October 17, 2019 / 7:26 AM / a month ago

Breakingviews - Huawei's China strength hides rising vulnerability

FILE PHOTO: A Huawei company logo is pictured at the Shenzhen International Airport in Shenzhen, Guangdong province, China July 22, 2019. REUTERS/Aly Song/File Photo

HONG KONG (Reuters Breakingviews) - Huawei’s good times could wind down soon. Stronger smartphone sales at home helped revenue jump a surprising 24% year-on-year in the first three quarters of the year. But the Chinese tech champion has yet to feel the full impact of U.S. restrictions, set to resume next month, and domestic demand could prove unreliable too.

The world’s top telecoms equipment maker has been on a U.S. export blacklist since May, which bars the Chinese group from doing business with American companies without special licences. Yet the latest set of numbers, released by Huawei on Wednesday, shows Beijing’s tech champion is doing just fine. Revenue in the first nine months of the year hit 611 billion yuan ($86.2 billion). The Shenzhen-based company, which says it is owned by its employee union, only releases limited financial data. But based on previous disclosures, that implies third-quarter revenue rose 27% from a year earlier, to 165 billion yuan, according to Reuters – not bad.

Founder Ren Zhengfei has loyal consumers at home to thank. Despite a contraction in the world’s largest smartphone market, Huawei’s smartphone shipments in China topped 37 million units in the second quarter, according to data from industry tracker Canalys, up an impressive 31% from a year earlier. That has come at the expense of rivals like Apple, as well as compatriots Oppo and Xiaomi, which all lost market share over that period. Huawei’s goal is to win half of its home market, up from its current 38%.

That’s bad news for rivals, but the company looks ever more vulnerable nevertheless. The latest growth was probably driven by handsets that launched before the U.S. restrictions kicked in. Huawei is also enjoying a reprieve, which will expire in November. Absent another extension from Washington, the company will lose access to critical components and software tools for both telecoms equipment and smartphones. Jefferies analyst Edison Lee estimates Huawei has just over three months of inventory, based 2019 first half numbers from regulatory filings.

    At the same time Huawei’s China market ambitions look vulnerable as shoppers pull back amid slowing economic growth. Winter might come earlier than expected.

Breakingviews

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