Network effect

Cisco and Ericsson join up to meet Huawei threat

Huawei P8 w

It is not often a Chinese brand features in the Financial Times’ “How To Spend It” supplement. But Huawei has just rubbed shoulders with some of the elite world brands the section showcases, thanks to a  rave review of its P8 smartphone.

The FT applauds the P8 for being able to almost “out apple Apple” with its sleek packaging, ultra thin screen and dual SIM card  – a boon for travellers who do not want to be hit with high data roaming charges or carry two phones. The gadget also has a number of intriguing bells and whistles. These include being able to shout out to its owner “I’m here” if misplaced at home and to digitally enhance the owner’s selfie to the detriment of anyone else appearing in the same photo.

Huawei stands testament to the fact that China can move to the higher end of the value chain. The slowness with which this has been recognised globally has much to do with the company’s unlisted status and its reputation for secrecy. But that image may now be changing thanks to soaring smartphone sales.

Huawei ranks only behind Samsung and Apple in the global league tables. In the third quarter, handset shipments jumped 63% year-on-year, putting the company on course to hit its target of selling 100 million smartphones in 2015.

Smartphone sales are the most visible manifestation of Huawei’s growing power. But it is the global sales of its network infrastructure which has really propelled it into the premier league of multinational tech companies. That success was demonstrated last week by the news that Sweden’s Ericsson and America’s Cisco Systems are forming a strategic partnership.

The technology analysts at Berenberg describe the move as a highly defensive one to combat Huawei and the new competitive threat posed by the recent $16.8 billion merger between Finnish telecom giant Nokia and French networking supplier Alcatel-Lucent. Both the Nokia-Alcatel-Lucent merger and the Ericsson-Cisco partnership bring together one firm with strong expertise in wireless networks and one with a strong grounding in internet protocol technology.

Huawei merged both business lines some years ago, creating a company with 2014 revenues of $45 billion. The combined Ericsson-Cisco entity will have revenues of $75.6 billion compared to Nokia-Alcatel-Lucent’s $26.9 billion. Alongside Huawei, the three form a global triopoly.

Analysts say Cisco needs the new partnership far more than Ericsson since its business is under threat on multiple fronts as the industry shifts to software-centric networks and Huawei eats into its revenues across the world (with the exception of the US, where it is banned from bidding for government networking contracts on security grounds).

Huawei and Cisco compete head to head in business enterprise systems, where Huawei has overtaken Cisco in China (boosted by the government favouring local tech products, citing security too).  This business segment is now believed to contribute about one third of its revenues and is growing by about 30% a year. Berenberg says it has hit Cisco, which is notching up sales growth in the single digits “at best”.

The bulk of Huawei’s revenues still come from wireless network  equipment and the company has very profitably ridden the wave of China’s 4G rollout. As a result, it had a first half global market share of 30%, above Ericsson’s 27% and Alcatel-Lucent’s 25% according to Dell’Oro Group research. However, the network expenditure of Chinese telecom carriers is peaking and revenues in this sector may come under pressure.

So should Huawei be worried that Ericsson and Cisco may now prove a more formidable competitive force? Tech journalists say the partnership looks good “on paper” since there is little overlap between the two and the lack of a full merger means they will not waste time trying to integrate two very different cultures.

But history is littered with failed partnerships such as Motorola and Apple, or Sun Microsystems and Microsoft. TechCrunch describes Ericsson and Cisco as the “old guard”: forced to rethink their businesses as competitors try to “eat their lunch”.

Huawei’s strategic marketing boss Xu Wenwei tells China Business News it is easier for companies to be fleet of foot if they are unburdened by the past, adding that Huawei is taking “the road of innovation”. For  example this week it revealed a smartphone battery that charges 50% in five minutes.

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