Daily Management Review

For 2016, Flat Profits Reported by China Tech Giant Huawei


For 2016, Flat Profits Reported by China Tech Giant Huawei
Profits are largely flat as sales continue to rise at Chinese tech giant Huawei and hence it is a mixed bag.
According to the company, while overall revenue jumped 32 percent to 521.6 billion yuan ($75.1 billion), net profit edged up 0.4 percent to 37.1 billion yuan ($5.3 billion) in 2016. Though sales came in line with the company's own guidance released earlier this year, profit growth was much weaker than expected.
The company is starting to feel a pinch even though Huawei holds firm as the world's third-largest smartphone maker. Analysts say increased spending on R&D and marketing are beginning to thin out margins as both profit and sales are no longer rising as quickly as before. Indeed, noting the lowest rate in at least a decade, the net profit margin sat at 7.1 percent for 2016.
But Huawei's position is still defended by its executives."Margins ranging around 7 percent is appropriate," said acting CEO Eric Xu.
The fastest growth at 47 percent was seen by the smallest of the firms in terms of sales – Huawei’s enterprise unit, involved in developing smart solutions for areas like urban planning and transport.
He said that the broader economic conditions will have to be considered by the company moving forward.
To further its business, the Shenzhen-based company has continued to spend massively on R&D, shelling out 76.4 billion yuan ($11 billion) and remains extremely ambitious.
CFO Sabina Meng emphasized the company's commitment to continued innovation while payoff from today's investments could still be a few years away.
"Products are the most basic building block," she said. "We will make the necessary investments on the resource side."
Nicole Peng, China director at tech research firm Canalys said that the hot release of its new flagship Galaxy S8 phone will mean increased market competition, even though Huawei was able to capitalize on Samsung's recent smartphone woes.

 "2017 is going to be less easy, and more challenging," she said.
Aiming to reach $150 billion in sales by around 2020, the company has set high targets.
But Kitty Fok, managing director of IDC said that to do so, it may need to rethink pricing strategy. In order to be remain competitive, Huawei has in the past lowered the price of its offerings.
In a move that could turn quite positive for the firm's financials, the company has been put on track to lead the way in setting overall industry standards by Huawei's investment in R&D, particularly in developing the 5G networks, analysts say.
Dubbed "Made in China 2025," which aims to grow ten key high-tech sectors and support growth, Huawei is also developing in line with a larger China initiative.
Analysts say that as the company continues to seek growth, the U.S. remains an important market for Huawei. But according to data from Canalys, lagging far behind leaders like Apple, that as well remains an uphill battle — the company holds only 1 percent of overall market share when it comes to smartphones.
According to experts, also continuing to weigh on its expansion into the U.S. are concerns over national security.
Meng said that there are no plans in the works for large scale overseas acquisitions and for at least the next few years, however, the company doesn't anticipate opening new branches.