Huawei profit halves; handset competition saps margins

HONG KONG (Reuters): China’s Huawei Technologies Co Ltd., the world’s No. 2 telecoms equipment maker, said net profit more than halved to $ 1.8 billion last year, as it spent more to market its own-brand mobile phones and ploughed more money into research and development.

Analysts also noted cut-throat competition in the handset business that chipped away at margins. The company’s gross profit margin dropped 6.5 percentage points to 37.5 per cent.

Huawei, founded by CEO Ren Zhengfei in 1987, has diversified into consumer devices, such as its Vision smartphones and MediaPad tablets, and enterprise networking equipment as its core telecoms gear market has stalled. It warned on Monday that the weak global economy could prompt telecom carriers to postpone investments or cut other costs.

“The downward spiral in the global economy, combined with other factors like political turmoil in some regions and exchange rate fluctuations, has impacted our company this past year,” acting CEO Ken Hu said in Huawei’s annual report. Hu is one of Huawei’s executives who take on the chief executive role for six months on a rotating basis.

Huawei said 2011 net profit fell 53 per cent to 11.6 billion yuan, though revenue rose 11.7 per cent to around 204 billion yuan ($ 32.3 billion), trailing telecoms gear market leader Ericsson, as the Chinese company has yet to make inroads into the US market. The company’s sales of carrier networks, its mainstay business that contributed 74 per cent of revenue, rose three per cent to 150.15 billion yuan. Ericsson last year had network sales of $ 19.8 billion, while its global services division contributed another $ 12 billion or so.

Based in the southern Chinese city of Shenzhen, Huawei has been selling telecoms equipment – switches, routers and hubs – to major carriers from China and Southeast Asia to Africa and Europe, but has met resistance in some markets, including the United States and Australia, over national security concerns.

Ren’s background with the Chinese military has been cited as hindering the company’s progress in North America, though he has denied close links to the military, pointing out he was made redundant from the People’s Liberation Army three decades ago.

The United States accounts for 25-30 per cent of the global telecoms gear market, but generates only one per cent of Huawei’s revenue, executives said last year.

Huawei, which competes with Nokia Siemens Networks GmbH, Alcatel Lucent and crosstown rival ZTE , has yet to sell its telecom equipment to leading US carriers.

Last month, the Australian Government said it was barring Huawei from bidding for contracts for its $38 billion high-speed broadband network, a move the Chinese trade ministry said was unfair.

With growth in global telecom equipment spending expected to slow this year, Huawei is pushing its mobile sales, and is the world’s sixth-largest mobile vendor, according to Gartner data.

Emerging from decades of relative obscurity, the company has grown its consumer electronics brand as it takes on heavyweights Samsung Electronics Co Ltd., Apple Inc and Nokia. It has said it aims to sell around 60 million smartphones this year, triple last year’s total. Rival ZTE said earlier on Monday it could more than triple its smartphone shipments this year to 50 million.

Last year, Huawei’s consumer devices business increased sales by 44.3 per cent to 44.62 billion yuan.

In the enterprise sector, where Huawei competes with US firms Cisco Systems and Juniper Networks, revenue rose 57.1 per cent to 9.16 billion yuan, making it the fastest growing division though it contributes only 4.5 per cent of total revenue, Huawei said.

The $ 35 billion global enterprise networking equipment market should grow at seven to 10 per cent a year to $ 48 billion in 2015, IDC data showed, as companies need more back-end gear to connect a mesh of computers on local, external and cloud networks.

“In 2011, Huawei embarked on new business ventures as the company increased investment in the enterprise and consumer business segments,” it said in its report.

Most of Huawei’s enterprise customers are in China, including financial giant China Construction Bank and technology companies such as Tencent Holdings, but it hopes to add more foreign clients.

In November, Huawei said it would pay $530 million to buy the 49 per cent stake it does not already own in a joint venture with US partner Symantec Corp, boosting its portfolio of products for its enterprise unit.