Research Notes

Huawei’s promise of transparency – Will their new 2019 accounting creates the same visibility required of their competitors?

For the past year and a half, Huawei has spent significant resources to cultivate a narrative that they are a successful company and innocent victim of an American president’s war on China. But a closer look shows that this narrative is not corporate communications, but rather propaganda, the presentation of intentionally misleading information to promote a political cause. Important tools of this information war include Huawei’s quarterly reporting and financial statements. Journalists, not realizing that Huawei is an unlisted company, quote the company’s information liberally and uncritically. This research note examines the deficiencies of Huawei’s financial reporting.

For 25 years Strand Consult has worked to create transparency in the telecommunications world and has documented Huawei’s manipulation of information and how it systematically avoids answering difficult questions. For example, in 2018 Huawei stated,

Although Huawei is not a public company, we abide by established standards and norms for public companies, including the publication of this Annual Report, which contains financial statements audited by an independent third-party organization. We do this to help people outside the company understand the real Huawei, our business integrity, and our independence. We actively engage with a wide range of stakeholders, including world governments, the media, and analysts, and our doors are always open to people from all walks of life.

Governments, authorities and telecom companies use the information published by Huawei and their competitors to make assessments. This research note compare the information Huawei publishes versus that of its competitors Nokia and Ericsson. It also examines the financial information from telecom companies, notably Huawei’s customers Vodafone and Deutsche Telecom, which are recognized as transparent companies.

In practical terms, Strand Consult has tested whether said stakeholder can access the same information from Huawei that they can access from Huawei’s competitors. While it is true that Huawei is not a listed public company and therefore is not subject to the same disclosure requirements, it does not give Huawei the right to claim that its information can be judged by the same standards as publicly traded companies.

There is far more to disclosure than the publishing financial information. Listed companies must uphold a strict set of rules in how information is processed, compiled, and formatted in order to be made public. Notably Huawei likes to enjoy the benefits of market economies without participating in its costs and responsibilities, such as the scrutiny of stock exchange regulators, activist investors, governments, and the press.

Huawei vs. Nokia and Ericsson how do they publishing financial information
The information Huawei provides is limited to what they publish on their website. This amounts to very limited annual accounts as well as some press releases on quarterly figures. The material can be found here:

Quarterly press release.
   2. Half year press release.
   3.2019 Annual report.

Nokia and Ericsson publish more detailed information under the Investor Relations section on their websites, and they publish additional information for capital market days. The US Securities & Exchange Commission (SEC) describes the many pieces of information that US listed companies must publish, especially their 20K form which contains very detailed information. The material can be found here:

   1. Nokia Investor Relations.
   2.Nokia SEC filings
   3.Ericsson Investor Relations
   4.Ericsson SEC filings.

In parallel, there are many financial analysts covering Ericsson (30 banks) and Nokia (34 banks). They continuously publish analysis that examines the companies’ official information as well as an assessment of knowledge collected from the market and media. In practice, there is significantly more information available for Nokia and Ericsson than for Huawei. Here are the banks that cover Nokia and the banks that cover Ericsson. There are no banks that cover Huawei similarly, meaning that the most critical financial eyes do not cover the company.

1. Nokia and Ericsson are companies with a narrow focus on telecommunications infrastructure; they sell to telecom operators. Huawei, on the other hand, is a company that makes solar panels, chipsets, mobile phones, laptops, tablets, telecommunications infrastructure, data centers, and solutions for AI and smart cities. To simply, Huawei is a consortium of companies with a range of products that addresses more industries than Nokia and Ericsson.

2. Huawei’s product lines are divided into four areas: Carrier Business (40.8% in 2018), Enterprise Business (10.3% in 2018), Consumer Business (48.4% in 2018) and Other, which amounts to CYN 721.202 in 2018. Huawei divides revenue into each of the four product areas without telling how their revenue compares with competitors. In practice, Huawei’s Carrier Business cannot be compared to the same division at Nokia and Ericsson. Nokia divides their “Carrier Business” into four categories: Mobile Networks, Global Services, Fixed Networks and IP/Optical Networks. In practice, Nokia and Ericsson have a very different level of detail in their accounts than Huawei.

3. Huawei reports aggregated revenue for all product lines geographically as follows: China (51.6% in 2018), EMEA (28.4% in 2018), Asia Pacific (11.4% in 2018) , Americas (21.3% in 2018) and Others. They do not explain how their product sales (Carrier Business, Enterprise Business, Consumer Business and Other) are distributed geographically.

4. A very large proportion of telecommunications infrastructure suppliers’ revenue comes from 5G equipment. According to Dell’Oro’s latest figures, China accounts for 45% of the market for 5G, and Huawei takes 70% of China’s total 5G market by serving China’s three state-owned telecom operators. ZTE has a market share of more than 20%, and together the two players make up more than 90% of the market for 5G equipment in China. In practice, it is impossible to see how important it is for Huawei to have increasing sales of 5G equipment to the three state operators in China for its global Carrier Business.

5. Huawei writes in its 2018 Annual Report, “Our 5G solutions received widespread acclaim the minute they hit the market. As of February 28, 2019, we have signed more than 30 5G commercial contracts with leading global carriers and shipped more than 40,000 5G sites to different markets around the world.”

6. There is little to no transparency from Huawei on the alleged 40,000 5G sites in China and their 5G customers. By contrast, Nokia publishes its 5G customers here and Ericsson here. Huawei claims it has many 5G contracts, but it does not publish the names of its customers. 

7. Huawei claims that bans on its equipment and licensing have not hurt sales. Indeed, it even claims to be growing market share. However, it’s difficult to tell from Huawei’s report whether the increase can be attributed to smartphone sales in China, a growth which may overshadow losses in other countries. It is also difficult to determine the impact on bans on Huawei equipment. In practice, it’s next to sell a mobile phone outside of China without Google Mobile Service.

8. Huawei claims that its large R&D investments amount to 100 Bn CYN ($14 Bn), and it mentions such investments when talking about 5G. The problem is that Huawei does not disclose how its R&D budget is distributed in relation to the various business areas. It only publishes a single R&D figure for all relevant divisions: Carrier Business, Enterprise Business, Consumer Business and Other. It is important to remember that Huawei’s largest business area is Consumer Business which in 2018 accounted for 48.4% of their total sales.

9. Nokia and Ericsson have more transparency in their R&D budget, and they publish the exact amount which is focused on providing infrastructure for telecommunications companies. In practice, one cannot compare Nokia’s $4.8Bn R&D budget and Ericsson’s $4Bn R&D budget with figures published by Huawei.

10. Huawei describes that it has many patents, but it does detail the share of essential versus non-essential patents. Essential patents are the prerequisite for building telecommunications infrastructure that meet international standards, but Huawei’s patent portfolio is made up many non-essential patents. In the telecommunications world, companies like Qualcomm, Samsung, Nokia and Ericsson hold the essential patents. In practice, Huawei’s business relies heavily on access to other companies’ patents to make equipment that meets global standards. In this analysis, Matthew Noble and Richard Vary of Bird & Bird document which companies are leading the 5G race

Nokia explains how their patent filings in 2019 are distributed (Connectivity 61%, Fixed & optical networks 9%, Services, applications & multimedia 19% and Emerging technologies & hardware 11%). Bot Nokia and Ericsson have extensive businesses  licensing their patents to other companies. Nokia earned $740 million in license revenue in 2019; Ericsson, some $800 million. Huawei offers only limited information on how much they earn in licensing revenue. For example, they claim increased sales of patents to a third parties comprises in 2018 with a figure of a “net gain/(loss)” of $98 million.

Simply put, Huawei’s official information falls short in comparison to its competitors. Its competitors provide far more transparency, as described below. Beyond that, we can see that the transparency of Huawei’s telecom customers greatly exceeds Huawei. Deutsche Telecom is a good example of global company that provides clear and transparent financial information.

What does this mean
It is true that Huawei is not a publicly listed company and thus is not subject to the same rules as companies listed in the US, Europe, or other parts of the world. The purpose of financial transparency is to offer accurate information to investors. On the other hand, nothing prevents Huawei from publishing the same information as its competitors Nokia and Ericsson, for example. There is also nothing that prevents Huawei from going ahead and delivering the same transparency that its customers provide.

Huawei’s objective is not to create transparency so that governments, media, financial analysts, telecom operators and a wide range of stakeholders can compare them with their competitions. Rather Huawei’s goal is to tell a story that it is a unique company deserving of special treatment. Their selective treatment of information underpins this narrative that is the foundation of their propaganda machine.

If you want a more detailed insight into where and how Huawei’s revenue is put together, then don’t look at Huawei’s financial information. Instead ask yourself the following critical questions:

1. Why doesn’t Huawei have at least the same transparency as their competitors Nokia and Ericsson? Shouldn’t Huawei offer the market the same transparency as its competitors?

2. How should the management and boards of telecom companies make an objective assessment of Huawei as a vendor when it does not offer the same financial transparency as competitors Nokia and Ericsson?

3. Huawei talks a lot about its many patents; but what proportion of its’ patents is essential?

4. It’s not a secret that Huawei relies on the patents of many non-Chinese companies. Which Western companies are similarly dependent on Huawei’s patents and how much does Huawei earn from licensing their patents to companies that are not owned by Huawei?

5. Huawei claims that they do not receive government subsidies, however China’s three state-owed mobile operators awarded Huawei over 70% of the 5G equipment market in China. Is that what competition experts would call indirect state aid?

6. What are the market conditions for Huawei’s competitors in China? Does Huawei have better market conditions outside China than Western suppliers have in China?

7.Many authorities around the world have declared Huawei an untrustworthy/high risk vendor, some having made this determination years ago. What is Huawei’s view on that designation?

8. Huawei says that they cannot be forced to spy by the Chinese government. In Denmark, Huawei offered to make a no-spy agreement with the Danish government. “If Huawei is one day pressed by the state to spy, the agreement obliges us to inform the Danish government, which immediately can cancel all contracts. If Danish politicians have other wishes for the agreement, we would very much like to meet and discuss it,” says Jiang Lichao of Huawei Denmark to the Danish newspaper Politiken.

9. Over the years, many financial analysts have questioned the accuracy of financial reporting by state owned and affiliated entities in China. Is Huawei’s financial reporting accurate and trustworthy? Indeed, Huawei’s CFO Meng Wangzhou was arrested in Canada in 2018 for allegedly defrauding multiple financial institutions in breach of international bans on dealing with Iran.

10. If Huawei wants to be compared to Western companies, shouldn’t Huawei be more transparent and stop misleading political leaders, the press, and customers?

Huawei’s notion of ”transparency” is to manipulate information and to deter difficult questions from governments, the press, and customers. To understand Huawei’s revenue and operations, don’t look at its financial information, which purposely obscures the company’s business lines, regions, and entities with whom it works.

We hope this note will help governments, telecom operators, the press, and the public bring a critical eye to Huawei´s financial reporting. It can also help Huawei to lift the level of its reporting to the same standards as their competitors.

Strand Consult’s one goal is to create the transparency that companies like Huawei are fighting against. If you want to know more, read Strand Consult´s research notes on China and cybersecurity or contact us.

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