TELECOMS: Huawei Challenged by Beijing, Cisco-Ericsson Tie-up

Bottom line: A new alliance between Ericsson and Cisco, and inability to quickly bring its new Nexus 6P smartphones to China reflect the challenges Huawei will face to maintain its growth as it comes under new pressures both at home and abroad.

Ericsson-Cisco alliance challenges Huawei

Two new developments involving Huawei are spotlighting the kinds of challenges the Chinese telecoms giant will face as it tries to maintain growth for its older networking equipment and newer and rapidly rising smartphone business. The larger of the two items have global giants Cisco (Nasdaq: CSCO) and Ericsson (NYSE: ERIC) forming a major new alliance that could provide big new competition for Huawei. The second comes in a smaller news item that has Huawei saying it will launch its new Google (Nasdaq: GOOG) smartphone in Taiwan later this month, but quietly adding it won’t be bringing  the Nexus 6P model to its home China market anytime soon.

Huawei grew at a breakneck pace in the first decade of the 21st century, as it made quick inroads into global markets where names like Ericsson and Motorola traditionally dominated. But that growth has slowed sharply in the last few years as the building of traditional telecoms networks slows worldwide. The slowdown has hit not only Huawei, but also led to major consolidation in the global networking equipment industry. At the same time, demand has been growing more strongly for individual company-based networks that are a specialty of Cisco.

That dual nature of the networking equipment market is the primary factor driving together Ericsson and Cisco in their new alliance. The pair announced the new business and technology partnership earlier this week, and said it could generate as much as $1 billion in new revenue for each company annually by 2018. (English article; Chinese article)

The idea behind the alliance is relatively simple, since Ericsson’s and Cisco’s products are highly complementary. Accordingly, the alliance will allow them to offer a wider range of products to help companies and big network operators build more efficient networks at lower prices. By comparison, Huawei offers similar products to Ericsson but is much weaker in the enterprise-oriented products made by Cisco.

All that said, it’s fairly safe to say that a big portion of the $2 billion in new annual sales Ericsson and Cisco believe they can get from their new tie-up will come at the expense of Huawei and the few other big players still in the space. Huawei previously reported its revenue surged 30 percent in the first half of the year to about $29 billion. But growth at its older networking equipment unit was far slower, and a big portion of the latest gains came from a nearly 70 percent increase in consumer product sales, including smartphones.

Growth in Smartphones

Smartphones have indeed been Huawei’s big growth driver lately, as the company quickly consolidates its place as the world’s third biggest manufacturer behind only Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930). It scored a big advance on that front with a new tie-up to make one of the latest 2 models in Google’s Nexus smartphone line that recently made their global debut. (previous post)

In the latest development of the Huawei-Nexus story, media are reporting that the new Nexus 6P will make its debut in nearby Taiwan on November 23, with prices starting at the equivalent of about $500. (Chinese article) While Taiwan is tantalizingly close to China geographically, the same reports also cite Huawei’s smartphone chief as previously saying the new Nexus 6P won’t be coming to the mainland anytime soon.

That latter pronouncement seems to quash my previous speculation that the Huawei-Google tie-up could auger an entry of the Nexus brand to China, the world’s biggest smartphone market. I speculated that Huawei could use its local connections to help Google navigate China’s massive bureaucracy, and also to gain some goodwill to repair its tattered relationship with Beijing. But this latest signal seems to indicate that even Huawei’s connections are limited, and it won’t be able to get a boost from Nexus 6P sales in China anytime soon.

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