Aug 28, 2006 12:19 PM,

Rivals could exploit Huawei's strategic crossroads

By Ed Gubbins

Huawei Technologies may be facing a crossroads with regard to its strategy that could provide a temporary opportunity for rivals to gain advantage over it, according to a research note issued recently from UBS Investment Research.

Consolidation among major equipment vendors is turning some of Huawei's competitors into giants. That trend may pressure Huawei to become more focused in its approach to both the markets it serves and the products it sells, UBS said.

"Huawei may be at a major crossroads with respect to its future direction and strategy," UBS analyst Qi Wang wrote. "The near-term uncertainty at Huawei creates a window of opportunity for its global competitors to strengthen their market position."

Huawei's competitors have long complained of its aggressiveness in bidding low prices for a wide range of carrier equipment. Some analysts have speculated that Huawei's decreasing cash flow could soon force the company to relax those low-price tactics, but UBS says the vendor faces "no immediate crisis." Huawei's cash dropped from $1.1 billion in 2004 to $883 million last year, and it has since used more cash to acquire Harbour Networks, in a deal valued at around $212 million. But while Huawei's cash decreased last year, its operating cash flow increased nearly 80% to $700 million. And the company can obtain additional funding from Chinese banks if needed, Wang wrote.

"Orders continue to grow rapidly," he added. "Business-wise, Huawei seems to be doing well."

In addition, vendors and analysts alike have expected Huawei's cost advantages to diminish as other equipment vendors move more of their manufacturing operations to China and other low-cost labor markets.

Huawei has already claimed that it is no longer the lowest bidder for some contracts. And at least one competitor, Alcatel, has substantiated those claims. In April, the company pointed out that larger, more established vendors sometimes underbid Chinese vendors. And last month, Alcatel criticized Ericsson for winning a low-priced GSM contract from Brazilian carrier Vivo.

As equipment vendors combine, it will be more difficult for Huawei to stay competitive in all of its chosen markets, Wang wrote. The company spent $588 million on research and development last year while rivals Ericsson, Cisco Systems and Alcatel spent $3.6 billion, $3.2 billion and $1.9 billion, respectively.

Given that challenge, Huawei may opt to focus its attention more directly on its home turf, the Asian market, and less on North America, on which Huawei has focused the least attention globally. The vendor has vowed not to try to compete with Ericsson to become China's top supplier of WCDMA equipment, a possible indicator of a plan to narrow its focus. But ultimately Huawei's plans are unknown.

"So far there has been no clear indication from the company," Wang wrote.