On March 30th we wrote that Huawei Technologies was back, with its net profit more than doubled from the same period last year (2023). Today, a Wall Street Journal (WSJ) news story reaffirmed that with reasons which were really no surprise! Huawei’s profit more than doubled last year, the largest jump in at least two decades. Roughly two-thirds of its revenue comes from domestic (China) clients.
Five years ago, the U.S. sanctioned Huawei, cutting off the Chinese company’s access to advanced U.S. technologies like semiconductors and the Android OS for its smartphones. Initially, the company struggled. In 2021, its revenue dropped almost 30% from the year before. Its core telecom equipment business was suffering. Apple’s iPhone was taking over Huawei market share in smartphones.
Yet in the last year, Huawei has come roaring back, boosted by billions of dollars in China government support. Huawei has expanded into new businesses, boosted its profitability and found fresh ways to curb its dependence on U.S. suppliers. It has held on to its leading position in the global telecom-equipment market, despite American efforts to squeeze Huawei out of its allies’ networks. Also, it’s making a big comeback in high-end smartphones, using sophisticated new chips developed in-house, such that it has captured 15% market share in China (knocking Apple out of the top five smartphone brands).
“The U.S. government’s campaign against Huawei is inadvertently bolstering the company’s resilience, echoing the age-old adage that what doesn’t kill you makes you stronger,” said Sameh Boujelbene, an analyst at research firm Dell’Oro Group.
China state support has paid off big time! After the U.S. imposed restrictions, Huawei and China’s government grew closer. Soon, Huawei leaders declared that every product they made going forward should be able to rely entirely on components developed by Chinese companies. China government contracts and company registration records, as well as WSJ interviews with former and current employees, reveal that billions of dollars flowed from the Chinese government to Huawei through preferential buying contracts and subsidies. State-owned enterprises, government agencies and Communist Party bodies sought Huawei chips, smartphones, cloud services and software, with some procurement contracts calling for Huawei gear by name.
Local governments have bought Huawei businesses, providing cash injections. Once reliant on Google’s Android for its consumer devices, Huawei built its own operating system. It has even made a foray into electric vehicles, a task that Apple gave up on, and developed its own version of Bluetooth. Huawei still faces challenges. Its most advanced semiconductors remain a step behind industry leaders such as Nvidia, whose chips are made by TSMC in Taiwan, which Huawei no longer has access to due to U.S. sanctions. U.S. export restrictions, which effectively barred Huawei from using American technology anywhere along the chipmaking process, meant the Chinese company could no longer source its chips from TSMC. Some analysts believe it will be hard for Huawei to keep innovating without access to more advanced Western technologies, especially chip making equipment and software.
One current U.S. official said Washington is closely tracking Huawei’s efforts to make its own semiconductors, in case more actions are needed to block China from manufacturing artificial-intelligence-focused chips that can give Beijing a military edge.
On May 16, 2019, China’s local government in Shenzhen, where Huawei is based, registered an investment company Shenzhen Major Industry Investment Group (SMII), focused on semiconductors, investing in foundries, manufacturing equipment and materials that would help ensure Huawei was supplied with enough domestically made chips and other technologies. Two companies established by SMII, including a chip foundry, employed former Huawei executives, according to people familiar with the matter. One received around a dozen patented technologies transferred from Huawei. Huawei human-resources managers had asked company researchers if they would work at that entity, promising them they could keep their benefits if they moved, according to people familiar with the matter. Shenzhen’s imports of semiconductor manufacturing equipment surged after SMII’s inception, official data shows. Through various state-backed funds, the Chinese government has invested in more than two dozen chip-related startups, over the past five years, according to corporate database Tianyancha.
That’s in addition to government investments in Huawei’s HiSilicon chip unit (more below), which made the silicon used in the company’s popular Mate 60 Pro smartphone. HiSilicon became an independent, wholly owned Huawei subsidiary in 2004. It was founded in 1991 as Huawei’s ASIC Design Center.
A majority-owned Shenzhen company also bought Huawei’s Honor smartphone business, which was struggling because of the U.S. sanctions. The deal was worth several billions of dollars, a person familiar with the transaction said. The cash allowed Huawei to focus on other businesses, including its higher-end Mate series of phones.
“We’ve been through a lot over the past few years. But through one challenge after another, we’ve managed to grow,” Huawei said in a written statement, adding that the company owed its survival and development to the trust and support of global customers, partners and “all sectors of society.” Sustaining R&D investment will be crucial going forward, the company said.
“We’ve been through a lot over the past few years, but through one challenge after another, we’ve managed to grow,” Huawei said in a written statement, adding that the company owed its survival and development to the trust and support of global customers, partners and “all sectors of society.” Sustaining R&D investment will be crucial going forward, the company said.
Huawei focused on building out more of its own supply chain and expanding into new areas that could generate revenue to help keep the company going, including cloud computing and other services, according to Chris Peirera, a former Huawei senior director in public affairs. “In the past, we chased the ideal of globalization, determined to serve mankind. What are our goals now? It’s to survive. We will make money wherever we can,” Huawei founder Ren Zhengfei later told the company’s staff in an internal letter.
Huawei received over $1 billion in China government grants in 2023, more than quadruple the amount it received in 2019, according to Huawei’s financial reports. In all, Huawei received nearly $3 billion in the past five years, accounting for 3% of its total R&D expenses.
Source: Huawei via WSJ
China’s government directed state agencies to buy more of Huawei’s software, chips and mobile devices, a policy that boosted Huawei while reducing China’s reliance on American companies, including Apple, whose iPhones are no longer allowed in the workplace for many government employees. A Chinese government research unit named Huawei as one of four tech giants spearheading the nation’s push to wean itself off foreign technology, while another government body singled out Huawei as a preferred state supplier of AI chips, servers and other enterprise software.
Though Huawei is still seeking to sell its products abroad in places such as Southeast Asia and Africa, it is more reliant on China’s market than ever, with 67% of revenue last year coming from domestic clients. The company often portrays itself as a national champion that gives priority to serving China.
Source: Huawei via WSJ
A WSJ investigation found more than 300 government procurement contracts worth around $5 billion specifically calling for the purchase of servers and other tech infrastructure powered by Huawei’s Kunpeng central processing units, or CPUs, in 2023. Other contracts listed Huawei CPUs among a handful of preferred local vendors. All of this was a sharp contrast to five years ago, when government agencies specifically requested products from U.S. chip makers Intel or AMD.
China’s buy-local policy is even more pronounced in the telecom-equipment space, Huawei’s largest revenue source. State-owned Chinese wireless carriers have largely stopped buying equipment from Huawei’s foreign rivals, Sweden’s Ericsson and Finland’s Nokia, even when one of them priced their contracts more cheaply than Chinese companies. The shift came while Sweden and other European countries indicated that they would cut Huawei and another Chinese equipment maker, ZTE, from their networks. Ericsson and Nokia held about 15% of China’s cellular network equipment market before 5G began rolling out in 2019. In China’s current 5G cellular-equipment market, Huawei holds about 4% to 5%, according to market research firm Dell’Oro.
They peg Huawei’s 2023 global telecom market share (#1) at 30% – double that of #2 Nokia as per this pie chart:
With so much government support, Huawei was able to avoid massive job and spending cuts that would have gutted its R&D or led to a talent exodus. Huawei boosted R&D spending to almost 165 billion yuan, or $23 billion, last year, up from 102 billion yuan in 2018. More than half of Huawei’s 207,000 employees are in R&D.
Huawei is now at the vanguard of China’s push to develop cutting-edge chips to wean reliance on Nvidia and Intel, as the Biden administration seeks to curb China’s ability to develop advanced chips and technology that could aid its warfare and surveillance. U.S. chip juggernaut Nvidia singled out Huawei as a top competitor in February.
Huawei is leading a government-funded project to develop memory units for advanced AI chips, people familiar with the matter said, with at least 11 national AI data centers now using Huawei chips. WSJ reports that last summer, a group of Huawei researchers gathered at a barbecue restaurant on the outskirts of Beijing to congratulate engineers who worked on the Mate 60 Pro chip set at Huawei owned HiSilicon.
“You HiSilicon people kick ass,” one of the Huawei researchers said, according to a person who attended. “Managers tell us daily that our work helps the country fight against foreign oppression,” a HiSilicon engineer who was present responded. “We’re becoming more and more like a state-owned company, aren’t we?” another researcher chimed in.
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References:
https://www.wsj.com/business/telecom/huawei-china-technology-us-sanctions-76462031
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