Impact of $30 bn lower revenues on Huawei?

If US sanctions continue, Huawei's carrier and consumer business revenue will be affected, its profitability will be impacted and the company will have to downsize its employees by around 10-15%

During an on-stage discussion with George Gilder and Nicholas Negroponte in Shenzhen, Huawei founder Ren Zhengfei said, “In the next two years, we will reduce our capacity. Our revenue will be down by about $30 billion. So our sales revenue this year and next will be about $100 billion. By 2020, we may regain our growth momentum to contribute more to human society.”

Let’s look at how $30 billion revenue depletion will impact Huawei for the next two years.

In 2018, Huawei reported revenues of $105.2 billion for 2018 and $92.6 billion in 2017. The company’s net profit was $8.7 billion in 2018. In 2018, revenues were up by about 13.6 percent and if the same revenue growth is forecasted for 2019, Huawei’s overall revenue would have reached around $120 billion but this is bound to show flat or negative growth due to US sanctions. Since, this ban is applicable from May 15, 2019, we expect around $10 -$12 billion revenue impact in 2019 and around $18 – $20 billion revenue impact in 2020.

Let’s look at Huawei’s 2018 revenue break-up both in terms of geography and business units and its impact on 2019 and 2020 revenues.  

Huawei’s 2018 Revenue Break-up in $Bn (Business Units):

Consumer – 50.8

Carrier – 42.9

Enterprise – 10.9

Others – 0.6

Source: Huawei  

Consumer and Carrier Business Units account for 89 percent of Huawei’s overall revenue. Consumer Business i.e. its smartphone business will have more impact vis-a-vis Carrier Business Unit as the company will have difficulty in launching new models both on 4G and 5G front. Even 5G models launch will be delayed in the absence of component and application ecosystem. The company will have to focus on developing new OS and building new applications. All this will take time and there is no guarantee that consumers will appreciate the new OS plus it will also lead to increase in R&D investment.     

Huawei’s 2018 Revenue Break-up in $Bn (Geographies): 

China – 54.3

EMEA – 29.9

Asia Pacific – 12.0  

America – 7.0

Source: Huawei 

In 2018 revenue break-up, China contributes 54.3 percent. It is expected that China’s revenue percentage will increase to around 60 – 65 percent thanks to 5G order which it plans to get from all the four operators – China Mobile, China Unicom, China Telecom and China Broadcasting Network whereas America revenue will show decline, followed by Asia Pacific. It is still a big question how Huawei balances its revenue in EMEA where it has made maximum investment in terms of R&D spend on 5G, cloud, AI and others. The revenue dent will depend on how European countries react to US ban and it is too early to forecast.

Speaking about R&D investment, Ren said, “In the next five years, we are going to invest $100 billion to reshape the network architecture so that the network will be simpler, faster and most trustworthy. If we have some financial challenge, we would not reduce our research and development investment. We would reinvent ourselves to contribute to human society.”

Huawei will not cut R&D spending despite the expected hit to the company’s finances and expects revival in Huawei’s business in 2021 added Ren.  

As of December 31, 2018, Huawei’s total number of granted patents reached 87,805 of which 11,152 core patents were granted in the United States. In 2018, R&D investment was 14.1 percent of Huawei’s revenue which totalled $14.8 billion and the company would like to invest an increased amount as the focus would be on indigenisation on technologies where it is presently dependent on US companies so the investment would be to the tune of $16-18 billion for the next two years and then it will increase to $22 bn over the next three years to take the overall tally of R&D investment to $100 billion in the next five years.  

All this will result in lower profitability for the company due to the increase in R&D investment and lowering of revenues.

Presently, the company has nearly 188,000 employees operating in more than 170 countries and regions, serving more than three billion people around the world. Of this around 80,000 employees work in R&D department. The decline in revenue and decrease in profitability will lead to downsizing of employee as Huawei will require more employees on R&D and less on the operation side. It is expected that there would be employee downsizing by around 10-15 percent in geographies where revenue would be impacted by US sanctions.

Artificial Intelligence (AI) will raise productivity in all industries by a projected 0.8%-1.4%. Huawei predicts that by 2025, the global AI market will be worth US$380 billion, 90% of which will come from the enterprise market and the company is banking a lot on AI in the next 2-3 years.

 

 

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