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Corporate News: Huawei Makes Push to Diversify Its Business(The Wall Street Journal Asia)

Nov 01, 2013

Juro Osawa

By Juro Osawa

9 August 2013

HONG KONG -- China's Huawei Technologies Co., one of the world's largest suppliers of telecommunications-network equipment, is trying to diversify into communications gear used by corporate clients to build their own campus networks.

While Huawei is a giant in the telecom world, it is still a minor player in the enterprise-network-equipment market, an area dominated by U.S. competitors such as Cisco Systems Inc. and Juniper Networks Inc. But the Shenzhen-based company, whose mainstay telecom-gear business has outpaced most Western rivals for the past few years, thinks it can become competitive in yet another business area.

William Xu, a Huawei senior executive in charge of the enterprise-network business, said in an interview that the company expects revenue from the segment to increase 40% this year to about $2.7 billion. By 2017, Huawei aims to increase the segment's revenue to more than $10 billion. "We are quite confident about meeting that target," he said.

For Huawei, enterprise-network equipment is still a fledgling business. Last year, the business generated $1.9 billion in revenue, up 26% from a year earlier and accounting for 5.2% of Huawei's overall group revenue.

By contrast, nearly 73% of the company's revenue came from its telecom-gear business, while its mobile-handset business accounted for 22%.

Diversifying into the enterprise-network market is important for Huawei, because the telecom-equipment business can be volatile, and Huawei could benefit from a more steady source of growth, said Canalys analyst Matthew Ball.

Investment by telecom operators is severely affected by the economic climate, but demand in the enterprise-network market, which has a much larger number of potential clients, tends to be more stable, Mr. Ball said.

Huawei sees opportunities in enterprise-network equipment because the market is going through major changes, with more companies adopting cloud computing and " bring-your-own-device" policies. Potential growth is greater than the telecom network market, Huawei's Mr. Xu said.

Still, even though Huawei has technological resources thanks to its expertise in telecom networks, it faces hurdles in the enterprise-network business.

One major challenge is building sales channels. Huawei is the world's second-largest supplier of telecom equipment after Sweden's Ericsson, but selling network gear to corporate clients outside the telecom industry will require a new distribution network that relies on resellers that distribute Huawei products.

"This is a very difficult market to penetrate for Huawei," said Mr. Ball, noting that Cisco and Juniper already have long-established global communities of sales partners they work with. "It takes a lot of time and investment to build a community of resellers," he said.

"More sales partners are seeing our potential," said Mr. Xu. There are currently about 3,000 partners world-wide that resell Huawei's enterprise-network equipment, and more potential partners are showing interest, he said.

On Thursday, Huawei announced a new switching product. Switches connect personal computers, mobile devices, printers and data centers to create a network. Huawei said the new software-programmable switches -- which will be available to customers in September -- can be upgraded through software updates, meaning that customers don't need to replace them with new switches every time they want to add new functions.

Mr. Xu said that the company is spending $600 million this year on research and development for its enterprise-network equipment, up from $500 million it spent last year, and expects continued growth in R&D spending.

Huawei's enterprise-network business currently generates roughly half of its revenue outside China, and its strong overseas markets are in Europe, Latin America and Asia, Mr. Xu said.