Moving Forward Through Times of Uncertainty

On Day 1 of the Huawei Global Analyst Summit 2021 (April 12-14), Eric Xu gave the following keynote speech.

We released our 2020 Annual Report on March 31. Our revenue grew 3.8% to 891.4 billion yuan (US$136 billion), and our net profits increased 3.2% to 64.6 billion yuan. This performance was in line with forecasts despite the impact of COVID-19 and external restrictions on the company. Our strategy last year was to stockpile in bulk, so our operating cash flow was 35.2 billion yuan, which was also in line with our forecasts.

2020 Revenue by Business Segment

Our carrier business remained steady, with revenue of 302.6 billion yuan, up 0.2% year-on-year. Our enterprise business achieved pretty decent growth thanks to opportunities in industry digital transformation. Its revenue rounded off at 100.3 billion yuan, up 23% year-on-year.

In our consumer business, revenue from smartphone sales dropped as a direct result of US supply bans. Nevertheless, we continued pushing forward with our Seamless AI Strategy to provide an intelligent experience across all scenarios and devices, including PCs, tablets, smart wearables, and smart screens. These eight segments in our consumer business portfolio, not including smartphones, saw a 65% increase in revenue, and they will remain our key focal points moving forward. Revenue from our consumer business as a whole grew 3.3% to 428.9 billion yuan.

In 2020, we ramped up R&D investment as part of our wider efforts to keep the company afloat, to address supply continuity challenges caused by US bans, and to pursue sustainability well into the future. Our R&D spend in 2020 reached 141.89 billion yuan, which was roughly 15.9% of our total revenue.

Looking to the future, Huawei will continue making breakthroughs in basic science and pushing the frontiers of technology. We will take a vision- and assumption-driven approach as we work to identify new industrial requirements for ICT and tackle some of the biggest challenges facing the industry.

We’ve had a lot of discussion about the technological challenges that the world will face between now and the year 2030. They’re challenges the entire global industry will face, and as such, we have to work together – and invest together – if we hope to address them.

Huawei was a topic of focus throughout 2020. 2021 will be another challenging year for us, and it’s also the year that our future development strategy will begin to take shape. We spent most of our time last year responding to one ban after another. This year, we may have more time to explore our next steps and where we want to go.

Five Strategic Initiatives for 2021

Next, I’d like to talk about our five strategic initiatives for the future. They are:

1. Optimizing our portfolio to boost business resilience
2. Maximizing 5G value and defining 5.5G with industry peers to drive the evolution of mobile communications
3. Providing a seamless, user-centric, and intelligent experience across all scenarios
4. Innovating to reduce energy consumption for a low-carbon world
5. Addressing supply continuity challenges

Our first major initiative is to optimize our portfolio to boost business resilience. These are uncertain times for Huawei, rife with challenges from geopolitical tension, the resurgence of COVID-19, and US bans. In this context, business resilience is our guiding principle. We want to boost the resilience of our entire business, and since last year we’ve been working to optimize our portfolio with this goal in mind. We have three priorities.

First, we will strengthen our software. Part of that involves continuing to improve our software engineering capabilities. In late November 2018, our Board of Directors decided to invest US$2 billion into upgrading our software engineering capabilities. More than two years have passed, and we are pleased with the results thus far. Moving forward, we will keep investing to push our software engineering capabilities to the next level over the remaining three years. And it’s precisely because of the results we’ve achieved over the past two years that we want to keep building on this progress to reduce our demand for and reliance on chips as we seek to make our products more competitive.

In addition, we’re also on the lookout for new business opportunities in the software sector. When we find the right fit, we will step up investment to increase the percentage of software and services in our revenue mix. The recent restructuring of our Cloud & AI Business Group, including its management team, is part of these efforts, as well. Software is at the core of cloud. We aim to build a stronger software organization and ensure it’s decoupled from hardware. Going forward, we will invest more in software to drive growth in this sector and pave the way for ongoing growth in the future.

Second, we will invest more in businesses less reliant on advanced process techniques. For example, we’ve been working on optical technology for years, but our primary focus was on optical communications. Over time we realized that this technology can also be used in other domains, such as optical displays, augmented reality head-up displays (AR-HUDs), intelligent headlights, and fiber sensing. We’re using existing technology to explore new opportunities and create new businesses. We want to deliver novel products to meet the needs of our consumers and enterprise customers, rather than giving them something that’s already on the market.

Third, we will ramp up investment in components for intelligent vehicles, especially autonomous driving software. Vehicles are becoming more connected, intelligent, electric, and shared. And at the core of these trends is whether or not autonomous driving software can make truly autonomous cars a reality, and take us a step closer to entirely unmanned driving. With heavy investment in autonomous driving software, our hope is to drive these trends forward as they facilitate the integration of the automotive and ICT industries, which in turn creates long-term strategic opportunities for Huawei.

Huawei positions itself as a provider of new components for intelligent vehicles. Our strategy is to help car OEMs build better cars. Richard Yu (Executive Director, CEO of the Consumer BG, President of the Cloud & AI BG) has started exploring ways to help carmakers sell their cars better. In these respects, we keep investing in autonomous driving software. Once unmanned driving becomes a reality, we will see disruption in practically all adjacent sectors and trigger the most disruptive industry transformation the world will see in the next 10 years.

Our second major initiative is to maximize 5G’s value and define 5.5G with industry peers to drive the evolution of mobile communications. By the end of 2020, more than 140 5G networks had been deployed worldwide, with more than 330 million 5G users. Global 5G development has gone far better than we all expected.

However, we’re well aware that the key to the commercial success of 5G doesn’t stop at consumers, but includes the business sector as well. We need to push forward in both areas to address the varied demands of consumers and industries alike.

We have to redouble efforts to drive consumer adoption and boost the 5G user base. By encouraging more 4G users to make the switch, we can divert more data traffic to 5G networks.

At the same time, we’re optimizing 5G solutions for businesses to drive their commercial adoption at scale and ensure that they benefit all sectors of society. At the end of 2020, we had a hand in more than 3,000 innovation projects worldwide. We have worked together with carriers and partners to secure over 1,000 5G contracts from companies across 20 plus industries. For the most part, 5G applications in business have seen the greatest progress in China, and Huawei has taken part in most of these projects, seeing great progress in industries like manufacturing, steel, coal, and ports. These efforts have brought efficiency gains to our customers and have created greater social benefits, too. Step by step, we’re creating tangible value with 5G in business domains.

In 2021 we will prioritize supporting the key requirements of different industries. These include providing highly reliable network connections, large uplink capacity, deterministic latency, as well as network planning, rollout, maintenance, and optimization services to meet the massive number of small requirements from companies of all shapes and sizes. In this way, we will bring the benefits of 5G to more companies and industries.

If we take a look at the business cases we’ve seen thus far, it’s clear that 5G has not yet met the requirements of all industries. And if we want to fully unleash the value of core 5G technologies, 5G standards need to keep evolving. Huawei proposed its vision for 5.5G at our Mobile Broadband Forum in 2020, and we hope this will mark the next milestone in 5G development.

So what does that encompass?

To date, 5G has mostly focused on large bandwidth, massive connections, and low latency. With 5.5G, we hope to add three more scenarios: Uplink Centric Broadband Communication (UCBC), Real-Time Broadband Communication (RTBC), and Harmonized Communication and Sensing (HCS).

UCBC

Built on 5G capabilities and peak bandwidths of 250 Mbps, UCBC will enable over 10 Gbps uplink bandwidth. This is more than a 40-fold increase and it will meet the challenging demands for manufacturing applications like machine vision and broadband IoT. From our experience we’ve found that downlink capabilities are more important for consumers using 4G or 5G networks, while uplink capabilities are more important for industrial 5G use cases. So we need to increase the uplink capabilities of 5G by at least 40-fold to meet industrial demand.

RTBC

The second scenario is RTBC, which will support large bandwidth and low-latency interaction. The goal is to deliver a 10-fold increase in bandwidth with a specified latency, which will help provide users enjoy a more immersive experience in the virtual world with applications like XR Pro and holographic communications.

HCS

The third new scenario is HCS. We hope that 5.5G will harmonize communication and sensing capabilities to provide centimeter-level accuracy and low-power indoor positioning. We all know that navigation signals are weak in indoor parking areas. But if these structures have 5.5G network coverage, their ability to position devices will be greatly improved to deliver better navigation services.

Right now we’re still in the beginning stages of 5G development and we should keep pushing forward. We need to define 5.5G, expand 5G’s potential from three key scenarios to six, and better meet the needs of all different kinds of industries.

Our third major initiative is to provide a seamless, user-centric, and intelligent experience across all scenarios. US bans have had a serious effect on our phone business, but our commitment to consumers remains unchanged. We will provide a seamless, user-centric, and intelligent experience across all scenarios, including smart home, smart office, easy travel, fitness and health, and entertainment. Through HarmonyOS and Huawei Mobile Services, we will keep working closely with developers and partners around the world to enrich the hardware and service ecosystems.

HarmonyOS

HarmonyOS is a distributed operating system that supports all scenarios. It’s already used in our smart screens, smart wearables, and head units. Next up it will be used in our phones. As of now, more than 20 hardware manufacturers have joined forces with 280 app providers to build out the HarmonyOS ecosystem. In 2021, we expect to provide the HarmonyOS experience on more than 100 million devices from over 40 major brands.

In the meantime, we will keep doing what we can to build out the global ecosystem. Huawei Mobile Services (HMS) is already the third largest mobile app ecosystem in the world. By the end of 2020, the HMS ecosystem had already more than 2.3 million registered developers, including 300,000 from outside of China. More than 120,000 apps have been built based on HMS Core, and we have seen a 10-fold increase in the number of apps launched on Huawei AppGallery outside of China compared to 2019. Huawei Mobile Services now serves over 700 million Huawei device users across more than 170 countries and regions around the world.

Our fourth strategic initiative is to innovate to reduce energy consumption for a low-carbon world. Huawei is running headfirst into the battle against climate change. We believe that this fight is closely linked to the ultimate destiny of humankind, and the greatest value that we as a company can provide is to innovate new technology that helps all industries reduce their energy consumption for a low-carbon world.

If we want to achieve our own carbon neutrality, we can invest in solar power stations to generate power that offsets our consumption, but that wouldn’t make full use of Huawei’s strengths. We can create the greatest value by helping all industries reduce power consumption through technological innovation, and also by reducing the power consumption of our devices as well as networking and communications equipment that we sell. This is where we hope to make a unique contribution to emissions and carbon neutrality to pave the way for a more low-carbon world.

We’ve already taken some practical steps.

The energy efficiency of traditional wireless base stations is roughly 60%. By replacing outdoor equipment rooms with outdoor cabinets, we can boost energy efficiency to 90%. From there, if we can migrate all equipment to poles, we can drive efficiency all the way up to 97%. This is a huge improvement.

We’re also exploring new ways to reduce the power consumption of data centers. With indirect evaporative cooling and AI-enabled optimization, we can reduce data center PUE from 1.4 to 1.2. What does it mean? It means that a data center with 1,500 cabinets can save 13 million kilowatt hours of electricity every year.

We have also been working on on-board chargers, ePowertrain, and battery management systems for electric vehicles. With our X-in-1 ePowertrain, we can raise the energy efficiency of electric vehicles from 86% to 89%. That means we can increase the electric range of vehicles by 4.5%.

And finally, there are power modules. All electronic products have power modules to convert 380V or 220V AC to DC, and then to different voltages through DC-DC converters. The conversion rate of these power modules is also a key factor in the overall power consumption of a product. By providing denser and more efficient modular power, we can increase energy efficiency by 4% and power density by 50%.

Our fifth major initiative is to address supply continuity challenges. I’m sure many of you here today are following this issue closely. Will Huawei survive US bans? How will we solve our supply problems?

Semiconductors are highly complex products to design and manufacture, and they require a massive investment in R&D and capital expenditure. This has resulted in a highly specialized global supply chain where every region plays a different role based on their own strengths. This collaboration has helped pave the way for nonstop innovation and lower costs, benefiting companies and consumers worldwide.

Let’s say there was no longer any collaboration across the global supply chain moving forward. Every region establishes their own end-to-end, self-sufficient local supply chain. According to a report by the Semiconductor Industry Association (SIA), Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, building regional self-sufficiency in semiconductor supply would take an incremental upfront investment of at least US$1 trillion. And this would lead to an overall increase of 35% to 65% in semiconductor prices. These cost increases would ultimately be passed down to the consumer.

We all know that chip foundries are increasing the price of chip production. Higher production costs will result in more expensive chips, which would ultimately lead to higher prices for all consumer electronic products. We can expect to see these price spikes for the foreseeable future.

The US has imposed three rounds of sanctions against Huawei over the past two years, and this has done significant damage to our business. Perhaps more importantly, it has caused even greater damage to the global semiconductor industry. US bans have effectively disrupted trust throughout the industry’s global supply chain, forcing more countries and regions to think twice about supply chain security.

Europe, Japan, and China have already upped their investments in semiconductors. In particular, Europe has made it expressly clear that they intend to achieve semiconductor self-reliance. In December last year, 17 countries, including Germany, France, and Spain, released the Joint Declaration on Processors and Semiconductor Technologies, a move that demonstrates Europe’s determination to invest heavily in homegrown semiconductor capabilities.

Because of US actions against Huawei, we have also seen panic stockpiling among many companies worldwide. In particular, some Chinese companies that never would have stockpiled before now have stockpiles to last three months, six months, or even longer. They think having a solid stockpile is a bulwark against supply chain uncertainty.

But the problem is, the industry has spent years building out a zero-inventory supply chain, so panic stockpiling has led to a global shortage in semiconductor supply. Until recently, everything was operating smoothly without the need to keep a large number of chips in stock. But now it has become common for companies to build up stocks lasting a month. This global shortage is a direct result of US actions against Huawei, and it has led to panic buying all over the world. Not only that, US actions against Huawei and other companies have also started to trigger supply shortages in different industries around the world, which may lead to unexpected economic crises.

We need to get the semiconductor industry back on track. To keep the situation from devolving further, rebuilding trust and restoring collaboration across the global semiconductor supply chain is crucial. There’s an incredible amount of risk right now. Leaders around the world need to take this seriously and make the wise political choice to rebuild trust and help the global supply chain get back on track as soon as possible.

If we are able to rebuild trust and restore collaboration across the global semiconductor supply chain, we can make the most of our collective strengths and maybe the problems we face at Huawei could be resolved as well along the way.

To conclude, we believe deeply in the power of digital technology to provide fresh solutions to the problems we all face. So we will keep innovating and driving digital transformation forward with our customers and partners to speed up the arrival of a fully-connected, intelligent world.

Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.