to consumers for only three years, but it has been making those devices as an ODM for rebranding by its carrier partners for eight years. In 2013 95% of its devices were sold under the Huawei brand. The company’s smartphone unit shipments increased from 32 million in 2012 to 52 million in 2013, a 63% growth rate, and it targeted 80 million units for 2014, an increase of 54%. TBR believes the company will enjoy unit growth in the 20% to 30% range in 2014, but will not achieve its goal because of rapid smartphone market saturation and product maturation, which are quickly decreasing sales growth and changing buying behaviors. Huawei’s core competency in consumer devices is hardware engineering, buttressed with a large and growing portfolio of patents. The company recognizes that it must supplement these skills with marketing, physical design and, most importantly, human interface design, and it hired largely from outside its home country to build up these capabilities. Huawei is also counting on the deployment of
  5. 5. TBR LTE, a technology in which it is an expert, to drive a refresh cycle in mobile devices, offsetting the decrease in devices sales growth. To drive continued growth in Consumer Devices, Huawei developed a strategy that TBR believes is sound: The company will focus on user experience and product quality to build its brand via word of mouth (though Huawei uses many marketing techniques, it does not advertise). The company drives sales through its strong relationships with carriers, but sales through other channels rose more than 30% in 2013. Huawei uses brand sponsorship by sports teams, individual athletes and other celebrities, and it places a large number of attractive “store-in-store” spaces in the retail channel. While Huawei focuses on the middle and upper tiers of the devices market, its devices are very price-competitive for their configurations. This last approach helped drive growth of its Honor sub-brand, which is confined to online purchases. Building reputation through user experience and product quality rather than advertising fits emerging buying behaviors, as new features deliver decreasing value to users and product life cycles increase. The Huawei strategy is appropriate for this stage of the market, but it does not drive rapid growth. The price of wireless data service constrains the available market for smartphones. As the market that can afford data services saturates, companies must persuade buyers to switch from their current brand to increase sales, and Huawei’s subtle approach will be challenged to drive further rapid growth. Its competitors, especially Lenovo, will not stand still, but Huawei has the advantages of exceptional relationships with carriers and deep expertise in communications technology. TBR believes these strengths will drive further growth, but not as rapidly as the company has enjoyed and currently expects. Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. TBR has been empowering corporate decision makers since 1996. For more information please visit ©2014 Technology Business Research Inc. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.