News for certain companies seems to come in waves, which has certainly been the case for embattled telecoms equipment giant Huawei these past couple of weeks. After a period of relative quiet, Huawei made upbeat headlines last week by reporting a 33 percent rise in annual profit, reversing a decline the previous year due to sluggish global telecoms spending. It enjoyed more positive headlines earlier this week when data tracking firm IDC reported that the company’s smartphone business zoomed in the fourth quarter of last year, making Huawei the world’s third largest manufacturer after industry leaders Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL). (previous post)
But the stream of positive news has come to a sudden halt, with the latest headlines showing the company could face more new obstacles in Europe and the US — the world’s 2 largest telecoms markets. In one of the 2 newest news bits, a European Union official has reportedly asked Huawei to raise the price of its imported products by 29 percent to offset concerns of unfair financial support from Beijing. (English article; Chinese article) In the other piece of news, media are reporting that Huawei had much closer ties than it previously admitted to a Hong Kong-based firm that allegedly tried to sell US computer equipment to Iran in violation of US sanctions.
Let’s take a look at the EU news first, as that looks like both the most significant development for Huawei despite its strangeness. According to the reports, EU Trade Commissioner Karel De Gucht has asked Huawei to hike the prices of its telecoms equipment imported to Europe from China to negate the effects of unfair government support the company receives from Beijing. At the same time, the commissioner is also reportedly making another strange request that China guarantee that European firms get at least 30 percent of the telecoms equipment market in China.
In exchange for those concessions, the EU would end a probe directed against Huawei and crosstown rival ZTE (HKEx: 763; Shenzhen: 000063), accusing the pair of getting unfair subsidies from Beijing. Industry watchers will note that with the exception of Huawei and ZTE , nearly all of the world’s major telecoms equipment makers are now based in Europe. Those include industry leader Ericsson (Stockholm: ERICb), which is based in Sweden, as well as Finnish-German giant Nokia Siemens Networks and French-American company Alcatel Lucent (Paris: ALUA).
It’s also worth noting that all the European firms are suffering amid a global downturn in telecoms equipment spending, which is hitting Huawei and ZTE as well. These particular requests seem a bit severe and even a little strange to me, especially the guarantee of 30 percent of the China telecoms equipment market for European firms, and I doubt that the Chinese will agree to the requests. If that happens, look for the EU to potentially levy some kind of punitive action against Huawei and ZTE telecoms equipment later this year, dealing a potentially big blow to both companies.
Meantime, Huawei is also receiving more bad news with the reports that it enjoyed closer ties than it previously admitted to a Hong Kong firm that deliberately tried to circumvent US trade sanctions against Iran. According to a foreign media report, Huawei’s CFO Cathy Meng previously served on the board of the Hong Kong company Skycom, which tried to sell 1.3 million euros worth of equipment from US computer giant Hewlett Packard (NYSE: HPQ) to Iran in violation of US trade sanctions. (English article)
Huawei had previously called Skycom one of its major partners, but this latest revelation appears to indicate its relationship with the company is even closer than it admitted. Meng also happens to be the daughter of Huawei’s media-shy founder Ren Zhengfei, whose past as a Chinese army engineer has led some to suspect Huawei of closer ties with Beijing than it admits to.
This latest revelation about Huawei’s attempt to sell to Iran, coupled with the EU’s new requests, don’t bode well for Huawei, and continue a string of negative news that has dogged the company for much of the last year. I don’t expect the bad news will end anytime soon, with the result that both Huawei and ZTE wll face a challenging year in their telecoms equipment business in the year ahead, especially in western markets where the companies will face growing resistance.
Bottom line: The latest negative headlines for Huawei in the EU and Iran foreshadow a difficult year ahead for the company, as it faces growing resistance in the lucrative US and European markets.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.