Huawei results unexpectedly strong, but clouds are on the horizon

By Lucy Ingham

Despite an extremely tough six months that have seen the electronics giant caught in the crossfire of the US-China trade war, the second quarter Huawei results have been extremely positive.

The company today reported revenue growth of 23.2% in the first half of 2019, up from 324.7bn yuan (£38.7bn) to 401.3bn yuan (£47.9bn). This represents a bigger climb than in the same period of 2018.

However, while the Huawei results may seem to show a company that has shaken off damage inflicted by the US’ blacklisting of the technology giant, this is not, in fact, the case.

While the blacklisting is currently suspended pending a review on 19 August, the positive Huawei results largely come from stellar domestic performance. This saw overall smartphone shipments rise by 24% to 118 million units, despite overseas sales actually dropping.

As a result, Huawei still faces a significant challenge in terms of the overseas market if it is to continue its growth as a global company.

Huawei results mask trade war challenges

Back in June, Huawei founder and CEO Ren Zhengfei admitted that the US’ aggressive sanctions against the company had come as a surprise, despite the company anticipating issues relating to the US-China trade war.

“We didn’t expect that the US government would launch such precise ‘strikes’ against us, with each ‘strike’ hitting our vital parts. Now we have several thousand ‘holes’, and fixing them will take time,” he said.

“We didn’t expect such extreme measures, but we did make some preparations. We are like a bullet-riddled Il-2 aircraft during World War II. We prepared to protect our core parts only, like our fuel tank. We didn’t prepare to protect non-core parts.

“In the coming years, our production capacity may decrease, and our sales revenue will be about $30bn lower than forecasted. In 2019 and 2020, our annual sales revenue will be about $100bn. But maybe in 2021, we will regain our growth momentum and provide even better services to society.”

While the company continues to put out a positive narrative with regard to its future prospects, the international situation remains extremely challenging.

“The US and China are locked in a race for the dominance of next-generation technologies like 5G, AI and cloud computing. Huawei is caught in the middle,” Cyrus Mewawalla, head of Thematic Research at GlobalData, told Verdict.

“Whilst today’s strong results reflected Huawei’s strength in China’s domestic telecom market, future growth will come from international expansion. Its international outlook very much depends on the outcome of the US China trade negotiations, which remain ongoing.”

Huawei’s US prospects

While some of Huawei’s international market remains largely out the reach of the US, such as its 5G contracts in the Middle East, which also helped buoy its latest results, the fact remains that the US’ efforts to block the company remain a significant barrier to its future growth. This is particularly true of country’s in the so-called Five Eyes intelligence sharing community, which includes the UK, that have been pressured to ban the company by the US president.

However, despite the company continuing to fight off espionage allegations, there are signs that prospects could improve.

In comments made last week, US president Donald Trump hinted that restrictions on Huawei products in the US could be eased as a result of improving trade negotiations with China, although other US politicians have continued to express security concerns.

For Huawei, however, the challenge is less of a matter of convincing the US that it can be trusted, but of waiting to hear the outcome of seemingly unrelated trade negotiations, in which the company is being used as collateral.

In the meantime, however, the company has lost out on a number of initiatives, such as its planned smart speaker, which had been in development with Google but was scrapped following its blacklisting.

Today, as the company faces continuing challenges, it is presenting a positive, yet realistic, attitude.

“Given the foundation we laid in the first half of the year, we continue to see growth even after we were added to the entity list,” said Liang Hua, chairman of Huawei, in a briefing with reporters today on the company’s results.

“That’s not to say we don’t have difficulties ahead. We do, and they may affect the pace of our growth in the short term.”

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