For the past year and a half, Huawei has spent significant resources to cultivate a narrative that they are a successful company and innocent victim of an American president's war on China. But a closer look shows that this narrative is not corporate communications, but rather misinformation, the presentation of intentionally misleading information to promote a political cause. Important tools of this information war include Huawei’s quarterly reporting and financial statements. Journalists, not realizing that Huawei is an unlisted company, quote the company’s information liberally and uncritically. This research note examines the deficiencies of Huawei's financial reporting.
Huawei’s numbers from 2010-2019 show the company evolving from telecommunications infrastructure to consumer electronics company. Moreover, the majority of growth in sales has come from inside China, not outside.
For 25 years Strand Consult has worked to create transparency in the telecommunications world and has documented Huawei’s manipulation of information and how it systematically avoids answering difficult questions. The Latest example is the annual report for 2019 where Huawei stated,
"Some people think we are not transparent because we haven’t gone public, but this doesn’t make sense. Huawei adopts a new model under which its funds are collected from its employees. This may even become a model for most companies in the future. How is this model different from those of Northern Europe? There is no difference at all. In other words, we embrace employee capitalism, and there are no zillionaires at our company.
We have gone into great detail with the public about our ownership and governance, subjecting our ownership structure, shareholding files, and registry of shareholding employees to outside scrutiny. We have also walked the media, academic experts, and government representatives through our Employee Shareholding Scheme, as well as our governance structure and mechanisms."
Strand Consult know that governments, authorities and telecom companies use the information published by Huawei and their competitors to make assessments. This research note compare the information Huawei publishes versus that of its competitors Nokia and Ericsson. It also examines the financial information from telecom companies, notably Huawei's customers Vodafone and Deutsche Telecom, which are recognized as transparent companies.
In practical terms, Strand Consult has tested whether these stakeholder can access the same information from Huawei that they can access from Huawei’s competitors. While it is true that Huawei is not a listed public company and therefore is not subject to the same disclosure requirements, it does not give Huawei the right to claim that its information can be judged by the same standards as publicly traded companies.
Indeed, there is far more to disclosure than the publishing financial information. Listed companies must uphold a strict set of rules in how information is processed, compiled, and formatted in order to be made public. Notably Huawei likes to enjoy the benefits of foreign market economies without participating in their costs and responsibilities, such as the scrutiny of stock exchange regulators, activist investors, governments, and the press.
Huawei vs. Nokia and Ericsson: Publishing financial information
The information Huawei provides is limited to what they publish on their website. This amounts to very limited annual accounts as well as some press releases on quarterly figures.
Nokia and Ericsson publish more detailed information under the Investor Relations section on their websites, and they publish additional information for capital market days. The US Securities & Exchange Commission (SEC) (NOK and ERIC) describes the many pieces of information that US listed companies must publish, especially their 20K form which contains very detailed information.
In parallel, there are many financial analysts covering Ericsson (30 banks) and Nokia (34 banks). They continuously publish analysis that examines the companies’ official information as well as an assessment of knowledge collected from the market and media. In practice, there is significantly more information available for Nokia and Ericsson than for Huawei. Here are the banks that cover Nokia and the banks that cover Ericsson. There are no banks that cover Huawei similarly, meaning that the most critical financial eyes do not cover the company.
Let´s look at the facts:
1. Nokia and Ericsson are companies with a narrow focus on telecommunications infrastructure; they sell to telecom operators. Huawei, on the other hand, is a company that makes solar panels, chipsets, mobile phones, laptops, tablets, telecommunications infrastructure, data centers, and solutions for AI and smart cities. To simply, Huawei is a consortium of companies with a range of products that addresses more industries than Nokia and Ericsson.
2. Huawei’s product lines are divided into four areas: Carrier Business (CYN 296.689 corresponding to 34,5 % in 2019) and (CYN 285.830 corresponding to 40.8% in 2018), Enterprise Business (CYN 89.710 corresponding to 10,4% in 2019) and (CYN 348.852 corresponding to 10.3% in 2018), Consumer Business (CYN 467.304 corresponding to 54,4% in 2019) and (CYN 348.852 corresponding to 48.4% in 2018) and Other, which amounts to CYN 858. 833 in 2019 and 721.202 in 2018.
3. Huawei divides revenue into each of the four product areas without telling how their revenue compares with competitors. In practice, Huawei's Carrier Business cannot be compared to the same division at Nokia and Ericsson. Nokia divides their "Carrier Business" into four categories: Mobile Networks, Global Services, Fixed Networks and IP/Optical Networks. In practice, Nokia and Ericsson have a very different level of detail in their accounts than Huawei.
4. In a few years, Huawei’s lead source of revenue has transitioned from telecommunications infrastructure to consumer products like mobile phones, laptops and tablets. In 2010, consumer products accounted for 17 % of Huawei's revenue; in 2019, 54 %.
5. Huawei reports aggregated revenue for all product lines geographically as follows: China (506.733 corresponding to 59% in 2019) and (372.162 corresponding to 51.6% in 2018), EMEA (206.007 corresponding to 24% in 2019) and (204.536 corresponding to 28.4% in 2018), Asia Pacific (70.533 corresponding to 8,2% in 2019) and (81.918 corresponding to 11.4% in 2018), Americas (52.478 corresponding to 6,1% in 2019) and (47.885 corresponding to 6,6% in 2018) and Others. Huawei do not explain how their product sales (Carrier Business, Enterprise Business, Consumer Business and Other) are distributed geographically.
6. In 2010, 66% of Huawei’s sales were outside China. By 2019, that share had fallen to 41%. This means that Huawei's revenue has grown faster inside China than out.
7. A very large proportion of telecommunications infrastructure suppliers' revenue comes from 5G equipment. According to Dell'Oro's latest figures, China accounts for 45% of the market for 5G, and Huawei takes 70% of China’s total 5G market by serving China’s three state-owned telecom operators. ZTE has a market share of more than 20%, and together the two players make up more than 90% of the market for 5G equipment in China. In practice, it is impossible to see how important it is for Huawei to have increasing sales of 5G equipment to the three state operators in China for its global Carrier Business.
8. At Huawei's 2019 Annual Report briefing, a journalist asked how large the share of Huawei's 5G sales were inside China versus outside. Huawei was unable to answer that question.
9. The company writes in its 2019 Annual Report, “Our carrier business has been leading the commercial rollout of 5G networks worldwide. Our RuralStar base station solutions are now being used in over 50 countries and regions, bringing mobile Internet to more than 40 million people living in remote areas.” Huawei writes February 28, 2019, “We have signed more than 30 5G commercial contracts with leading global carriers and shipped more than 40,000 5G sites to different markets around the world.”
10. There is little to no transparency from Huawei on the alleged 40,000 5G sites in China and their 5G customers. By contrast, Nokia publishes its 5G customers here and Ericsson here. Huawei claims it has many 5G contracts, but it does not publish the names of its customers.
11. In 2018 and the first quarters of 2019 Huawei claims that bans on its equipment and licensing have not hurt sales. Indeed, it even claims to be growing market share. Huawei’s 2019 Annual Report reveals that the bans have been hard on the company, as Huawei relies heavily on access to technology from US companies.
12. In 2018 it was difficult to tell from Huawei’s report whether the increase can be attributed to smartphone sales in China, a growth which may overshadow losses in other countries. It is also difficult to determine the impact on bans on Huawei equipment. In practice, it’s next to impossible to sell a mobile phone outside of China without Google Mobile Service.
13. The 2019 Annual Report makes clear that sales in China, especially mobile phones, have been essential for Huawei's growth.
14. Huawei claims that its large R&D investments amount to 131 Bn CYN ($18,4 Bn) in 2019 and 100 Bn CYN ($14 Bn) in 2018, and it mentions such investments when talking about 5G.
15. It is disappointing that Huawei won’t disclose how much of its R&D budget relates to the products sold in the Consumer Business division, which account for 54.4% of revenue nor the proportion of R&D in the Carrier Business which accounts for 34.5% of Huawei's 2019 revenue.
16. Nokia and Ericsson are more transparency in their R&D budget, and they publish the exact amount which is focused on providing infrastructure for telecommunications companies. In practice, one cannot compare Huawei’s figures with Nokia's $4.8Bn R&D budget or Ericsson's $4Bn R&D budget.
17. Nokia explains how their patent filings in 2019 are distributed (Connectivity 61%, Fixed & optical networks 9%, Services, applications & multimedia 19% and Emerging technologies & hardware 11%). But Nokia and Ericsson have extensive businesses licensing their patents to other companies. Nokia earned $740 million in license revenue in 2019; Ericsson, some $800 million. Huawei offers only limited information on how much they earn in licensing revenue. For example, they claim increased sales of patents to a third parties comprises in 2018 with a figure of a “net gain/(loss)” of $98 million.
18. Huawei describes that it has many patents, but it does detail the share of essential versus non-essential patents. Essential patents are the prerequisite for building telecommunications infrastructure that meet international standards, but Huawei’s patent portfolio is made up many non-essential patents. In the telecommunications world, companies like Qualcomm, Samsung, Nokia and Ericsson hold the essential patents. In practice, Huawei's business relies heavily on access to other companies' patents to make equipment that meets global standards. In this analysis, Matthew Noble and Richard Vary of Bird & Bird document which companies are leading the 5G race.
19. Huawei claims that it doesn’t receive government subsidies, but China's three state-owned mobile operators awarded Huawei over 70% of the 5G equipment market in China.
20. Last week, state-owned / controlled Chinese mobile operator China Mobile awarded Huawei and ZTE 86 % of a CNY 37.1 trillion contract. There is much evidence that the Chinese state, through orders from state-owned/ controlled enterprises, is providing massive financial support to Huawei.
Simply put, Huawei’s official information falls short in comparison to its competitors. Nokia and Ericsson provide far more transparency, as described below. Beyond that, we can see that the transparency of Huawei's telecom customers greatly exceeds Huawei.
What does this mean
It is true that Huawei is not a publicly listed company, and thus is not subject to the same rules as companies listed in the US, Europe, or other parts of the world. The purpose of financial transparency is to offer accurate information to investors. On the other hand, nothing prevents Huawei from publishing the same information as its competitors Nokia and Ericsson or companies such as Deutsche Telecom, which is recognized globally for its financial transparency.
Huawei has better market conditions outside China than its foreign competitors have inside China
If Huawei wants to be compared to Western companies, Huawei should be more transparent and stop misleading political leaders, the press, and customers. Huawei’s notion of ”transparency” is to manipulate information and to deter difficult questions from governments, the press, and customers. To understand Huawei’s revenue and operations, don’t look at its financial information, which purposely obscures the company’s business lines, regions, and entities with whom it works.
Huawei’s objective is not to create transparency so that governments, media, financial analysts, telecom operators and a wide range of stakeholders can compare them with their competitions. Rather Huawei’s goal is to tell a story that it is a unique company deserving of special treatment. Their selective treatment of information underpins this narrative that is the foundation of misinformation.
If you want a more detailed insight into where and how Huawei’s revenue is put together, then don’t look at Huawei’s financial information.
We hope this note will help governments, telecom operators, the press, and the public bring a critical eye to Huawei´s financial reporting. It can also help Huawei to lift the level of its reporting to the same standards as their competitors.
Strand Consult’s one goal is to create the transparency that companies like Huawei are fighting against. If you want to know more, read Strand Consult´s research notes on China and cybersecurity or contact us.