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    Huawei’s smartphone push eats into profitability

    Huawei smartphone push eats into profitability

    Chinese group looks to overtake market leaders Samsung and Apple

    by: Yuan Yang in Shenzhen, Nic Fildes in London

    Chinese technology group Huawei increased its revenues by almost one-third in 2016, putting it on track to become the world’s biggest smartphone maker within a few years, analysts said.

    However, the Chinese group’s shift of focus away from its more lucrative telecoms equipment business and towards smartphones came at a cost, with net profit margins falling for the second consecutive year.

    Net profits increased just 0.4 per cent to Rmb37.1bn ($5.4bn), despite revenues rising 32 per cent to Rmb521.6bn.

    In its annual report released on Friday, Huawei said it “does not pursue high profitability; we share our profits with our customers and industry partners”.

    The tone of the statement about profit clashed with a memo sent out by Huawei founder and chief executive Ren Zhengfei after the company missed its internal profit targets. The memo, published by Reuters, sent a chill through its 170,000 strong workforce as Mr Ren complained about how unproductive some of his workers have been. “Huawei will not pay for those that don’t work hard,” he said.

    That has not, however, slowed investment. The employee-owned group added on Friday that it would spend more than originally planned in its £1.3bn investment into the UK, despite a slew of deals being cancelled as Britain begins to leave the EU.

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    Huawei does not pursue high profitability; we share our profits with our customers and industry partners

    Huawei annual report

    “Huawei is on the right track to overtake Apple and Samsung,” said Lucio Chen of market research group Canalys, adding that this goal would take at least two years to achieve. Huawei grabbed market share from those two competitors in a disastrous 2016 for Samsung, whose sales suffered from its self-combusting Note 7.

    Despite being largely blocked in the US due to security concerns, Huawei cemented its status as the world’s third biggest smartphone manufacturer by shipping 139m devices last year — an increase of almost one-third from 2015.

    “Huawei has come a long way from its old days and broken through the notion when ‘Made in China’ made people cringe,” said Jensen Ooi, analyst at IDC, a consultancy.

    Revenues from Huawei’s consumer business group, which includes smartphone sales, rose 44 per cent.

    Last year, the company released a line of high-end mobiles such as the P9 in an attempt to win over wealthier consumers in the west, and said it planned to match the specifications of rivals Apple and Samsung.

    Huawei started selling its flagship Mate 9 phone in the US in January in its first big step into the US market. The company spent a “special investment” of Rmb4.9bn last year in a branding blitz featuring actor Scarlett Johansson and footballer Lionel Messi.

    The Chinese company, which trails Oppo in its home market but has made more headway overseas, unveiled its P10 handset at Mobile World Congress in February. That handset offers enhanced imaging technology as its partnership with Germany’s Leica continues to build. It also built in video futures developed alongside GoPro.

    More than half of Huawei’s revenues come from its networking arm, although this proportion has been falling over the past few years. It said last year that it intends to improve the profitability of its original business where it competes with Nokia and Ericsson.

    Huawei has built half of all the 4G base stations in the world, yet is blocked from supplying telecoms infrastructure to the US after being branded a threat to national security.

    The company now hopes it will lead the international rollout of 5G networks, which will be necessary for new “internet of things” devices such as driverless cars.

    “I’m not optimistic about Huawei’s chances in the US,” said Zhao Ziming of Analysis International, a Beijing-based consultancy. “It’s normal for the US government to be sensitive [about Huawei] — the Chinese government restricts Google.”

    Additional reporting by Xinning Liu

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