UK Becomes Regional Staging Post For Huawei

Huawei Technologies has committed to invest US$1bn (GBP650mn) in expanding its operations in the UK and to spend a further US$1bn in UK procurement , research and development and centre of excellence activities over the next five years. The company ' s UK workforce is to grow from more than 800 at present to more than 1,500 by 2017. While the UK government lauds the investment as a sign of confidence in, and a boost for, the UK manufacturing and foreign investment sectors, BMI believes the deal is much more significant for Huawei in the developed markets space.

The company already counts all four of the UK's mobile network operators ( Vodafone , O2 , 3 , Everything Everywhere ) as well as key fixed-line and broadband providers BT , TalkTalk and Virgin Media among its key customers and is therefore already more deeply entrenched in this market than it is anywhere else in the world outside its home market. In that regard, it is not surprising that the company has decided to build up its presence in the UK and to use this base as a staging post for its assault on Europe and other mature markets. Although the company has proven very successful at breaking into frontier markets (non-Chinese revenues grew by 14.9% to CNY138.4bn in 2011), using its low-cost product and vendor financing capabilities as leverage, developed markets have largely been more reluctant to use Huawei products. Gaining the confidence of the UK government could help open more doors in Europe.

Huawei Revenue Breakdowns, 2010-2011 (CNYmn)
2010 2011 % chge y-o-y
Source: Huawei Technologies
China 62,143 65,565 5.5
Overseas 120,405 138,364 14.9
Total 182,548 203,929 11.7
Carrier Networks 145,800 150,145 3.0
Enterprise Business 5,834 9,164 57.1
Consumer Business 30,914 44,620 44.3
Total 182,548 203,929 11.7

O perators wo rldwide are keen to source low-cost advanced solutions to upgrade the data processing capabilities of their networks even as core revenues fall rapidly and customer expectations regarding quali ty of service soar ever higher. As a manufacturer of low-cost handsets, routing and storage solutions as well as enterprise-grade IT systems, Huawei should appeal to a very broad customer base in developed markets, where margins are growing ever tighter.

Nevertheless, influential states have been wary about letting Huawei into their markets for a number of reasons. The US, Indian and Australian governments, in particular, have banned Chinese manufacturers from high-profile network supply deals due to concerns that Chinese-made equipment could be used to spy on end-users or surreptitiously interconnect with national security systems. More extreme views include suggestions that Chinese-made equipment could be used as weapons in cyberwarfare and that they would be conduits for distributed denial of service (DDOS) attacks on government or utility networks or for more insidious computer viruses targeted at disrupting essential online systems. This is denied by Huawei, which recently published a white paper condoning such activities and noting that such an approach would be counterproductive to its core revenue-generating business.

Huawei's reluctance to provide greater transparency with regards to any links it may have with the Chinese government or military, as well as its sources of financing, serve only to frustrate governments still concerned about the company's growing influence around the world and, despite the US government's intention to thoroughly investigate the company ' s products and corporate structure, we do not expect this impasse to be resolved any time soon.

The US government, in particular, could also be accused of protectionism, as many of the world ' s leading networking, storage and carrier solutions vendors - which include IBM , Dell , Cisco Systems and Juniper Networks - are based in the US and have been losing customers around the world to the Chinese newcomer.

BMI would not expect any investigation into Huawei's links to the Chinese government or the processes involved in the design and manufacturing of its products to reveal anything of significance, even if Huawei were to open itself up . While the company has been accused of using its influence and resources to undercut its rivals and secure important contracts in emerging markets, as has been alleged in Algeria, it seems unlikely that such an approach would work in developed markets, such as Europe and North America.

The high-profile investment in the UK could therefore soften some European states' stance with regards to allowing Huawei to compete on a level playing field. This would not only be good news for network operators and consumers, as the cost of building new networks and providing services would fall, but also for local economies, particularly in markets that could themselves become secondary expansion staging posts for the company.