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T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

TBR EVENT PERSPECTIVE

Huawei shifting from product-driven to focus on services, cloud and IT

Huawei Global Analyst Conference 2015

Shenzhen, China, April 21-23, 2015

Michael Sullivan-Trainor (michaels@tbri.com), Executive Analyst, Telecom

Jillian Mirandi (jillian.mirandi@tbri.com), Senior Analyst, Cloud

Krista Macomber (krista.macomber@tbri.com), Analyst, Data Center

TBR perspective While Huawei highlighted another year of more than 20% year-to-year revenue growth at its annual analyst

conference, the company faces significant challenges in maintaining its stellar record. Huawei’s telecom carrier

customer base, which provides 67% of revenue, is slowing spending as worldwide broadband rollouts near

completion and the industry prepares to undergo a transformation that will target a lower-operating-cost model

aligned to decreased overall vendor revenue.

Huawei’s answer, as executives expressed at this year’s event, is to transform into a more services-oriented

supplier able to deliver a broader array of IT and cloud solutions, primarily to carriers but also to enterprises, while

continuing the long-term development of profitability in its devices business.

TBR believes Huawei is on the right path, shifting from a product-focused company to a product and services

player. The impetus for the move is clear: Huawei’s carrier customers are not adopting new technology fast

enough. Investments in product areas are slowing and carriers are slow to undertake the profound transitions to

software-mediated networks even though Huawei and its peer suppliers are rapidly building the next wave of

virtualized IT and communications solutions.

The rules of the game are changing. In the past Huawei responded to customers’ apparently insatiable need for

new, higher-capacity products. Now Huawei must find ways to persuade its customers to adopt game-changing

products and services such as NFV and SDN. The dilemma is not unique to Huawei as Ericsson faces the same

challenges. The shift in adoption patterns, combined with the need to invest in new technologies, is a major

motivation of Nokia’s acquisition of Alcatel-Lucent, which Huawei executives applauded because it will add a third

large supplier with sufficient financial strength to help carriers through the transformation.

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The challenge for Huawei is speed. Transformation requires competencies that are not core to the company.

Leading with consulting, integration and partnering within a broad ecosystem, including open systems, is very

different than leading with the latest and greatest product lines fresh from Huawei’s massive fine-tuned research

and development. Huawei recognizes the challenge and announced investments totaling more than $500 million in

best practices, including building consulting competency, methodologies and platforms as well as opening new

competency centers.

Carrier: Building the path to 5G while pivoting to services Simultaneous with the analyst event, Huawei demonstrated one of the fastest LTE implementations in the world

(450Mbps using three-carrier aggregation — a stepping stone to 5G) with Hong Kong Telecom, hosted analysts at

its new NFV/SDN Open Labs in X’ian, and reported on the formation of a third services unit focused on integration

services for information and communications technology (ICT) transformation, the data center and customer

experience.

This combination of initiatives reflects the transformation within the carrier business group, where product-driven

approaches are giving way to those that are services-led, and highlights a larger role for Global Technology Services

(GTS). GTS is targeting a new role as the strategic partner and prime ICT systems integrator for networks and data

centers within carriers. In addition to building competencies and partnerships, Huawei introduced a standard

reference architecture based on a customer-centric operating model that the company will use as a framework for

its solutions. Huawei’s services goals include:

Managed Services: Focus on operations transformation and creating value for operators. The company has

already accumulated 380 management service contracts and more than 40% growth in revenue since 2006.

Key investments for 2015 include establishing the Service Operations Support Organization (SvcOps) and

developing the Operations Web Services (OWS) platform.

ICT Transformation: Become the prime integrator. Huawei will build on its base of integration services

conducted for more than 480 data centers, with 160 cloud deployments and 20 NFV/SDN joint innovation

project with operators.

Customer Experience Management (CEM): Increase value with persona-based, ICT journey design and

analysis based on a foundation of network optimization. The company has delivered CEM projects for more

than 100 operators and developed 20 Service Operations Centers.

OSS/BSS: Become a strategic partner. Huawei has engaged in 210 OSS projects to transform operations for

operators such as China Mobile and Telefonica.

TBR believes Huawei can successfully pivot to services and products with services leading the way as necessary,

but the path will be challenging and time consuming. The company will meanwhile leverage its position in wireless,

fixed, transmission and data networking to capitalize on all aspects of market growth in the regions where it is

allowed to play. Huawei is also well-positioned to take advantage of the likely fallout of the merger of Nokia and

Alcatel-Lucent and the weaknesses Ericsson is experiencing in its major markets.

Huawei has the luxury of China-based LTE growth in the short term as well as the best position among its

competitors in emerging markets. These advantages should provide Huawei with enough time to build out its new

services focus from an already strong base. While the change goes against some of Huawei’s core approaches to

the market, the company has proven both resilient and determined in achieving its goals to date.

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Enterprise, data center and IT: Revenue growth will come by leveraging partners and growing R&D investments to enable IT ‘as a Service’ Carriers are the core of Huawei’s business, but the company’s future as outlined by Huawei executives lies in the

enterprise. TBR believes that for Huawei this means maintaining leading year-to-year growth in the data center —

a piece of Huawei’s IT strategy that can bridge Huawei’s telecom background and its newer enterprise business.

Huawei’s messaging around the data center for a large portion of this year’s summit was centered on carriers and

the network; for example, messaging its ability to provide end-to-end hardware and software capabilities as well as

integration services spanning the internal data center through external networking implementations for carriers.

This approach is natural for the company, smartly playing to its core competencies and leveraging its installed base

as a starting point to drive sales. For Huawei elevating a sustainable data center business within its overall strategy

is a critical next step to ensure continued robust growth, especially as peers such as HP leverage virtualization of

the network to penetrate Huawei’s core accounts.

TBR believes Huawei has the vision to compete against mainstream data center peers such as HP and Dell. Huawei

recognizes customers want simplicity from purchase through deployment and that IT systems are shifting from

back-office support to mission-critical, business-focused functions. This vision culminates in Huawei’s concept of

Service-Defined, Distributed Data Centers (SD-DC2). SD-DC

2 covers important technology bases such as scalability,

footprint consolidation, I/O acceleration and investment in open software platforms such as OpenStack. Huawei

has some go-to-market execution challenges such as deviating between discussing “service-oriented” and

“software-defined” IT, which TBR believes will add confusion in industries that are already complex from

technological and go-to-market perspectives. We believe Huawei’s focus on approaching enterprise markets with a

vertical-specific focus will help Huawei drill down into more specific customer pain points than if it approached the

market with a horizontal approach.

Huawei aims to grow its enterprise business from $3 billion in 2014 to more than $10 billion by 2019, which it

cannot do without increased sales avenues globally, including in mature markets, where it currently has less

penetration than in emerging markets. The company’s focus on close alliances with channel partners will provide

ready avenues into these markets provided that Huawei is able to differentiate from peers that are also increasing

their investment in empowering channel partners to sell solutions in growing areas such as cloud computing.

In a commoditized data center hardware market, Huawei will leverage open, ecosystem-driven innovation to

differentiate. Huawei is working to build its reputation as a chip, systems and software innovator and open

ecosystem cultivator as a key piece of its differentiation in the data center. At this year’s global analyst summit,

Huawei described this concept as “Huawei Inside,” similar to Intel’s “Intel Inside” campaigns. TBR believes this

proposition will appeal to Chinese customers desiring indigenous innovation. TBR believes it will be important for

Huawei, when working to drive its strategy abroad, to message its close engagements with industry partners to

bring to market solutions that are more finely tuned to customers’ particular requirements — at the risk of being

perceived as driving a more proprietary and closed approach. For example, it is working with customers around

centralized initiatives such as its Smart City campaign.

Huawei has its eye on driving innovation in areas such as centralized cloud management that will help solve

customer pain points such as IT complexity. However, TBR believes pressures around open-ecosystem-driven

innovation from IBM with its OpenPOWER Foundation will be challenging for Huawei to navigate. IBM’s

OpenPOWER Foundation has gained strong momentum in China and will benefit from IBM’s long-standing

expertise in the data center and diverse geographic customer base. Furthermore, IBM’s shift in corporate focus

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from delivering preintegrated, industry-standard systems enables IBM to position effectively against Intel, which is

still an important Huawei partner.

TBR believes Huawei has a number of opportunities to overcome these challenges. Whereas IBM still faces a

degree of customer scrutiny in China due to tensions between the Chinese and U.S. governments, Huawei can tout

complete lack of scrutiny to customers in China. Huawei can also focus on more clearly articulating where it is

working with Intel and where it will seek to add Huawei-driven innovation. Finally, as noted by Huawei’s Rotating

CEO, Eric Xu, Huawei has strong channels in place through its carrier business that it can use to motivate partners

to work with Huawei. Huawei is taking a number of initiatives to increase engagement with partners and improve

leverage of partners, ranging from technical certification, joint marketing and demand generation support to

investment in enabling partners around service delivery — a core focus for Huawei in the enterprise space during

2015.

Cloud: Huawei enters the private cloud market, announces Cloud Services Division While Huawei’s cloud strategy remains largely tied to the data center and software sales of its Fusion portfolio,

evidence of a broadening view is taking shape as the company formally announced a Cloud Services division that

will be housed in Huawei’s very own public cloud. Set to launch in July, Huawei’s public cloud services will be

available in the Chinese market only. While the company claims it will provide public cloud based on customers’

complaints of a limited market in the country, TBR believes Huawei is using China as a test ground for a potential

global offering. By building and scaling its own public cloud, Huawei will gain the knowledge to help its carrier and

enterprise customers also build public cloud environments.

A philosophical shift in Huawei’s strategy over the past year has been its willingness to be “open.” Along with

hardware much of Huawei’s cloud strategy (up the stack) relies on open-source frameworks OpenStack, Cloud

Foundry and Hadoop. Huawei’s entire private and hybrid cloud strategy is based on OpenStack, and the company

is a top contributor to the community. Huawei’s play here is to provide the hardware to build a private cloud, the

development layer, analytics, management and soon the “as a Service” cloud option as well.

Public cloud is one of Huawei’s growth initiatives, and we expect the company to be successful. However, other

regional players such as Alibaba and U.S.-based cloud giants such as Amazon Web Services (AWS) and, to a lesser

extent, Microsoft and IBM have been operating their own cloud businesses in the country since late 2013. Huawei

also faces the challenge of competing head-to-head with the carriers they are — in tandem — helping to transform

to cloud businesses themselves.

Devices shifting from market penetration to profitability From a consumer standpoint Huawei rose to the fourth-largest smartphone provider in 2014, but aggressive

moves by Lenovo and Xiaomi challenge the company. TBR believes Huawei’s increased investment in services and

its sharpened focus on selling high-end smartphones and preserving margins will help Huawei drive forward with a

smaller-scale but stable consumer business that returns profit and has opportunities for cross-selling with its

carrier and enterprise businesses.

Huawei’s corporate emphasis on services in 2015 means shifting from a focus on after-sales service and repairs in

the consumer segment to providing more holistic support across the life cycle of consumers’ devices. Huawei will

launch new services such as performance optimization that are supported by a uniform Huawei Operational

Excellence center. Building upon this center, Huawei has aggressive goals to build service centers and full-service

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online platforms within five kilometers of major cities in more than 100 countries. Meeting these service levels will

be challenging, but Huawei recognizes that this services rollout is a long-term rather than a near-term goal, and its

focus on stability and profitability with its consumer business will help the company fund expansion.

Huawei’s increased focus on differentiating around services builds on the company’s investment in improving

design and quality of premium smartphones. Huawei works to market and differentiate around product

innovation; TBR believes the company has work ahead of it in this area but is making strides. We believe Huawei’s

relatively global presence in the consumer market, with the company generating more than 50% of its consumer

sales outside of China, is partly due to its improved product designs and more focused portfolio. Huawei’s

international presence in the consumer market is also driven by the company’s investment in expanding its

international retail channel. This international presence, coupled with Huawei’s deep relationships with carriers,

positions Huawei to find unique applications for its consumer business such as building solutions for more

intelligent information management.

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com. ©2015 Technology Business Research, Inc. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other TBR products is not and should not be construed to be investment advice. TBR does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright-protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.