A few weeks ago, two of China’s largest telecom equipment manufacturers, posted very different forecasts for their profitability. Huawei Technologies, the world’s second largest manufacturer behind Ericson, geared up for a net profit of 15.4 billion yuan (approx. $2.48 billion), a 33% increase of FY2011. ZTE Corp., by contrast, warned of a larger loss, something on the order of 2.5 and 2.9 billion yuan.
Why such a large spread for two enterprises operating in primarily the same market? Analysts seem to differ on reason. Some point to the size difference between the two companies, with Huawei better equipped to handle price competition because of its size. Others cite industry factors. Margins are quickly shrinking on the hardware side of the telecom industry, and even though Huawei is showing impressive sales growth, bottom line growth of the same magnitude remains to be seen. However, as Huawei does not break down its financial information by business unit, there is little indication of which segment is lagging in profitability.
As carriers invest in new network technologies, it will be interesting to see if further consolidation, as evidenced in Japan and the United States, will continue to affect hardware manufacturers. Further, with the global economy still recovering and investment for some companies stalled, how can those giving access to new technologies spur carriers into action?
Bar graph of net profits for Huawei Technologies and ZTE Corp
Huawei Technologies may have high expectations for the future because of its new smartphone the Ascend P2, which they are calling the “world’s fastest smartphone” (shown here: http://techcrunch.com/2013/02/24/huawei-ascend-p2-official/), and the launch of its global brand campaign “Make it Possible” (http://www.newswire.ca/en/story/1119391/make-it-possible-huawei-device-unveils-its-global-consumer-branding-campaign-at-mobile-world-congress).
The Chinese cell phone carriers report the number of subscribers since January this year. China Mobile has the highest number of 3G but has the lowest penetration rate of 3G phones with only 13%. China Unicom and Telecom has higher penetration, AND these are the two carriers that have iPhone.
Source: China Carriers Smartphone 3G Penetration Only at 22%
What are the core businesses? Assembly, correct? So the comments that focus on who has which brand may matter.
More interesting to watch will be whether Chinese firms succeed in some niches with hardware. So far firms in the US, Japan, Korea and Taiwan are the players, though “fabs” are located in many countries. Running a “fab” profitably is not easy, it depends on very good maintenance and process control as a slight drop in yields results in a large drop in profits — revenues shrink, costs don’t. Lots of firms have proved bad at operating factories.