Huawei’s profits collapse as US sanctions bite

Founder Ren tells employees marginal businesses will be ‘shrunken and closed’ and ‘chill’ will be felt by everyone as company fights to survive

Huawei Technologies, the Shenzhen-based telecommunication equipment maker, has announced a change in business strategy to focus more on the bottom line than generating revenue after its net margin declined by nearly 50% in the first half of 2022 compared to the same period last year.

Huawei’s founder, Chief Executive Ren Zhengfei, wrote in an internal memo that the tech giant would shut down or reduce its unprofitable businesses and focus more on its high-value lines in the coming few years.

Employees would get more bonuses or promotions if they could help the company boost operating profits – less so, sales – according to the memo obtained by Chinese news media.

Ren said:

The continued recession of the global economy, together with the impact of the Covid-19 epidemic, will greatly hurt people’s consumption power. We face not only pressure on supply but also a weakening market demand. Between 2023 and 2025, we must make survival our main goal. We must stay alive and live with quality. From this perspective, we need to adjust our business strategy and decide what can be done and what should be abandoned … With survival the main principle, marginal businesses will be shruken and closed. The chill will be felt by everyone.

The company said its net margin was 5% in the first six months of this year, compared with 9.8% in the same period of last year. It means Huawei’s net profit fell by 51.97% to 15.1 billion yuan for the period.

Commentators said Huawei saw declining profitability because its smartphone business had been hit by the United States’ sanctions since 2019. They said the company should downsize its e-vehicle business as its returns were less than expected.

The memo

Ren posted the memo, titled “Huawei must shift to seek for profit and cash flow from boosting revenue” on the company’s online discussion group earlier this week.

He said Huawei must stop expanding or investing blindly, have the determination to downsize and give up some national tasks, replenish cash flow to get ready for a worsening future, cut off risky and non-profitable businesses, grant bonuses to employees by their actual business results and increase inventory.

“Our respite period is 2023 and 2024. We are not sure whether we can achieve any breakthroughs these two years,” Ren said. “Therefore, everyone should now not present concepts but talk about reality, especially in business forecasting.”

“Whoever made up stories and cheated for funding will pay for the losses,” he told employees in the memo. “Only if we can stay alive, can we have a future.”

He added that some strategic businesses, such as internet-related units, might be able to go on but a lot of barely-surviving businesses had to be terminated. He said Huawei would strengthen its research and development (R&D) and modularize its products to boost competitiveness.

Huawei founder and CEO Ren Zhengfei. Photo: Huawei.

Some commentators said Huawei did not need to make the whole smart car and should focus on some core high-value modules. They said it’s the right decision for the company to focus on mobile OS, semiconductor design and emerging sectors such as smart cities and data centers but it would take time to see big results.

Since 2019, Huawei has partnered with different Chinese automakers. In the beginning, it worked with Seres, a California-based e-vehicle maker owned by the Chongqing Sokon Industry Group, to produce a sports utility vehicle (SUV) called SF5. At that time, Huawei was only slightly involved in the project by contributing its DriveOne digital power, Hi-Car panel and audio systems.

In 2020, Huawei partnered with BAIC Motor Corp, a Beijing-based automaker, and provided more components including the seat-control and driving assistance systems. It also helped Changan Automobile and lithium-battery supplier Contemporary Amperex Technology Co Ltd (CATL) produce a smart vehicle called Avatr 11.

Last year, when Huawei partnered with Seres again to produce SF7, it provided most electronic components in the car.

Chinese media pointed out that Huawei definitely wanted to focus on high-value components and let automakers finish the low-end parts but that the latter would not have enough incentive.

Rong Hui, former vice president at New Technology Research Institute of BAIC Group, has said that it was ill-advised for BAIC to rely too heavily on Huawei’s smart car modules, which cost 40,000 yuan (US$5,800) each with a profit of 15,000 yuan for Huawei while BAIC does not make a profit for its part.

A columnist who specializes in the auto sector wrote that the returns of Huawei’s auto part business were less than expected. He said if Huawei tried to share more profits with automobile makers, it would take even longer to recoup its huge investments in the sector. He said Huawei should consider downsizing its smart car business.

US sanctions bite

In May 2019, the US Commerce Department put Huawei and its 70 affiliates on its Entity List on national security grounds. It banned the sales of hardware and software involving US technology to Huawei and its subsidiaries.

Huawei then launched a huge promotion campaign in June 2019 to criticize the US and boost employees’ morale.

In a seminar called “A Coffee With Ren” in Huawei’s headquarters at that time, Ren told guests and foreign journalists that the US sanctions were indeed powerful but American customers’ trust in Huawei was even more powerful.

He said the US sanctions would not have a big impact on Huawei’s businesses, quotes that were still being used by Chinese media until early this year.

Huawei then launched its HarmonyOS, or Hongmeng in Chinese, and used inventory chips plus self-developed Kirin chipsets to maintain its smartphone output. It also boosted the output of Honor, its smartphone brand at that time.

Huawei’s new HarmonyOS will take aim at Google and Microsoft’s businesses. Image: Facebook

However, it had to dispose of its entire stake in Honor in November 2020 so that the unit could obtain US chips. In the fourth quarter of 2020, Huawei slowed its smartphone production.

In 2019, Huawei, together with Honor, was the No 1 smartphone maker in China with a market share of 26.5%, according to the industry research group Canalys.

Last year, Huawei’s market share fell to just 9.3% while Honor had a 10.4% market share, according to research group Cinno. Oppo ranked No 1 with a 20.5% market share while Vivo ranked No 2 with 18.2%. Apple and Xiaomi had 16% and 15.2% of the market, respectively.

Richard Yu, chief executive of Huawei Technologies Consumer Business Group, admitted during a public event n late May this year that Huawei’s businesses had been severely hit by the US sanctions. Yu said Huawei had been “too naive” in believing in globalization and not moving to make its own chips many years ago.

On August 12 this year, Huawei reported a 5.8% decline in overall sales to 301.6 billion yuan ($43.9 billion) for the first half of this year from a year ago.
Revenue of the company’s carrier business grew 4% to 142.7 billion yuan while that of enterprise business, which includes cloud and business services, increased 28% to 54.7 billion yuan. Revenue from devices, including sales of smartphones, dropped by 25.3% to 101.3 billion yuan.

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