Huawei orders on track, margins squeezed
SHENZHEN, China (Reuters) - Huawei Technologies HWT.UL, China's largest telecoms equipment maker, said it is on track for contract sales to grow by 30 percent annually for this year and next, but competition is squeezing margins and crimping profit growth.
The company also said it aims to build on a recent string of contracts wins from carriers in developed markets including the United States and Japan to further bolster its export business.
Contract sales -- orders that have been booked -- reached $5.2 billion in the first half of 2006, of which 65 percent came from exports, up from 58 percent at the end of last year.
That put it on track to reach its full year target of $10.7 billion, Huawei Vice President Hu Yong said in an interview for the Reuters China Century Summit.
Unlisted Huawei aims to grow contract sales by another 30 percent next year, of which 70 percent would come from exports if the Chinese government does not issue licenses for the country's phone companies to build third-generation cellular networks.
Revenue will exceed $8.0 billion this year, up from $5.98 billion last year.
Huawei generated net income of $681 million in 2005, but profit growth this year will be slower than the increase in contract sales as severe competition squeezes margins, he said.
"As competition is getting more intense and gross margins in the industry are falling, our net income growth will definitely be lower than 30 percent," he said.
Gross margins have fallen to about 37-38 percent now from 41-42 percent last year, he said.
Hu said he expects the company's European sales this year to double from last year to $1.0 billion on a contract basis.
Huawei competes with local rival ZTE Corp. (0763.HK) 000063.SZ in their home market, alongside global giants Motorola (MOT.N), Ericsson (ERICb.ST), Nokia (NOK1V.HE) and Cisco Systems Inc. (CSCO.O) in the contest for billions of dollars that China spends yearly on telecoms gear as it upgrades its networks.
DEVELOPING MARKETS
The Chinese firms have embarked on aggressive campaigns to sell overseas in the last three years, offering telecoms gear at prices below those of their global counterparts.
While both scored initial success in developing markets such as India, Southeast Asia and Africa, Huawei has been breaking into bigger and more lucrative developed markets.
In late 2004 it was selected to build a 3G network for Dutch carrier Telfort in a deal sources valued at up to 400 million euros ($509 million). Recently it agreed to supply phones to mobile giant Vodafone (VOD.L) and has struck deals to sell 3G equipment to carriers in the United States and Japan.
"More and more first-tier operators in developed markets have begun purchasing Huawei products on a large scale, which reflects that our products and services can meet their demand. This is a good start," Hu said.
Huawei will raise its headcount worldwide to 50,000 by the end of this year from 44,000 at the end of June. Nearly half of its staff are engaged in research and development, Hu said.
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