Some people have asked us recently: who is next? After market consolidation of suppliers, in the form of Alcatel-Lucent in 2006 and Nokia Siemens Networks in 2007, followed by the bankruptcy of Nortel Networks (2009), is this the end of the game?
Last year we heard some rumours that one particular European supplier might give up. This year we hear rumours about another one. We are not here to comment rumours – having said that, rumours are a sign that some people, employees and customers are worried.
They had better be. Huawei has been massively successful in the last 10 years. Turnover was USD2.7bn in 2002 and USD21.7bn in 2009, a CAGR of 35% over the period. They have been eating the cake of all other telecom suppliers.
So what is the secret? Three things: vendor financing at terms you can only dream of, massive investment in R&D, and very dedicated staff who are also shareholders, so it seems.
On the first point: on a number of assignments, we have seen Huawei vendor-financing terms that other suppliers will never be in a position to provide. It seems clear that Chinese banks and the Chinese government will do whatever is necessary to make customer operators happy. Somehow it is strange that other suppliers do not knock on the door of the European Commission more often for anti-competitive behaviour.
On the second point: an operator was telling us about the roadmaps of Huawei compared to other suppliers. Huawei does not spend ages trying to figure out whether to develop feature A or B, or B1, or C. They develop all of them in one go, throwing R&D resources at the problem, leaving it up to operators whether to use the features or not. Do the other supplier over-analyse what the market wants? Having said that, when Huawei is compliant with all requirements in your RFP, be careful to read the footnotes.
On the third point: we have heard of the average Huawei staff in China working 2,700 hours per annum. Wahoo, Europeans, wake up! But you might wonder how much time does that leave them for a life with family in friends? Not much I presume.
Is Huawei profitable? Not easy to tell. The Annual Report 2009 shows a PBT margin of 7%-14% over the last 5 years. Nevertheless, we are not familiar with the Chinese accounting standards. Also, the Annual Report 2009 is not audited in the traditional sense. On page 19, KPMG makes two revealing points: “Huawei Technologies Co., Ltd. is not a public company and is not required to publish its audited consolidated financial statements under the Company Law of the People’s Republic of China“ and further down: “We have not performed an audit on the consolidated financial statements summary, accordingly, we do not express an audit opinion“. Whatever this means.
Who does Huawei belong to? The Annual Report tells us: the Union of Shenzhen Huawei Investment & Holding Co., Ltd. (the “Union”). Not a trade union, but a union of shareholders. So it seems that Huawei is owned by its employees. Well, a temporary form of ownership, controlled by the management: apparently, employees can’t buy shares but are allocated shares annually based on their performance (and other factors). Note that only Chinese employees can own share in the company, not foreign employees. The company pays dividends but employee shareholders have to return their shares if they leave the company, with shares apparently bought back by the company at their current value (determined by whom?). Conclusion: the company does not really have to be profitable as shareholders are employees, and profit, as a form of bonus, is optional.
So who is going to stop them? Nobody can really compete with Huawei on the first point – well, apart from ZTE – but on the second and third points, suppliers have taken massive steps to boost their work force in China and India at the expense of their other Western locations. As China and India further develop and employees in those countries start looking for a better life on earth now rather than in heaven tomorrow, the terms of the game will change, but not any time soon.
In the meantime, European suppliers have three wild cards:
- the quality of their customer relationships, which seems to count less and less as a factor though. Huawei seems to be facing challenges to retain its non-Chinese employees over the long term, due to cultural issues and probably working conditions, including salaries that are not as competitive as …. their competitors.
- their service business, where the process know-how and experience of the Chinese in Managed Services does not seem to be quite there yet, but catching up.
- the opportunity to copy Huawei and make turn their employees into shareholders on a wide scale, making them the real owners of the company and eventually responsible for their own success (or failure). But this means more than allocating stock options to the top management (only) and a few thousand Euros worth of shares to each employee at a discount price…
And to finish with one extract from the “Huawei Caricature“ book, dated April 2005 and printed in 1000 copies only, which we had the pleasure to read:
“Huawei people should have the courage to self-discipline, readiness to be promoted or demoted, and humility to free ourselves from bondage of temporary personal gains or loss. Huawei people will be trained in-service and be moulded in adversity“.
Europeans, think about it.