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It’s time for Cisco to cough up shareholder cash Related Topics Tech » Media » By Lee Chyen Yee HONG KONG | Fri Feb 3, 2012 2:09am EST HONG KONG (Reuters) - When Huawei Technologies posts its annual results in April, they will likely show the unlisted Chinese firm has overtaken Sweden's Ericsson as the world's top-selling telecoms equipment maker. As with solar panel maker Suntech Power, another Chinese manufacturer that is a world beater yet little known beyond the Great Wall, it's been a rapid rise to the summit. And, as the pace of global spending on telecoms equipment slows -- on the switches, hubs and base stations that connect networks -- Huawei has been building serious growth in new areas such as smartphones and its MediaPad tablet PC. Globally, Huawei already ranks sixth in mobile phone sales. Privately-owned Huawei was founded in the southern boomtown of Shenzhen by CEO Ren Zhengfei just 25 years ago, after he left the People's Liberation Army as part of a scaling down of the world's largest military force. Now 68, Ren, who was named the fifth most powerful Asian executive by Fortune in 2011, was involved in military technology development for the PLA before setting up Huawei with just 20,000 yuan ($3,200). Annual sales are forecast at around 200 billion yuan ($31.7 billion), around two-thirds of which, some $21 billion, are from telecoms gear, putting it ahead of Ericsson's 2011 network sales of $19.8 billion. Ericsson, which has a market value of more than $31 billion, has led the mobile telecom equipment market for at least the past decade. GEAR GROWTH SLOWS Global spending on telecoms equipment is forecast to grow 6.9 percent this year to $444 billion, slower than last year's 7.7 percent growth, dented by Europe's debt crisis and the generally weak economy that has checked spending in the IT sector, according to IT research firm Gartner. Ovum, a UK research firm, sees a similar trend, with growth in telecom operators' spending slowing to 5.5 percent in 2012 from 12.2 percent last year. About two thirds of Huawei's revenues come from selling telecoms gear -- where it also competes against Nokia Siemens Networks GmbH, Alcatel Lucent and ZTE, another Chinese firm. As well as consumer gadgets, Huawei has pushed aggressively into selling routers and switches to corporations in the so-called enterprise sector, a growing $35 billion market dominated by Cisco Systems and Hewlett-Packard. "There's a lot of price pressure now (from the Chinese firms) and this is going be tough for Ericsson," said Bill Rojas, an analyst at research firm IDC. Some analysts, however, say Huawei needs to build strong channel partners -- distributors and systems integrators -- over the next 3-5 years if it's to compete in the enterprise sector. "The market is wide open, this is anybody's game," said Matt Walker, an analyst at Ovum, referring to the telecoms market. "I know some observers will see a conservative growth outlook, think it means a tight price climate, and conclude that this favors Chinese vendors. I don't see this." "Huawei and ZTE are positioned well in both these markets, but so are others," he said. "Services may be a big part of it." Ren's background with the Chinese military has often been cited as hindering Huawei's progress in telecoms technology in North America, though the company has repeatedly denied having links with the armed forces. Last year, Huawei backed away from buying U.S. server technology company 3Leaf's assets, bowing to pressure from a U.S. government panel, and in 2008, it gave up on a bid for U.S. networking equipment company 3Com. In 2010, some Republican lawmakers raised national security concerns about Huawei's bid to supply mobile telecoms equipment to Sprint Nextel Corp. GEAR TO GADGETS The real future growth driver for Huawei, and ZTE, also based in Shenzhen, is likely to be in red-hot consumer gadget markets, helping take up some of the slack in telecoms. Huawei's consumer devices -- dongles, mobile phones and tablets -- now bring in almost a fifth of its revenues and these sales are powering ahead at 40 percent, the company said last month, twice the growth seen in 2010. Huawei had sales of $6.8 billion in its consumer business last year, and is moving up the value chain by selling more of its feature-filled IDEOS and Vision smartphones. A key advantage here is price. Huawei's new Ascend smartphone sells at around $400, much cheaper than the most basic Apple iPhone 4S, which costs around $650 in Hong Kong stores. The phones are increasingly available at stores in glitzy Chinese malls and have featured at a Milan fashion show. "Chinese users prefer mid-range smartphones as they are more affordable than the expensive high-end ones, and have a much better user experience than low-end phones," microblogger Hu Yang wrote on Sina Weibo. "Let's hope Huawei introduces more such mid-range smartphones in the future, (though) I hope Huawei improves its software capabilities in smartphones as mine still has some bugs that aren't resolved." As sales grow rapidly, Huawei hopes margins won't be compromised. Its overall gross profit margin rose to 41.9 percent in 2010, from 39.6 percent, while, at Ericsson, gross profit margin declined to 35.1 percent last year from 38.2 percent in 2010. "We are trying to have a strategy that doesn't revolve around price," said a Huawei executive, who declined to be identified as he was not authorized to speak to the media. "Over the last 2-3 years, we have been focusing more on value, like customization, support and systems integration." Other new growth areas Huawei is looking at include fourth generation (4G) Long Term Evolution (LTE), an upgrade from 3G technology that promises faster data downloads. "Huawei is very competitive in LTE products. They're going to take away more market share," said IDC's Rojas. Huawei has clinched more than three dozen fourth generation LTE contracts globally with major operators such as Japan's Softbank Corp, and sees sales of LTE equipment doubling next year, a senior executive said in November. The Chinese firm, which employs more than 110,000 staff worldwide, has been offering solutions to operators that will help ease network migration with its singleRAN (radio access network) technology. As part of a branding and image drive, Huawei also bid, unsuccessfully, to set up a phone network in London's Underground during this year's Olympic Games. Huawei's Asian base, particularly in its home market, may also prove beneficial, both for its telecoms gear business and device sales. "The good thing is that Asia still needs to catch up with network deployment. The demand is there," said another Huawei executive, who also asked not to be named. "It may not be the same growth rate as before, but it's still quite significant compared to other parts of the world." ($1 = 6.3067 Chinese yuan) (Reporting by Lee Chyen Yee; Editing by Ian Geoghegan) Tech Media Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above. 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