Huawei rules the world, except U.S.

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Huawei rules the world, except U.S.


In Stockholm on Monday, Ericsson, the venerable Swedish company that has long been the leading maker of the infrastructure that underpins the world’s mobile communications networks, announced that it had fired its chief executive officer, Hans Vestberg. In a not-unrelated development, the company reported last week that its first-half revenues were down 11 percent from the same period a year before, to $12.3 billion.

Also on Monday, in Shenzhen, China, Ericsson rival Huawei announced that its first half revenues were up 40 percent, to $36.8 billion.

The two companies aren’t exactly comparable — for one thing, 31 percent of Huawei’s revenues came from selling smartphones and other consumer devices, while Ericsson got out of the phone business years ago. But yes, something big has been going on.

Nokia finalized its acquisition of Alcatel-Lucent in January. Both it and Huawei sell a lot of fixed-line networking equipment as well as wireless. When it comes to just wireless infrastructure, Ericsson was still in first place with a 28 percent market share in 2015, according to IHS data, with the combination of Nokia and Alcatel-Lucent at 26 percent and Huawei at 23 percent. But Nokia’s revenues are down so far this year, too. It seems inevitable that Huawei will soon overtake both companies in wireless infrastructure as well as overall sales.

Huawei is also the No. 3 maker of smartphones, after Samsung and Apple. It’s among the market-share leaders in optical networking equipment, routers and other key elements of the world’s communications infrastructure. ZTE, which is also based in Shenzhen — the giant new city that has grown up next to Hong Kong since China’s economic reforms began in 1978 — also shows up on a lot of those market-share rankings a rung or two behind Huawei.

Leadership in the mobile communications business began in the U.S. with AT&T and Motorola. It shifted to the Nordic countries in the 1990s with the remarkable rise of Ericsson and Nokia. Since the introduction of the iPhone in 2007 it has been shared by companies on three continents, with Apple taking the bulk of the profits. Maybe, just maybe, it is now shifting to southeastern China.

I’m guessing that many of you reading this, though, have never or barely heard of Huawei. Why is that? A lot of reasons, actually:

• Huawei only started making phones and other consumer products with the company’s name on them about six years ago.
• Huawei is employee-owned, and not traded on any stock exchange.
• Its founder, Ren Zhengfei, keeps a low profile, and the company is run day-to-day by a rotating crew of three CEOs who trade off every six months.
• The major U.S. wireless carriers have been effectively barred from buying Huawei networking equipment by members of Congress worried about cyber espionage.
• Huawei’s $5.7 billion in profit last year (the company produces audited annual financial statements even though it’s not publicly traded), while a lot more than Ericsson or Nokia made, still isn’t much in comparison with the likes of Apple, Samsung, Qualcomm or Cisco.

Those relatively low profits, though, aren’t necessarily a sign of weakness. Like Amazon, Huawei has been using its low margins as a source of competitive advantage. A decade ago it broke into the European wireless infrastructure market by underbidding rivals and offering carriers equipment that would work with multiple kinds of networks (2G, 3G, etc.), thus sparing them from repeated upgrades. Now it is forgoing profits to pour huge sums into research and development. Its $9.2 billion in R&D spending in 2015 put it among the world’s leaders in that category.

I visited Huawei’s headquarters in Shenzhen earlier this month. They’re next to the infamous Foxconn manufacturing complex where Apple iPads and Macs are made, but are otherwise a world apart. Huawei contracts almost all of its manufacturing out to firms such as Foxconn and Flex. About 45 percent of its 176,000 employees are engineers. Those in Shenzhen work on a sprawling, leafy campus that might have reminded me of Silicon Valley but for the summer heat and humidity that kept people from cavorting outside.

If Huawei’s rise continues, U.S. lawmakers and regulators will face a difficult decision. A lot of the charges leveled at the company by the House Intelligence Committee four years ago come across as speculation and hearsay, but at the same time it’s not crazy to worry about putting the nation’s communications networks in the hands of a company from a country known for doing a lot of hacking of U.S.

communications networks. On the other hand, by refusing the products of the global industry leader, we could also be ensuring that our communications networks aren’t up to global standards.

Justin Fox

*The author is a Bloomberg View columnist.
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