Huawei 2019 Annual Report Press Conference Q&A
On March 31, 2020, Huawei organized the 2019 Annual Report Press Conference. Huawei Rotating Chairman Eric Xu answered questions about Huawei's business performance and development as well as recent hot topics during an online Q&A session with over 80 media outlets via WeLink. Below is the transcript from that Q&A session.
Eric Xu: It is our hope that the pandemic ends as soon as possible. We also hope that every patient around the world can be treated and cured as quickly as possible. The outbreak of COVID-19 is another reminder that we share this world and share the same fate. In order to address common challenges such as this one, we need to be united, because a virus knows no borders and may target anyone, regardless of their race, skin color, or wealth.
As a company, Huawei's top priority in responding to the pandemic has been ensuring the health and safety of our employees. Since all this began, we have implemented a whole series of measures to protect our employees. On top of that, we are also working to satisfy the requirements of customers and governments around the world as they fight the pandemic.
As of today, we have fully resumed all production activities in China, so in the short term, we can continue supplying our customers and partners around the world.
But as COVID-19 continues to spread, we may see lasting global effects for some time. Our supply chain department is providing daily updates about how our suppliers around the globe have been doing, so that our company can do everything we can to help partners along the supply chain combat the pandemic and continue production. We can't say for sure how the pandemic will evolve. If the measures being taken to combat the virus are not effective, it is possible that some of our suppliers won't be able to continue supplying us. In this case, we will face challenges to our supply continuity. We definitely don't want to see this happen and we will work hard to ensure our supply continuity.
02 CNN: Eric, I heard you when you said that China is trying to get back to normal and Huawei is trying to get back to normal, but as the pandemic is spreading globally, it really feels like we're sort of entering a stage of before coronavirus and after coronavirus. So how do you see Huawei's business being fundamentally changed because of the coronavirus pandemic? Do you see changes in how you approach the supply chain or changes in how you approach HR? I have heard you are now giving virtual tools to carrier clients, for example. How do you view some of the things you have rolled out because of the coronavirus pandemic? You know, they were emergency measures, but will you continue them in the future?
Eric Xu: I don't know whether the pandemic will end up being the turning point between two eras, but the impact of what is happening will undoubtedly stay with many families and individuals for the rest of their lives.
As for Huawei, we don't have the time or energy to think about what new improvements we should make in our business operations. Our priority right now is helping customers and governments around the world fight the pandemic while guaranteeing the health and safety of our employees.
In light of the current situation, people around the world are spending a lot of time shopping, gaming, and having meetings online. This has caused a dramatic increase in network traffic, and presents huge challenges in terms of network stability and security. Huawei is providing network services for more than 170 countries and regions. We have been working closely with our customers and local governments to ensure networks remain stable and secure. We are doing what we can to help meet the rapidly growing demand for networks.
Over the course of the pandemic, we have also identified some areas for improvement within our operations management structure. We will take measures to address those areas and drive continuous improvement once the pandemic is over. For example, we've learned during this ordeal that we don't have to sit face-to-face to have a successful meeting, and today we've even learned that we don't all need to be in the same room to have a good press conference. This unprecedented situation has also created new perspectives on networks, especially 5G networks.
03 Reuters: How much of Huawei's revenue last year came from 5G equipment sales outside of China and what sort of impact did US pressure have on those sales?
Eric Xu: Last year, our revenue from 5G was just over 3 billion US dollars. It made up only a small percentage of our carrier business revenue and therefore only a very small percentage of our company's total revenue. 5G deployment was only just starting to kick off worldwide in 2019, and we have not yet seen large-scale 5G rollout. Of course, 5G has been a heated global topic of discussion. Never before in history have we seen a single technology so extensively discussed that everyone, regardless of their age group, has heard of it. This has actually saved our industry quite a lot of money in terms of the advertising that would have been needed to get consumers to accept 5G.
To be honest, the US's attacks against Huawei have had quite an impact. At the very least, they have created a lot of extra work for us. For example, we've had to spend a lot of time explaining the situation to our customers, partners, and also government regulators. A few of our customers who had used Huawei equipment to build their 2G, 3G, and 4G networks did not end up choosing Huawei to be their 5G partner for a variety of reasons. Some decided not to continue working with Huawei on 5G in some regions. Examples include Optus and VHA in Australia, TDC in Denmark, and Telia in Norway.
04 The Global Times: Recently, there have been US media reports claiming that the White House is considering new export control restrictions, which may ban chip manufacturers, such as TSMC, from supplying Huawei. How will Huawei deal with this issue?
Eric Xu: I have read the report from Reuters, and another report from China Daily that was published on March 29. China Daily said that if the US imposes these new measures, the Chinese government will have no choice but to do the same for some US companies. If the US did take such measures, the Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board. The Chinese government will also take some countermeasures. Why wouldn't it be possible for the Chinese government to prohibit the use of 5G chips made by US companies in the Chinese market, as well as the base stations, smartphones, and all other smart devices powered by these 5G chips, citing the same cyber security concerns?
Even if the US does take such measures, we could still buy chips from Samsung in South Korea, MediaTek in Taiwan, and Spreadtrum within China's mainland. Even if we cannot make these chips ourselves, I believe that many chip companies in China will grow, and we could then make our products using chips from these companies, as well as those from South Korea, Japan, Taiwan, and Europe.
If the US government arbitrarily changes its Foreign Direct Product Rule, it will disrupt the global technology ecosystem. If China fights back, what would happen to the industry? The disruption would have an enormous domino effect.
If "Pandora's box" is opened, there could be a catastrophic domino effect across the global industry ecosystem. In such a situation, Huawei would not be the only victim.
In that context, we hope there will be more collaboration across the global industry. Everyone can come together to look at the real challenges faced by the industry and customers, and provide trustworthy products for customers and the best possible products and services for consumers.
Therefore, I hope what you have mentioned will not become a reality; otherwise, it would cause enormous damage to the entire industry, and none of the players across the US industry chain would be immune from that damage.
05 CGTN: 2019 was a tough year for Huawei due to the FCC litigation and the Entity List. Last year, we saw Huawei invite a lot of media personnel to come and visit the headquarters in Shenzhen, and have a lot of interviews with Ren Zhengfei. Going forward this year, what more does Huawei want to do in terms of transparency? How does Huawei want to better showcase who they are to deflect the claims that the company has connections with the government?
Eric Xu: We will continue to move forward in the same way we did in 2019.
06 Bloomberg: You mentioned just now the US ban has had a substantial impact on Huawei's business. Can you share your outlook for Huawei's business in 2020? Can you predict the sales of 5G smartphones outside China?
Eric Xu: 2019 was probably the most challenging year for Huawei. However, we enjoyed nearly half a year of fast growth before May 16, 2019, and we had substantial inventory to respond to customer needs. Now, I think 2020 will be the most difficult year for Huawei, because we will be subject to the Entity List throughout the whole year. Some people in the industry think we are running out of inventory, so this year is a crucial test of whether our supply continuity measures are effective.
The coronavirus outbreak brings new challenges such as global economic decline, financial turmoil, and diminished market demand, which we didn't see coming. As the pandemic around the world is still developing quickly, our current priority is to ensure the safety of our employees and respond to the needs of customers and governments as they fight the pandemic. At this point of time, it's difficult to forecast our performance in 2020 with any accuracy.
We will try our best to survive so that we will still be standing this time next year, when it's time to release our 2020 annual report.
Regarding the sales of 5G smartphones outside China, any new smartphones we launched after May 16, 2019 can't have Google Mobile Services (GMS) preinstalled. To protect the interests of our smartphone users worldwide and ensure a quality user experience, we've launched Huawei Mobile Services (HMS) and AppGallery. We'd like to see Google apps available on Huawei's AppGallery, just like they are available on Apple's App Store. By working together like that, we could deliver more varied and better apps to consumers. We want all of our 5G smartphone users outside China to be able to use Google's apps. We hope our 5G smartphone sales will grow in markets outside China. But right now, we can't make an accurate forecast. It depends on the development of the HMS ecosystem.
07 China Daily: Currently Europe is one of the regions worst hit by the coronavirus. Can you share your opinion of the impact of the pandemic on the 5G network rollout in Europe? Since the situation in China is largely under control, China has accelerated the 5G network deployment. How do you view the 5G opportunities this year?
Eric Xu: 5G deployment in Europe will certainly be delayed, and the longer this pandemic lasts, the longer the delay. Since the situation is largely under control domestically, China has accelerated its 5G deployment. Currently, the three major carriers in China are inviting tenders. I believe the three carriers will complete the 5G deployment plans they made earlier this year, and may even outperform their plans slightly. The number of additional 5G networks they deploy will depend on our supply, the speed of deployment, and their budgets. We will see if we can make up the time lost due to the pandemic.
08 The Wall Street Journal: What do you attribute the slowdown in profit growth last year to? And why your share of overseas revenue declined last year? What do you attribute that to? Is it to the US restrictions or did you see other factors at play?
Eric Xu: After the US Bureau of Industry and Security (BIS) put Huawei on the Entity List on May 16, 2019, we had to invest more into R&D to patch up the "holes" in our battered "aircraft". All of a sudden, many of our suppliers could no longer supply us, which forced us to rebuild our supply chain. In this context, it was not realistic to strive for a net profit growth rate like we'd had in the two previous years. We had to survive first.
As for the lower share of overseas revenue in the total revenue mix, one of the major reasons was that our new products launched after May 16 could not use GMS. Our consumer business outside China had grown very fast up until May 16, but then declined sharply afterwards. It only started to bounce back slightly in the fourth quarter of last year. As a result, our consumer business revenue in markets outside China was short by at least ten billion US dollars. That's why the proportion of overseas revenue as part of the total was lower.
09 South China Morning Post: Huawei smartphones have a very big market share within China but are not doing as well in markets outside China. We also noticed that many Chinese phone vendors are starting to penetrate the premium segment outside China. So how would Huawei balance its domestic and international smartphone business, especially in light of the current pandemic?
Eric Xu: In China, we're committed to implementing a Seamless AI Life strategy that we call "1 + 8 + N". We are also working to build out the HMS ecosystem so that we can continue selling smartphones in markets outside China. We certainly hope we can continue using GMS, but that decision is not up to us. What we can do is develop the HMS ecosystem and the AppGallery.
It will be hard, but we're left with no other choice. We do not position ourselves as a domestic player for smart devices. We're aiming for the global market.
10 Brussels journalist: European governments are taking measures to restrict the role of high-risk vendors. Many European governments count Huawei as being part of that group of high-risk vendors. First of all, I just want to ask again, whether you can break down the impact of the measures being taken across Europe right now – on the carrier business figures in Europe specifically.
Second, I was wondering if Huawei considers measures taken in countries like France, the UK, and perhaps other European countries, as being discriminatory or unfair in any way. Does it consider taking any steps or actions to address discrimination or unfair competition?
Eric Xu: At least from public reports, I haven't seen or heard about any European Union member labeling Huawei as a high-risk vendor. As you know, the UK is no longer part of the European Union. I think European countries base their decisions on facts, and they are well-versed in what cyber security actually means. We have been engaging and communicating with various European governments. I am not in a position to comment on things that have not come out yet.
11 Japanese journalist: Japanese mobile companies were cooperating with you on 5G technology, but you are being regulated by the government. Please tell me your strategy about 5G in Japan.
Eric Xu: From the various public sources available, I haven't seen anything that said Huawei was banned from participating in Japan's 5G deployment. We have been communicating with our customers and with regulators.
We didn't have any collaboration with NTT DOCOMO or KDDI in Japan in the mobile domain. We've only worked with SoftBank in the mobile domain, and our current collaboration is mainly focused on 4G. SoftBank has not deployed a lot of 5G base stations. And we hope that our partnership with them can extend from 4G to 5G. But this is up to them.
12 Guancha.cn: You said that if the US tightens restrictions on Huawei, it would lead to systemic risk across the industry. But what if the US government was determined to do this? What would be the impact on the semiconductor industry in the US? What setbacks will US companies face?
Eric Xu: I refer you to a BCG report commissioned by the US Semiconductor Industry Association. It's "How Restricting Trade with China Could End US Semiconductor Leadership." This report provides clear answers to the question you just raised.
13 Journalist: How do you believe that the multi-vendor OpenRAN and TIP will challenge Huawei's business over the next five years?
Eric Xu: I think the impact on our business would be negligible. Let me talk a bit about OpenRAN.
OpenRAN is not an "alternative" 5G standard like some people think. In essence, OpenRAN is an implementation architecture and technology for base stations. Base stations built on OpenRAN architecture and technologies still have to comply with 5G standards and meet carrier requirements regarding power consumption, performance, and cost effectiveness.
OpenRAN advocates openness and open source. It's just one method we can use to build 5G base stations, and possibly future 6G base stations. Historically, we saw a transformation in methodology for building base stations back in the 3G era. That was made possible by Huawei's distributed base station solution, DBS. Before DBS was launched, both baseband units and remote radio units for base stations could only be installed in air-conditioned equipment rooms. Huawei's DBS made it possible to install the remote radio unit separately on towers. That substantially increased base station performance and coverage. This made DBS an ideal implementation architecture of 4G and 5G base stations. It is now a de facto implementation standard, but not a 4G or 5G technology standard.
From the 2G era all the way through to the current 5G era, 3GPP has focused on interoperability when developing communications standards to ensure connectivity between mobile phones and base stations, between base stations and core networks, and between base stations across different vendors to enable global roaming. 3GPP has never focused on base station implementation methods or architecture.
From a carrier perspective, how base stations are built isn't really an area of interest either. Different vendors have often had different implementation methods. Carriers care more about the performance, quality, and cost effectiveness of base stations.
You've heard about SingleRAN, and now you are hearing about OpenRAN. Both of them must meet 5G standards and ensure connectivity between all mobile phones and base stations, between different base stations, and between base stations and core networks.
I'd like to compare SingleRAN to dedicated computing, and OpenRAN to general-purpose computing. Historically, there has always been a race between general-purpose computing and dedicated computing. Companies that work on general-purpose computing have been trying to replace dedicated computing. But today, we are seeing more and more scenarios for dedicated computing, rather than less, especially with the emergence of AI.
Former Intel CEO Brian Krzanich once told me that he wanted Huawei to use Intel's x86 CPUs for our base stations. I told him that Huawei would love to use Intel's general-purpose processors as long as they could deliver the same performance as Huawei's in-house dedicated processors for the same cost. If we could have used their products directly, why would we bother to develop our own? Like general-purpose computing, OpenRAN needs to resolve the issues surrounding power consumption, cost effectiveness, and performance in order to satisfy customer demand. But that may still need to take a lot more work, so in the short term, I don't think OpenRAN will have any impact on Huawei's business.
You may have noticed that the most critical mobile communications technologies are all wireless technologies. It doesn't matter if a solution uses OpenRAN or SingleRAN, a remote radio unit or an active antenna unit. They all must ultimately meet the customer's needs by offering high performance and cost effectiveness.
14 McGill University in Canada: Can you give any further information about the New IP strategy raised by Huawei?
Eric Xu: I came up with the name for the New IP myself. Why did I give it this name? It was because Huawei was doing research on 5G New Radio at the time. To me, the future mission of IP is similar to that of 5G. So I thought, why not call it New IP just as we call 5G New Radio?
IP technology was first invented in 1969 and the protocol was finalized in 1978. It's been over fifty years since then, and IP has achieved great success. In the beginning, IP was designed to connect computers around the world. It was mainly intended for office networks, and was then extended to mobile Internet in order to connect all mobile phones. However, for many years, IP technology has not kept up with the needs of industrial Internet, particularly in terms of low latency and security. 5G has a similar story. While 5G was supposed to meet consumers' increasing needs for enhanced mobile broadband, it must also deliver the low latency required by industry as well as massive connectivity for the Internet of Things. It's the same for the New IP. While it's supposed to meet the needs of the mobile Internet and office networks, it will also need to meet the needs of the industrial Internet, like low latency and security.
The New IP is still being researched today. Huawei's IP experts are conducting this research and working together with scientists and engineers from around the world. Currently, IP experts from many countries, including Italy, the UK, Canada, Germany, Belgium, and Spain, are freely participating in the research and innovation of the New IP. They hope to overcome the challenges and better prepare IP for the future. The idea is to ensure the New IP will meet traditional needs for IP as well as new needs of the industrial Internet.
The New IP is a purely technical topic. The Financial Times should not politicize discussions surrounding the New IP from the very beginning. Technical experts do not have ulterior motives. They simply come together to have discussions and explore how IP can address future needs. These activities are not as complicated or politically-driven as some people think, and the technical topic being researched should not be politicized.