Decoding Huawei – Emergence as a Major IT Player Looms

Last month I attended Huawei’s annual Global Analyst Summit, for the requisite several days of mass presentations, executive meetings and tours that typically constitute such an event. Underneath my veneer of blasé cynicism, I was actually quite intrigued, since I really knew very little about Huawei. And what I did know was tainted by popular and persistent negatives – they were the ones who supposedly copied Cisco’s IP to get into the network business, and, until we got better acquainted with our own Federal Government’s little shenanigans, Huawei was the big bad boogie man who was going to spy on us with every piece of network equipment they installed.

Reality was quite a bit different. Ancient disputes about IP aside, I found a $40B technology powerhouse who is probably the least-known and understood company of its size in the world, and one which appears poised to pose major challenges to incumbents in several areas, including mainstream enterprise IT.

So you don’t know Huawei

First, some basics. Huawei’s 2013 revenue was $39.5 Billion, which puts it right up there with some much better-known names such as Lenovo, Oracle, Dell and Cisco.

 

% Revenue / $ revenue (Billions)

Annual Growth rate

Telco & network equipment

70 / $27.7

7%

Consumer (mobile devices)

24 / $9.5

18%

Enterprise business (servers, storage, software)

6.5 / $2.6

32%

 

What is different about Huawei is that about 70% of their revenues come from networking equipment dominated by telco equipment sales, both fixed and wireless, with the rest coming from consumer mobile devices (24%) and enterprise business, their term for their IT product sales (6.5%). While growth has been modest, at about 8.5%, very close to the industry average but ahead of most hardware-dominated companies, its R&D investment is very high at 12.8% of revenues.

Why does it matter?

At first glance, Huawei’s 6.5% of revenues attributed to the IT segment, around $2.6 Billion, is not such an impressive number. Until you look at the growth, which is 32% annually, placing them neck in neck with Cisco’s often-cited UCS systems business (currently running at around $2 Billon annually) for being the largest and fastest growing systems (primarily server and storage) business. Combining the rapid ramp in revenues with a very aggressive R&D investment of 18% of total R&D, this gives the IT LOB the equivalent of a 35% R&D budget and a meteoric growth rate. If Huawei was a domestic IT supplier reporting these kinds of numbers they would be the darling of the trade press rather than a well-hidden secret. While R&D budgets can change over time, it is clear from Huawei’s historical R&D (actually rising), that the company is investing at a higher rate that most of its peers, and intends to use its revenues from its slowly growing core telecom business to fund its expansion into other areas.

Where is Huawei investing?

It will probably not come as a shock that Huawei is investing in cloud. Or that they are rapidly growing their own storage product line. At this point, Huawei has an adequate if not strongly differentiated product line of x86 servers spanning from entry rack and tower to a competent blade chassis through high-end 8-socket (with larger systems hinted at) servers. Its storage portfolio currently spans from entry to midrange, with larger enterprise-class “OceanStore” products promised in the near future, with an emphasis on scalable cloud-oriented storage. Of particular note is their FusionShpere software-defined storage product, native IP that federates the storage on a FusionCube blade into a single pool of storage, much like VMware’s vSAN. Architecturally FusionSphere is not tied to the blade hardware, and Huawei will almost certainly deliver this as a scalable software-defined software product for more general use – a strong placeholder for the vital software-defined storage required for future software-defined computing environments. Huawei’s network portfolio is adequate if not distinguished.[i] From an overall data center infrastructure perspective, you could fill a new data center with only Huawei gear and have a functional enterprise.

But an adequate server, storage and networking portfolio is just the price of entry today, and Huawei, like everyone else in the world, is putting heavy bets on cloud as a growth vehicle for IT sales. Huawei, like the majority of the industry, is investing in OpenStack, and claims to have major innovations around managing multiple data centers as a federated entity, having built an entire management layer for multiple data center operations. Currently Huawei is offering its OpenStack cloud services on a trial basis inside China, but my expectation is that they will be aggressively scaling this up along with services to compete with HP and the new IBM/Lenovo fusion.

“So”, the skeptic would say, “We have hardware, some good software, OpenStack and other bits and bobs, but nothing that says Huawei is in any way different.” The potential leverage for Huawei comes in the form of its deep roots in telecom technology and its growing mobile device business, Huawei will be deeply involved in the development of the emerging G5 standards, and combined with its mobile business, will be in an excellent position to rapidly capitalize on opportunities for new devices, new workloads, and will have an opportunity to be an early adopter of new cloud-related hooks between te worlds of telecomm, enterprise cloud and mobile devices. Interestingly, among the universe of Huawei’s IT competitors (HP, IBM, Cisco, etc) the only other company who had a combined portfolio that includes the enterprise trinity of server, network, storage and mobile technology is another $40B Chinese company, Lenovo.

So why have I never seen a Huawei box in any company I know?

The simplest answer is probably because if you are reading this you are most likely in either North America or Western Europe, or maybe Japan, which, for all of the media hype about the development of the Chinese market, still constitute the majority of the market for IT equipment in the world. Huawei, for all of its strengths, is a very China-centric company. Despite some high-profile success in other markets, the majority of its sales, people and awareness are in China, especially in its IT business.

This Chinese centricity is both an immense strength as well as Huawei’s biggest weakness. It is front and center in what is soon to be the world’s largest economy, with deep relationships, strong products and an excellent perspective on emerging trends (matched only by its soon to be arch-nemesis Lenovo). Unfortunately, outside of China, Huawei is much less well known than Lenovo due to Lenovo’s long exposure as a desktop and laptop supplier. Where it is known, especially in the developed markets, the perceptions are not good. Huawei has in effect become a commercial proxy for all of the political tensions between China and the rest of the world, and carries with it suspicions of being a front for Chinese cyber-espionage to the extent that it has been effectively been precluded from competing for any US Government or sensitive commercial sector business.

Sadly, recent disclosures about the activities of the US NSA seem to have made the worst fantasies about Huawei look like child’s play, and the revelation that if you really want to be secure from government cyber-espionage you should use tin cans and waxed string as your network may give Huawei another lease on life as a supplier.

Looking forward – Investment decisions will determine Huawei’s trajectory

Can Huawei emerge as a true global technology player? All the technical ingredients are present, with at least adequate technology at all levels of server, network, storage and associated system software present, along with interesting potential synergies between their core telco and mobile business and an emerging services and cloud business portfolio under construction. The real tipping point for Huawei’s future will be management decisions about investment priorities.

Huawei’s management has exposed a slate of investment priorities, and from my perspective they are intelligent choices – using revenues from a mature telco business to fund development in more rapidly growing IT and mobile, continuing deep involvement in emerging telco standards and looking for opportunities for synergy between communications, processing and consumer devices and demand, and deepening investment in cloud. But that is not enough – Huawei cannot grow and prosper as a China-centric company, and that dilemma will be put into heightened perspective when it has to compete with a resurgent Lenovo, a Chinese company that truly presents itself as a global company.

The one choice that was never directly addressed, either publicly or in private, was whether Huawei is willing to spend another $1 billion more or less (my estimate, not theirs) to aggressively enter the NA and continue to increase its presence in European markets as a broad-based technology supplier. My assessment is that with sufficient investment they could succeed, and that if they wish to break out to the next level and be a truly global supplier outside their core telco equipment sector to challenge the likes of IBM, HP and Cisco, they must.

 




[i]
My colleague Andre Kindness, Forrester’s network analyst, comments that their network product line is under increased pressure from other emerging Chinese suppliers as well as the major incumbent vendors. He also cites deficiencies in their overall SDN technology offerings. Nonetheless, Huawei’s network portfolio remains adequate to support its emerging enterprise IT ambitions, and their investment momentum seems more than adequate to sustain and make necessary improvements.