Huawei is slowly being strangled

Back on a results conference call from Shenzhen for the first time in four years, after her “detention” at a palatial residence in Vancouver, Huawei’s Meng Wanzhou appeared far chipper than the company she helps to manage as chief financial officer. The Chinese equipment giant, which previously bulldozed rivals in international markets, looks decidedly un-chipper – nay, chip-less. Cut off from the semiconductors it needs by US sanctions, Huawei has sought salvation in software. Today’s update proves its strategy is failing.

The results are appalling, whatever Huawei says. Meng talked up efficiency improvements, but profits rose only because sanctions forced Huawei to sell its Honor smartphone unit (now on a tear) and a server business that could no longer buy x86 chips. Proceeds were booked as “other income,” a figure that rocketed 8,686% last year, to 60.8 billion yuan (US$9.5 billion), and went straight into operating profit. Even after the usual extravagant outlay on research and development (R&D) – which, at nearly RMB143 billion ($22.4 billion), equaled a monstrous 22.4% of sales – net profit was higher. But nothing “organic” was good.

The 50% drop in device sales was expected. Guo Ping, one of Huawei’s rotating chairmen, explained why the smartphone unit has suffered so much worse than other divisions in a rare moment of total transparency. Huawei needed a baseband chip for every one of the 120 million smartphones it sold in 2019, he told a Wall Street Journal reporter posing questions. Each 5G basestation also needs its own baseband chip, said Guo, but only a million of those were shipped the same year.

Network squeeze

The shocker, then, was that sales to telecom operators fell as much as they did – by 7% last year when rivals reported growth. The industry tends to assume Huawei does not have to worry about its unpopularity outside authoritarian regimes because China is such a vast and lucrative market. Unfortunately, it seems, some earlier high-speed feasting on Huawei products means China’s appetite for 5G basestations is practically sated. “The 5G construction in China was completed in 2020 and therefore customer demands are not that high,” acknowledged Meng.

These consumer and carrier units together account for 82% of revenues, and all the software expertise in the world will not save them – purely because they are mainly hardware businesses. Stuck with less sophisticated chips, Huawei has argued it can overcome its limitations through software advances, and thereby remain competitive. But this assumes innovation is in deep freeze everywhere else. The best products will be a blend of high-end chips and brilliant software, not reliant on one or the other.

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