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The Huawei Factor

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After a year of relative peace and growth, the wireless and wireline equipment business might be headed right into some heavy weather, thanks to Chinese equipment giant, Huawei. In my most recent column for Business 2.0, I had pointed out that a rapid consolidation in the number of wireless carriers was going to put pressure on the big three – Ericsson, Nortel and Lucent. In addition, Huawei is getting quite serious about the US market.

A recent report in China Daily says that the company might actually try and partner with Nortel and Lucent instead of trying to fight on its own. (Light Reading reports that now the company is backtracking from the statements made in the China Daily report.)

I am not sure what is the obvious benefit for LU or Nortel, given that they will be giving up their own market opportunities instead. I think it is a polite way of Huawei letting the rivals know – work with us, or else. Huawei executive vice president Zheng Baoyong told China Daily, “venturing into developed markets like the United States and Europe will become a significant part for our growth in the years to come.”

Muayyad Al-Chalabi who is a very knowledgable man in the ways of telecom and toils as a VP for RHK feels that in the near term, Huawei will see limited success in North America, but will take growth away from established players. He draws the parallels with auto industry and home appliances. It took a little while before prices became a determining factor and shifted growth away from North American vendors. Telecom will go through the same curve he points. I think the speed with which the price-destruction will happen will be much faster than either of the two markets. Look at the price-driven success they are having in Asia, especially in hot-telecom market of India and China. (It is planning to start a new $100 million telecom plant in India.)

According to estimates by brokerage firm Friedman Billings Ramsey, Huawei’s wireless infrastructure products are as much as 35 percent cheaper than comparable products from other, more established players. The price points being offered by the Chinese vendor are enough for even biggies like Nextel to consider it as a supplier.

Huawei is curently selling EVDO phones for about $130 and WCDMA phones about $250 which is about 30% than everyone else on the market. In addition, the company has received a $10 billion loan from Chinese government to offer vendor financing. Huawei’s agenda is pretty clear – get business and sales at any cost. We saw this happen in late 2000: vendor financing by Lucent (and Carly Fiorina) resulted in others jumping into the fray including Nortel and Cisco, leading to what I like to describe as “Self mutilation” of North American telecom industry.

The implications of Huawei are quite clear – at the risk of being early, I still think the good times are over.

18 Responses to “The Huawei Factor”

  1. N. Zoze

    Huawei has entered poorer markets like Sri Lanka, and they use unethical marketing and and sales tactics to win projects. They can even alter technical evaluations using powerful marketing tactics. Their customer service side is horrible and customers will have a tough time dealing with them. I hope that the Western vendors will prevail, because the civilized feel they brought to the telecom market is certainly not present with huawei and zte. They are in the undercutting game, and quality is a minor issue. They have no respect for customers and as soon as they win a project, they lose interest in serving the customer. They also use underhanded techniques to take money away from countries. That means the countries whose market they enter will not benefit at all.

  2. I think most of you guys do not really know Huawei just like you do not China today.
    Every company has its own strategy to survive in the market. Huawei hires lots of Chinese engineers and pay very high wages for them, these are RMB. So when you translate their salaries to US$, these are relativly less than any western workers. However, This is the only advantage which the Chinese people have.
    As for the high-tech field, not only westerners have inventions and originative ideas.Huawei sumit 249 PCT international patents cases which is 212 case more than CISCO.
    Please try to find out what is happening in China and try to respect them more. Thank you

  3. Huawei is China Flagship company. They advertise on the back cover of TIME magazine and produce quality products at very low cost. It is difficult to assess whether chinese Huawei is making any money or whether they are buy market share and try to suffocate the competition. Fact is Huawei has received USD 10 Billion loan from chinese banks which are all controlled by the governement (And bankrupted btw) so it is difficult not to see the obvious link between Chinese governement and Huawei. As Huawei is getting market share and extending their list of customers, they start to face difficulties on what was so far an advantage. Huawei has no roadmap and basically provide tailor made solution. This is sustainable with a limited number of customer only. Besides they are starting to face implementation issues. As an example, the CDMA project won in Thailand is extremely late.

  4. Minhaz

    Huawei’s design staff is based in China, hence the lower costs. However as a BDM for a US vendor, handling Asia-pacific, we run into them a lot, and inspite of their price advantages, we still win a lot of new business. That’s due to the fact that the network operators hate to keep replacing equipment, and generally deal with low quality hardware.

    Thus there is a fear that when Huawei improves their quality, US and European vendors will be in trouble. I don’t think so -As I see it, with globalization, labour costs in developing nations like China and India will increase (You should see inflation in those countires). By the time the Chinese figure out the quality improvements, and something else called customer support, the US and European manufacturers will have newer generations of products with much smaller price gaps and thus take away Huawei’s main advantage.

    As for Om’s article, I read Business 2.0 a lot, and generally like most of his work, but sometimes you just need to be in the business to get all the details right!

  5. Huawei is wholly private owned company, which has little relation with the Chinese government. In the “code violation suit”, Chinese government didn’t offer much help on HW’s side. And Huawei is a much different company from other manufacturers. It has almost 30,000 employees,50 percent of which are in R&D.And the salary level is the highest in the industry in China, though much less than overseas counterparts, maybe that’s why the products’price is 30percent lower. I don’t know if HW rip off techs from Cisco or Nortel, but in the bid in Thailand ,Huawei took the bid at 30percent lower price still ,left Ericsson and Moto ,and the same-level quality. I am a young Chinese, and I ‘ll be honored to attend HW than other foreign-owned company.

  6. LightBoy

    Huawei is an established company in Europe now. France Telecom is their next victory which has the rest calling them up to put into RFI/RFP’s just to see a 30% price stick against all the other vendors. Interesting piece – that the code violation suit against Huawei that Cisco had four years ago was dropped because of pressure from the US Govt. who wanted to push China into the WTO. Cisco was told to back off.

  7. Jesse Kopelman

    Penguin, if you knew how much markup there was in the network equipment side . . . The more established players could cut their prices in half and still make a nice profit, if they were efficiently run companies (big if). That’s not to say Huawei isn’t up to hanky-panky. Isn’t everybody these days?

  8. Jesse Kopelman

    Sasha, Huawei may rip off Nortel and Cisco on the wireline side but their wireless equipment seems to be more advanced than offerings I have seen from Ericsson and Nokia. As for reliability, I can’t say. Om, if making handsets and network equipment is a bad strategy, what do you say about Motorola, Ericsson, Samsung, and Nokia?

  9. penguin, i agree it would be nice to get a look at their financials and one has to say that the model makes sense. they are leveraging their domestic market and scale for competing agressively in the overseas markets. i don’t think it is all clear with them. secondly, someone said they are not a cell phone maker. they are making handsets and everything else – which is interesting because i am not sure if that strategy is really going to work in the long run

  10. Huawei is not a cell phone maker. It is a high-tech backbone equipment manufacture. And Huawei is not a state-run red company. They lost quite a few landslide bids in China to another Telecom Giant Zhongxing, now they need to make it up in the rather low-tech less competitive US.

  11. The Huawei story is a great one (new company from an explosive emerging market shakes up the existing order.) But here are my questions in regards to their fabled price advantage:
    1) Everyone manufactures in China (or other low cost areas) so why is it assumed that Huawei has some sort of lock on low-cost manufacturing?

    2) In Europe and North America, they will have to pay western prices for staff, integrators etc., the same western prices everyone pays. No price advantage there!

    So how do they offer such great prices? Excellent question, shame they are not a publicly listed company. Would love to examine their financial records.

  12. sasha

    most people forget that honda started out as a cheap car maker and sony started out making transistors. these guys are pretty serious. they are using price to take away opportunities for western equipment makers in some of the growth markets. if they win a little in the west and take share in big growth markets like china and india, well that spells trouble

  13. Sasha S.

    Price is not everything (because Huawei products are far inferior to those of established European and U.S. manufacturers).

    Two points:

    1. cheap stuff is fine but if that gives users technical problems they might end up with higher costs and service interuptions. As wired and wireless connectivity becomes a comodity – end users will demand reliability and that comes down to quality infrastructure. Huawei makes infrastructure equipment (blatant rip-off of Cisco and Nortel) for much lower price but with no tech support. Cash-strapped and short sighted telco operators will go down the road paved with Huawei hardware but I doubt that will be a winning strategy in the long run.

    2. If Huawei makes bad rip-offs of Ericsson phones that does not mean that many people would want to havce them. Mobile phone (in Europe) is a higly fashionable item and having the latest and the greatest phone is a matter of personal pride – I doubt that anyone would want to be seen using those phones. Samsung has started this way and it is now nr.3 manufacturer of mobile phones in Europe – still none of people I know would be caught dead with Samsung phone. They are considered to be cheap, of inferior quality and not a phone style concious user would use. in short: third world stuff. And Huawei has a very very long way to go to even come close to Samsung.

    My take: Huawei is great place for Nokia to outsource manufacturing of their phones. But Huawei own phone? No, not in this 5-year plan-period, comrades.