SHANGHAI – Nearly 30,000 customers, partners, and industry followers gathered here in the largest Chinese city to get a glimpse of the future of Huawei, one of China’s most successful communications technology companies and an object of controversy to some competitors in the West.
Following two days of technology announcements, demonstrations, and executive keynotes, one thing is clear: Huawei has grown immensely in the last ten years, and it shows no sign of slowing down. The company has clearly evolved from its “fast follower” reputation to an innovator in many areas. And the reason for Huawei’s rapid growth is its intense focus on research and development and the expansion of its product portfolio.
How did this happen? Clearly engineering is at the core of Huawei’s culture. The company says it has more than 50,000 patents and it is spending a lot of R&D — to the tune of $9 billion in 2015, or 15 percent of its revenue.
Back in 2002, I wrote a story about a little-known company called Futurewei, a U.S.-based subsidiary of Huawei, in a story for Light Reading called “Has Huawei Got Cisco’s Number?” The story detailed how this global upstart was systematically providing lower cost alternatives to Cisco’s products.
“They’re Cisco’s biggest fear, even though Cisco won’t admit it,” said an unnamed analyst at the time.
It’s rare that my stories have such predictive capability — but in this case that story was a template for the competitive landscape of the next decade. Fourteen years later, Huawei has passed Cisco’s annual revenue figure of $50 billion — in 2015 Huawei booked revenue of $61 billion with a compound annual growth rate of 18 percent. Huawei officials want that figure to reach $100 billion by 2020. It’s no longer Cisco’s biggest fear — it’s a nightmare come true.
But Huawei is no longer a company that just does copycat routers. It’s got award-winning consumer devices, smart-city software, cloud services, and many other products. Its converged infrastructure product, FusionCube, made headlines recently with a favorable Forrester review. Its consumer business is now growing 41 percent per year and has a strong mobile device franchise. The new Honor 8 mobile handset is a hit worldwide and getting great reviews. And it’s emerging as a leader in the carrier open source front, where it’s putting big money behind projects such as Open-O and looking to build open source across its software-defined networking (SDN) and network functions virtualization (NFV) product lines — which just resulted in the release of its first commercial SDN controller, the Agile Controller. The company is even doing research on technology and climate change.
More importantly, unlike some of its Western counterparts in the networking and service provider space, Huawei has successfully linked together diversified portfolios in enterprise, consumer, and service provider businesses. Western companies such as Ericsson, Nokia, and Cisco failed to develop their consumer businesses and link it to their core networking capabilities.
Diversification is Key
In a global market where single-digit gains are welcomed, Huawei appears to have the most momentum with the most diverse base of customers. The share of the company’s revenue by segment in 2015 was 59 percent service provider, 33 percent consumer, and 7 percent enterprise. Recently, powered by smartphone sales, the consumer segment has been growing substantially, so that number may actually accelerate in 2016.
This diversification has led to what the company talked about this week at Huawei Connect: It’s “device, pipe, cloud,” strategy intended to segment the three areas of focus.
This week in a keynote, Huawei’s rotating CEO Ken Hu (Huawei has a system of three rotating CEOs) talked about how cloud will become the “intelligent brain” that communicates with any connected network or device. “Cloud plays an important role in the structure,” said Hu. “Cloud is going to have an important influence on the society. It’s not just affecting technology models, but business models and people’s mindset.”
Hu’s cloud brain concept, of course, is not new — as the concept of artificial intelligence (AI) takes over the world (and the cloud). But Huawei seems well positioned to back it up with all of the pieces of the puzzle: the device, pipe, and the cloud strategy. Its large Western competitors can’t seem to break out of their own respective silos.
China cynics, of course, can point to Huawei’s support from the government-sponsored entities and the immense coordinated infrastructure buildout. Of course, this is all true. But I also think there’s something different going on here that separates Huawei from its counterparts, including rivals in China such as ZTE. Huawei’s strong engineering culture has separated it from the pack.
Huawei also has the benefit of being a profitable, private company. It can invest for the long term without worrying about shareholders or quarterly reports. Compare Huawei’s approach to some of its competitors, which seem to be grasping for growth and in perpetual restructuring mode. As an example, Cisco’s R&D budget has been flat for years, around $6 billion or 8 percent of revenue. Its R&D approach has not grown meaningfully in a decade. Cisco is not known for internal innovation, it acquires nearly all its innovative products through acquisition — and it’s M&A activity has slowed down.
Even Ericsson, once known for its Nordic innovation, has been cutting back on R&D spending. A couple years ago, Ericsson was spending $1.3 billion per quarter on R&D, a number that has dwindled to $900 million per quarter in 2016, according to public financial statements.
One has to ask: What will be the result of this R&D divergence over time? Huawei’s latest investments loom large in the next phase of that battle for networks, which may be the highest stakes battles to date. The next big markets — 5G, Internet of Things (IoT), and NFV — represent the largest growth areas in communications and networking in years.
The technology industry can continue to criticize China and wage political wars — but maybe a better response should be to focus in the lab. That means spending more money on R&D and steering the conversation back to the topic of product development and innovation, rather than on globalization, stock options, and share prices.