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Huawei turns to software to be more resilient and “survive better”

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Huawei showed little concern about the future of the company at the global summit of analysts held last Monday. The strategy that the company plans to follow this year and the next is to diversify its component supply chain and dedicate much more resources to software development, so that equipment and telecommunications networks are less dependent on complex chips. Huawei’s current president, Eric Xu, acknowledged being affected by the US embargo on its purchase of chips but also that the company can be self-sufficient thanks to the immense Chinese market. Huawei’s current challenge is not to survive, as it has done in recent months, but to “survive in better conditions”.

The inaugural ceremony of the annual analyst summit, which this time reached its eighteenth edition, was clearly aimed at an international audience, who could follow its broadcast live and delayed through the Internet and Twitter, with simultaneous translation in different languages from the company’s auditorium in Shenzhen, where Huawei is headquartered in China. Physically there were about 400 guests, including analysts and journalists, the vast majority Chinese. The event took place at four in the afternoon China time, ten in the morning Spanish time, which gave an idea of ​​the interest in the message having international repercussion.

The president of Huawei Technologies, Eric Xu, was in charge of outlining the strategic lines that will govern the future of the company in the coming years, both in terms of technological development and introduction into new markets. Xu acknowledged that during the past year, as well as the previous one, the company has had to face immense challenges derived from the embargo imposed by the Donald Trump Administration on its main suppliers of electronic components, but it has survived. Now, he added, it is not just about surviving, but about “surviving in better conditions.”

Huawei wants to reinvent itself as a software company that serves all types of industries through its telecommunications networks; networks with more features thanks to software and not so much to chips

The impact of the US sanctions on last year’s income statement has been broad, as can be seen from Huawei’s recently released annual report, but on a substantial turnover, net profit and total assets basis, even by Chinese standards, where everything is immense. Revenue grew by a reduced 3.8%, far from the double digits of previous years, but reached 136,717 million dollars. The operating margin fell one point, to a healthy 8.1%, and assets rose again to 134,491 million dollars, after the strong push of 2019, it is assumed that to source components, as seen in the graph below .

By divisions, the carrier business, of telecommunications equipment, represents 34% of the total, with a virtual stagnation (0.2%) while the consumer (basically smartphones) represents more than half of the total, 54, 2%, with 3.3% growth. The healthiest business is business, with a 23% increase and which already represents 11.3% of the total. The chapter of “others”, which shrinks by a third, is practically negligible for the magnitudes that Huawei handles.

It must be borne in mind that these results for all of 2020 mask what happened in the fourth quarter, where Huawei’s best-known, most representative and probably profitable business, the consumer one, was severely affected by the US embargo. Huawei’s smartphone sales collapsed in the last quarter in Europe, because the new models could not carry Google’s mobile services, and the company had to ration the components it had in stock due to the difficulty of buying new ones, especially those. Kirin chipset manufactured by TSMC and which had driven the sale of the company’s smartphones.

Throughout this year 2021, it is presumable that the consumer division will drastically reduce its turnover, due to the lack of enough components, and the smaller sale of Huawei smartphones will be covered by its Chinese competitors, as Xiaomi is already doing. , Oppo, Vivo and many others, in Europe and especially in China. In any case, as seen in the geographical distribution of Huawei’s businesses, China represents no less than 65.6% of all the company’s revenues, with growth last year of 15.4%. EMEA (Europe, Middle East and Africa) accounts for 20.3%, with a drop of 12.2%, while Asia Pacific as a whole represents another 7.2% of total revenues and a drop of 8.7% . Revenues in America continued to be very meager and fell by a quarter, so a greater embargo on its products in the United States hardly affects it.

Strong foundation in China and weak in Europe

Huawei’s business is linked, and will continue to be, to the sales made in its domestic market, which is otherwise immense and dominating, especially in the sale of telecommunications equipment. Its main competitor is another Chinese company, ZTE, although Ericsson won a significant order for the next three years from China Mobile a few months ago, after Nokia threw in the towel and did not go to tender. What remains to be elucidated is what will happen this year and the next with Huawei’s carrier business in Europe, which was 180,849 million yuan, a not inconsiderable 27,870 million dollars.

Huawei’s position in China, a market as huge as it is difficult for a foreign company to penetrate, allows it to face the future with sufficient confidence. In fact, Eric Xu came to say that with the Chinese market Huawei already covers its needs. This does not mean that the company does not want to continue doing business and selling telecommunications equipment to European operators. The recent opening of a research and development center near Paris and the announcement of another center in Great Britain (although the latter has little chance of succeeding) demonstrates its interest in continuing to sell telecommunications equipment and increasing it if possible.

For the European Union, and especially for Germany, the sale of technology to China is a priority; Hence, last December 30, in extremis, a trade agreement was signed between the European Union and China, which should now be ratified by MEPs and there are doubts that it will be done, at least under the agreed terms, by the opposition from many members. The United States is totally against Europe’s agreement with China, which could jeopardize the renewal of the bilateral treaty that the European Union is negotiating with the United States, now without Great Britain.

“The unjustified US sanctions against Huawei and other Chinese companies are creating an industry-wide supply shortage and could trigger a new global economic crisis,” warns Eric Xu.

Despite the fact that the issue of Huawei 5G equipment purchases by European operators has been under discussion for months, a clear position has not yet been adopted, especially by Germany. Many Deutsche Telekom 4G stations, almost half, work with Huawei equipment and their upgrade to 5G requires that they continue to use equipment from the same manufacturer, according to specialists. The official position of Europe is that the 5G equipment that is installed from now on is safe, an imprecise condition and difficult to assess. For now, the situation is not of extreme urgency, because until next year and thereafter there will not be a strong deployment of 5G networks in Europe, but it should be clarified as soon as possible, such as the agreement of the European Union with China and, therefore, with Huawei.

Huawei believes that Biden will maintain the embargo

At the analyst conference, Eric Xu assured that Huawei’s future strategy is based on the assumption that the United States, and its current president, Joe Biden, will keep his company on the so-called Entity List, which restricts its access to technologies. Americans, for a long period. The inventory that Huawei has for the business-to-business segment is currently sufficient, “but it will not last for long,” he said, without giving further details. Xu added that other Chinese companies are concerned that the same thing happens to Huawei, so he believes that this will encourage many companies to invest in the manufacture of chips to meet the needs of Huawei and other Chinese companies, without violating the restrictions. Americans.

Huawei’s solution to this conflict involves allocating immense resources to developing software that allows Huawei’s telecommunications networks to function without major problems with less sophisticated and complex chips and equivalent features. In a smartphone, it is vital that the chips are tiny and with great integration of functions, because the terminal must be small, but in a radio station the size is not so important and similar features can be achieved without so much integration, especially if very advanced software is developed.

Just two days ago, Nokia’s head of technology and strategy, Nishant Batra, assured in a virtual meeting that “it is important that the entire industry is clear that the future of 5G networks lies in the software and not just us as suppliers [ of telecommunications equipment] ”. For Batra, the use of the cloud and disaggregated and virtual networks in the coming years is also essential. In addition, software in networks must be deployed quickly and focused on specific business use cases, with agreements based on the service provided and not so much on the type of networks used, he stressed.

The investment in software engineering that Huawei will make over the next five years should allow the company to be more resilient and its products more competitive. This investment in software will add to the colossal sum you already invest in research and development. Last year, Huawei allocated 15.9% of its total turnover, 21.7 billion dollars, to R&D.

Reinvent itself as a software company

In late 2018 the company approved a $ 2 billion plan to increase its software development capacity. The idea of ​​empowering software, therefore, is not new. What is relevant is the announcement that the company wants to reinvent itself as a software company that serves all types of industries through its telecommunications networks; networks, in addition, that will have much more benefits thanks to the refined software and not so much to the use of microelectronic components.

This mutation from a manufacturer of telecommunications equipment to a provider of telecommunications solutions should allow Huawei, according to the strategy outlined by Xu, to enter many other business segments, particularly the automotive industry. Xu assured that they will invest 1 billion dollars this year in the automotive business, with the main focus on components for intelligent vehicles and platforms for autonomous vehicles.

Huawei’s plan is not to build or assemble cars, as Xiaomi, a Chinese smartphone maker that has just overtaken Huawei in this business, has announced, but to supply technology to make cars more autonomous and safer. And it explicitly cited Chinese carmakers GAC Group and Great Wall Motor. He also confirmed that it has partnered with luxury electric car maker Arcfox and will demonstrate its smart guidance technology this Saturday at a trade show in Shanghai. It is not ruled out that Huawei uses the “Huawei Inside” logo, which has made Intel so successful for nearly twenty years on personal computers.

Looking to 2030, a future that is closer than it seems, Xu enunciated nine technological challenges for a “smart world”, among them the definition of an improvement of the 5G standard, baptized by Huawei as 5.5G and by others, like Nokia, like 5G +, characterized by higher upload bandwidth, low deterministic latency and antennas with higher dynamic bandwidth and higher resolution in the positioning of objects. The development of optical components, to increase the capacity of fiber optics, is another challenge for Huawei and the telecommunications industry in general.

More expensive products and chips in the coming years

Xu made a special mention in his speech to the serious deterioration of the global supply chain that unleashed the presidency of Donald Trump and that Joe Biden believes that he is willing to maintain. “Clearly, the unjustified US sanctions against Huawei and other Chinese companies are creating an industry-wide supply shortage [of products and components] and could even trigger a new global economic crisis.”

Coincidentally, these words from Huawei were spoken a few hours before Joe Biden held a summit with the virtual assistance of US leaders from the semiconductor and automotive industries to analyze the current shortage of chips for car manufacturers and try to ensure that The United States makes more chips in its territory, without even a statement being issued at the end of the meeting.

For the incumbent president of Huawei, the US trade restrictions on Huawei have not only hurt his company but have also deteriorated the relationship of mutual trust that existed in the global semiconductor supply chain. Now, he added, each country is trying to build its own chip factories to become more self-sufficient rather than trying to reestablish global supply chains.

This, Xu warned, can represent an extraordinary investment of at least 1 trillion dollars (1 trillion), which will cause the prices of semiconductors to rise between 35% and 65%, and, ultimately, will have an impact on products. of end consumers. And he recalled that a company has already sent a letter to its customers telling them that it will raise prices and cancel the discounts for next year (in reference, without mentioning it by name, to TSMC).

The sensation produced among analysts by the words of the current head of Huawei (because the position is rotating) is that Huawei has sufficient means to face the sanction imposed by the United States, thanks, especially, to the immense size of the Chinese market, but with a serious loss of its current very competitive position in the international telecommunications market; not in the Chinese market, which will continue to lead.

It also appears that the United States wants to keep up the fight against Huawei and other Chinese companies in the coming months. The question that hangs among many analysts is whether the United States can continue to maintain it, given the serious breakdown of the global logistics chain that has been organized, whose epicenter is precisely in China and controlled by Chinese companies, which supply most of consumers.

Ultimately, everything will depend, analysts also consider, on the position adopted by the Chinese Communist Party and Xi Jin Ping, because there is little Huawei can do, apart from resisting. The speech delivered in Alaska by a very senior Party leader and the Wall Street Journal cover story last Tuesday, with the headline: “Message from Beijing to America: Now We Are Equal,” does not invite optimism.