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Huawei: Planning $2 billion investments in the Indian market

Company Stories , September 30, 2011

If Huawei’s financial performance in the past five years is any indication, the company is on a fast growth path. A compound annual growth rate of 29 per cent for revenues, a 57 per cent increase in operating profits and a 56 per cent rise in net profits in the past five years have put the Chinese company in a strong position in the global telecom equipment market. The Shenzhen-based company, which was established in 1987, today has an extensive global footprint. It is present in 140 markets, has an employee base of 110,000, and works with 45 of the top 50 telecom operators in the world, including France Telecom, Bharat Sanchar Nigam Limited (BSNL), Bharti airtel, British Telecom and Vodafone.

Huawei, which won its first contract outside China as late as 1997, recorded international sales of more than $100 million by 2000. The value of its overseas contracts crossed that of its domestic business for the first time in 2005. Since then, there has been no looking back. Today, Huawei is a leading telecom equipment provider not only in developed regions like Europe, but also in emerging markets of Asia and Africa.

Given that the company is very young as compared to its global counterparts, it has made brisk progress and is today second only to global market leader Ericsson. According to Gartner, at the end of 2010-11, Huawei held about 15.7 per cent share of the $78.6 billion global carrier network infrastructure market, behind Ericsson which had a 19.6 per cent share.

Several factors have supported Huawei’s success story. One of these has been the company’s low-cost equipment offerings. According to industry experts, for some equipment, the company’s prices are almost 50 per cent lower than those of its competitors. This strategy has helped Huawei win over international customers from its rivals. To offer cost flexibility to customers, the company has been offering vendor financing (a guarantee for commercial loans given to customers). This has helped it enter new markets in Africa, the Middle East and South Asia.

The fact that Huawei is an employee-owned firm has made it easy for it to take quick decisions and implement solutions without the pressure of investor approvals. Also, the company has more than 51,000 employees (46 per cent of the overall employee base) engaged in research and development (R&D); and 20 research institutes in India, the US, Germany, Sweden, Russia, China, etc.

Indian operations

India has been a key market for Huawei. In 2001, the company strengthened its position in this market by setting up Huawei Telecommunications India. In terms of client base, Huawei has served almost all major Indian telecom operators,  from state-owned BSNL and Mahanagar Telephone Nigam Limited to private operators like Bharti airtel and Reliance Communications.

The company has announced an investment of $2 billion in the Indian market over the next five years to set up R&D centres, manufacturing facilities, etc. The five-year plan focuses on development and augmentation of segments like local R&D, local manufacturing, technology cooperation with Indian IT service companies, local sourcing, local employment, talent development, and support for rural education and IT literacy.

Under this plan, a new R&D centre has been planned in Bangalore. Huawei’s existing facility in the city, which was set up in 1999 and now employs 2,000 engineers, is its largest R&D centre outside China. The new campus will increase the manpower base in India to about 3,000.

The company has initiated the first phase of local manufacturing in Chennai and is exploring various avenues of cooperation in local manufacturing. Local R&D and manufacturing facilities are being developed with export capacities and for supporting India’s local industrial development. Almost 95 per cent of the company’s R&D staff comprises Indian nationals and 85 per cent of its pan-Indian operations are localised.

With its revenues growing by 100 per cent between 2008 and 2010, Huawei has shown strong financial performance in India. In 2008, its India revenues stood at $1.3 billion (around Rs 64 billion). In 2009, Indian operations accounted for over 10 per cent of its total revenues.

In 2010-11, however, revenues from the Indian market fell by almost 24 per cent to Rs 56.88 billion. The decline was attributed to the stringent security rules enforced by the Indian government, which practically stopped new orders for Huawei. The company faced similar issues in the US. Industry experts attribute this to a general suspicion regarding Chinese technology companies and their ties with their government. “It is not Huawei they have a problem with, it is China,” says an industry analyst.

However, in the past one year, the company has taken every step to meet all security requirements of the Indian government. It was the first vendor to respond to a request from the Indian Institute of Science, Bangalore, for testing hardware equipment supplied by foreign vendors. The company is prepared to accept all security clauses of the Indian government.

Future growth

Despite these issues, Huawei remains positive about its Indian business. It has prepared a growth plan for the next one year, for which it has identified new verticals and business units. The company is expecting sales worth $100 million from its Indian enterprise business in 2011. This is significant as compared to the global contract sales of $2 billion in this segment in 2010. Besides, Huawei will increase the employee strength in the Indian enterprise business segment from 100 to 500.

“India’s share in the enterprise business is very small and hence we didn’t have a dedicated sales team for it till 2010. But now we are ramping up manpower, sales and infrastructure in the country,” says Dabing He, president, marketing, enterprise business group, Huawei.

The company is looking for a share in the Indian computing device market and is prepared to capitalise on the tablet market. Huawei is expected to launch Android-powered tablets with customised content priced at Rs 20,000-Rs 25,000 in the near future.

At the global level, the vendor is focusing on the mobile handset segment. According to Victor Xu, chief marketing officer for Huawei’s device business, the company is likely to ship 20 million smartphones across the world in 2011, higher than a previous target of 15 million units. This is a major increase as compared to the 3.3 million smartphones exported by the company in 2010-11.

Huawei is trying to augment its handset offerings in India as well. It plans to establish a product development centre in the country that will design and develop software, and test handsets. The vendor has already launched three smartphones in India and will introduce another 8-10 handsets this year. It is targeting a 5-7 per cent share in this market by 2013.

The way forward

According to a Bloomberg report, Huawei aims to more than triple its annual sales to $100 billion in the next 5-10 years by entering segments like cloud computing and small business networks. The company has decided to move away from the traditional telecom network market due to limited growth prospects. Mobile broadband, business support systems and internet protocol TV will be its key focus areas in 2011-12. It is also planning to assist Indian operators in meeting the demand for high-bandwidth data services, which will result in improved revenues for the latter.

 
 

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