Huawei's hematopoietic capacity in its main business continues to increase, and its ability to cope with external uncertainties is also improving.
Shenzhen Huawei Base R&D Center
Author | Xie Lirong, Wu Junyu
Source | Finance eleven people
Finding certainty in uncertainty, keeping pace and surviving is the only proposition huawei has been sanctioned by the U.S. government.
This big proposition is broken down into numerous small goals and fine punches, and eventually condensed into a few numbers.
On March 28, Huawei released important data for Huawei's 2021 annual report. Several figures were highlighted: global sales revenue of 636.8 billion yuan, net profit of 113.7 billion yuan, an increase of 75.9% year-on-year. R&D investment reached 142.7 billion yuan, accounting for 22.4% of the annual revenue, and the cumulative R&D expenditure invested in the past decade exceeded 845 billion yuan.
Huawei's chief financial officer Meng Wanzhou released this set of data. It was her first public appearance six months after returning from Canada. In the later Q&A session, she said that the past three years have been a difficult time for Huawei, and now, Huawei has passed through the "black barrier area".
Meng Wanzhou
Black barriers are a phenomenon endemic to the atmosphere. When satellites, spacecraft, intercontinental missiles and other space vehicles re-enter the atmosphere at a very high speed and return to the earth, communication with the ground will be seriously ineffective or even completely interrupted at a certain altitude and within a certain period of time.
The reason for the high risk in the black barrier zone is that astronauts are most dangerous during this period because the return module loses communication with the ground control center for a moment, and friction with the atmosphere produces temperatures of thousands of degrees Celsius. If heat protection measures are not taken, astronauts will not be able to bear it, and the structure of the return capsule will be damaged.
Huawei's financial report data this year has exceeded external expectations. From a numerical point of view, Huawei's business scale has become smaller, but profitability and cash flow acquisition capabilities are increasing, and it is further logical to draw a conclusion: Huawei's ability to cope with uncertainty is improving.
Guo Ping, Huawei's rotating chairman, concluded that Huawei cannot survive by cutting down on food and clothing, and needs to maintain strong investment.
Guo Ping
1
Where does the money come from
According to the financial report data, Huawei's total revenue in 2021 was 636.8 billion yuan, down 28.6% year-on-year. This is the year when Huawei's total revenue fell the most since 2019. The scale has dropped to the same level as in 2017 (237.2 billion yuan). At present, Huawei is mainly in three major business segments, and the revenue contribution of each sector is uneven.
Among them, the operator's business revenue, which accounted for the largest proportion of revenue, was 281.5 billion yuan, accounting for 44.2% of the total revenue, and the business of this sector fell by 7% year-on-year; the decline in operator BG revenue was affected by multiple factors, and there were two reasons for simple analysis, one was that the expansion of overseas business was blocked; the second was that the revenue of equipment manufacturers in the current year was closely related to the cycle of 5G construction. China has slowed down in 2021 after the peak of 5G construction in 2020.
This can be seen from the capital expenditure of China's three major telecom operators. According to the public financial reports of the three major operators, the total capital expenditure in 2020 increased by 11% compared with 2019, but the total capital expenditure in 2021 increased by only 1.8% compared with 2020. China Mobile also announced the investment in 5G construction, 5G construction investment in 2020 is 110 billion yuan, and 5G investment in 2021 has not grown, still 110 billion yuan.
Consumer revenue of 243.4 billion yuan is Huawei's second largest business segment, accounting for 38.2% of total revenue, which is the most affected by US government sanctions, down 49.6% year-on-year in 2021.
Enterprise business revenue was 102.4 billion yuan, accounting for 16.1% of total revenue, an increase of 2.1% year-on-year, and it is the only sector that has maintained growth among Huawei's three major businesses.
Huawei's enterprise business mainly serves the digital transformation of governments and large enterprises, and its main products include servers, storage, cameras, enterprise networks, and data center energy. Because the above business supply chain is relatively autonomous and controllable, it is regarded as Huawei's "big granary". After 2019, Huawei's enterprise business has become one of the important driving forces for Huawei's performance growth.
In 2021, Huawei's enterprise business revenue was 102.4 billion yuan, an increase of 2.1% year-on-year, and it is the only sector in Huawei's three major businesses to maintain growth. However, the growth of the business was less than expected. At the beginning of 2021, Huawei's enterprise BG announced a target revenue of 20 billion US dollars (about 127 billion yuan). According to the original target, the growth rate of Huawei's enterprise business should reach 25%.
Each of the three major businesses is important to Huawei. It is also the core source of Revenue for Huawei. Huawei sees through this point, rethinking and integrating technology, resources, channels and products, pruning and pruning leaves, and the ultimate goal is to ensure a smooth winter.
Huawei's net profit increased by 75.9% year-on-year to RMB113.7 billion. Operating profit was 121.4 billion yuan, and the operating profit margin was 19.1%, the highest level since 2005 (Huawei first announced five-year performance data in 2009). The $121.4 billion includes $60.8 billion in "other net income and expenditure," mainly $57.4 billion from the sale of Glory and Superconverse, which is a non-recurring profit or loss in the accounting account, while the profit after deducting non-recurring income "represents actual operating conditions."
After deducting one-time income, Huawei's profit in 2021 is lower than the previous three years, and the profit margin is higher than in 2020, slightly higher than in 2019, but lower than in 2018.
It is worth noting that Huawei's high net profit in 2021 benefited from two factors.
First, proceeds from the sale of shares in Honor and X86 servers.
Source: Huawei Annual Report
Second, Meng Wanzhou mentioned that the net profit margin still increases without considering the income from asset disposal. Specific measures include, but are not limited to, sales structure adjustment, supply plan management to improve sales gross margin, internal operation efficiency improvement and overall sales management expenses significantly reduced and other factors.
Relatively abundant profits are of great significance to Huawei at present. In view of some objective factors, Huawei sold a part of the past, but from the final result, this part of the cash-out objectively created conditions for Huawei Boxin's future.
In addition, from another point of view, Huawei's main business hematopoietic capacity is indeed increasing, and its ability to cope with external uncertainties is also improving.
Huawei is a global enterprise, and in 2021, regional markets will continue to be under pressure. Among them, China fell by 30.9%, Asia-Pacific fell by 16.7%, the Americas market fell by 26.3%, and the European, Middle East and North African markets fell by 27.3%. In 2021, Huawei's revenue share in overseas markets will continue to decline.
In 2015, Huawei's revenue in overseas markets accounted for 58%. In Europe, the Middle East, North Africa, Asia Pacific, the Americas and other overseas markets accounted for 58% of revenue. However, in 2021, Huawei's revenue share in the Chinese market rose to 65%, and its share in overseas markets was only 35%.
That is to say, in 2021, 65% of Huawei's revenue will come from China.
Since the macro-political and economic situation has not appeared in a major favorable factor that is particularly conducive to the growth of Huawei's revenue market, after the release of the financial report data, the outside world is worried about whether Huawei can get enough revenue and profits in 2022.
But according to the comprehensive information we have obtained, Huawei is trying to do its best to do its best to do the internal factors that are conducive to the growth of the broader market.
For example, China's digital economy is still developing rapidly. Huawei's government and enterprise affairs and cloud businesses are considered to be a large and growing business. According to a mid-level person in Huawei's enterprise business, the goal of Huawei's government and enterprise China in 2022 is still to "hit more grain".
The specific approach is to strictly assess the profitability of the NA market (super large government and enterprise customers) and moderately control the amount of orders taken. Focus the strategy on the commercial market (large and medium-sized customers, non-first- and second-tier cities) and sell solutions that are closer to demand.
In other words, Huawei intends to get more opportunities by intensively cultivating and deepening the digital economy market.
However, in this market, Huawei faces real challenges in the short term. There are two reasons for this:
First, the macro environment is cold, which has an impact on the digital expenditure of the government and enterprises.
Second, Huawei's self-designed Kunpeng server chip is still unstable in production capacity, of which 28-nanometer process chips can theoretically be supplied by local companies, but the supply of 7-nanometer and 14-nanometer chips for advanced processes is still restricted by TSMC.
Another particularly noteworthy is that Huawei began to integrate the comprehensive technical strength and vertical output capabilities of the three major business BGs through organizational structure innovation.
Huawei set up five major armies at the end of 2021. Guo Ping, Huawei's rotating chairman, said that Huawei's product line is long, and there are many technologies and complexity. Through the operation and management of such a short chain as "Legion", it is easy to quickly meet customer needs.
In November 2021, Huawei announced the establishment of five major armies, including coal mines, smart highways, customs and ports, smart photovoltaics, and data center energy. At the end of 2021, Huawei has established ten more reserve corps, including interactive media, sports health, display core, campus network, data center network, data center base, site and module power supply, airport rail, power digital service, and government affairs Netcom.
According to Huawei's past organizational structure, carrier BG, enterprise BG, and consumer BG are front-end sales and service organizations, directly facing customers. R&D organizations such as products and solutions are located on the back end and are not customer-facing. This front-end and back-end organizational structure is not flexible enough in the context of digital transformation penetrating into verticals and customer needs to dig deeper. The sales and service organization lacks industry Know-How, and the product and solution team's research and development is not close enough to front-line customers.
Unlike previous front-end and back-end architectures, the Legion is small but flexible, with sales, service, and R&D functions. It can be close to customers in a three-in-one way to provide more professional services in vertical industries. The relationship between the legion and the BGs is that the legion is located on the front end, and the BG, as a sales and service organization, is the back-end support interface of the legion.
Guo Ping, huawei's rotating chairman, said that the biggest benefit of the legion model is to shorten the management chain, quickly meet market demand, combine Huawei's technology and customer demands, create value, and create more revenue and profits for Huawei.
He said that the operation and management authorization of such a short chain as the Legion makes it easier for customers to do business with Huawei, and Huawei hopes to create a win-win new business model.
However, the legion is still in the exploratory and experimental stage. Experiments on different legions have had mixed effects. The smart photovoltaic and data center energy business was relatively independent before, and the exercise of rights after independence became a legion was smooth, which was a relatively successful case. However, at present, the major legions are still in the stage of external exploration and internal integration.
2
Where does the money go?
According to the financial report data, Huawei's total investment in research and development in 2021 reached 142.7 billion yuan, accounting for 22.4% of the annual revenue. This means that for every 5 yuan of revenue generated by Huawei, it will spend more than one yuan on research and development. Huawei's investment rate in R&D expenses is high, and it has formed a mechanism since 1998, but the proportion of R&D investment in total revenue in 2021 has surpassed any other year in Huawei's history, setting a new record.
In late 1997, ren wrote an article titled "What We Learn from the American People" after his trip to the United States. The article wrote that he found that major companies in the United States spend about 10% of their annual research and development funds on sales, creating opportunities. These large companies "rely on research and development to create opportunities, sweep the profits of the opportunity window in a short period of time, and invest in creating greater opportunities." ”
Since then, Huawei has introduced the "R&D funding according to 10% of sales" regulation.
However, if we look at Huawei's R&D investment in the past decade, we can find that Huawei's investment in R&D expenses has climbed from around 10% in 2010 to more than 20% year by year. Especially after the sanctions in 2019, the increase in the proportion of R&D investment has increased significantly.
According to the EU's 2021 industrial R&D investment scoreboard, Huawei's R&D investment ranking has ranked second in the world.
For technology companies, high R&D investment is a must and right thing to do. But this is also a paradox. Whether R&D investment is too high and the specific places of investment are correct is a question of choosing between risk and return.
The technology-leading strategy is the consensus of all high-tech companies, and the imitation of the strategy department will last a long time. However, during the contraction period of the changing macro environment, different companies' understanding of R&D investment will be different and change.
For example, when the family surplus food is not enough, how to balance R&D investment with cash flow and profits, for example, if there is a contradiction between the technology cycle of R&D and the strategic execution cycle of the enterprise, who to choose? For example, how to evaluate and verify the effectiveness of R&D investment?
Where will Huawei's R&D funds go?
Guo Ping, huawei's rotating chairman, said that Huawei's future survival and development will rely on continuous strong investment in research and development, and will continue to maintain strong investment in the future.
He said that Huawei's problems cannot be solved by reducing food and clothing, but should optimize the system architecture, improve software performance and explore theory. Build a highly trusted and reliable supply chain by solving technical and process challenges.
The so-called "highly credible and reliable supply chain" can be tried to be understood from two perspectives.
First, in the case of advanced technology is not available, to be competitive in systems engineering.
Huawei's difficulty in being "stuck in the neck" on a single point of technology is well known, and this is a link that must be broken. Guo Ping said that when there are difficulties in leading the single point technology, it is necessary to seek a breakthrough in the system. This sentence can be understood as solving the problem from the root of the system, rather than a single breakthrough of "headache and foot pain".
This includes hardware engineering architecture design, software capabilities and architecture, and basic theory/materials/algorithms.
Second, through the continuous micro-innovation and small improvement of components and frameworks, we will try to promote the improvement of system capabilities.
Guo Ping gave a small example. A large number of AI applications such as taking pictures, speech recognition, etc. require a lot of computing power and consume high power. Additive neural networks reduce large-scale floating-point multiplication. The power consumption of the AI part of the calculation can be reduced by 88%, and the corresponding circuit area can be reduced by 76%.
In this case, huawei's path to solve the problem of computing power is not to find more computing power. Instead, it starts from basic research and development and systematically solves the problem of computing power.
Looking back at this problem from a technical point of view, multiplication consumes far more hardware resources than addition. If you don't use multiplication, all of them are added, which can theoretically greatly increase the speed of operation.
Huawei's strategy is to start with basic research and development. A team from Huawei's Noah's Ark Lab, Peking University, the University of Sydney, and the Hong Kong University of Science and Technology proposed an additive-only neural network, AdderNet. The paper was included in CVPR (the top conference in the field of computer vision and pattern recognition organized by the IEEE) in 2020, and the official source code was also opened on GitHub.
One of the papers was Chen Hanting, an intern at Noah's Ark, who was in his phD at Peking University at the time of publication.
When the research results came out, it was logical to land them in business and technology at the right time.
There are many similar cases. For example, due to the sanctions imposed by the US government, the process technology of some of Huawei's materials has been restricted, and the only way is to choose alternatives to achieve the original function. If the base station product wants to achieve the double optimization of performance and energy saving, it is necessary to consider the part with the largest energy consumption, that is, the amplifier device of the RF unit. Huawei uses gallium nitride materials to manufacture power amplifiers, and the amplification efficiency of high-frequency signals is much higher than that of traditional semiconductor materials represented by LDMOS, which can reduce energy consumption by 20%.
Guo Ping stressed that Huawei is working hard to promote the reconstruction of basic theory, architecture and software. He said that the three reconstructions are still being worked on, but fortunately, "some theoretical and architectural breakthroughs have begun to lay eggs along the way."
Data disclosed in Huawei's 2021 annual report shows that Huawei is one of the world's largest patentees. By the end of 2021, Huawei has more than 45,000 valid authorized patents worldwide (more than 110,000). More than 90% of patents are invention patents. In addition, Huawei ranked first in the number of patents granted by the State Intellectual Property Office of China and the European Patent Office in 2021, and ranked fifth in the number of patents granted by the USPTO in 2021.
To do all of the above, in addition to the R&D environment, direct expenses and other costs, talent is the core.
We have counted huawei's employee scale and R&D personnel since 2014. After Huawei was included in the entity list in 2019, the scale of employees is still growing. In 2021, after the sale of honor and x86 server business, the total number of employees was reduced by only 2,000 people.
Huawei's R&D team is particularly in the expansion phase. In 2018, Huawei's R&D personnel were only 85,000 people, but after 2019, Huawei's R&D personnel entered the fast lane of growth. Huawei's R&D staff has reached 107,000 in 2021, an increase of 11.5% compared with 2019, which was included in the entity list.
Huawei's "genius teenager" program has attracted the most attention in the past two years.
In 2019, after Huawei fell into crisis, Ren Zhengfei proposed the "Genius Teenager" plan, which was originally intended to find the best talented teenagers around the world to join Huawei and accelerate the breakthrough of basic technology. At that time, Ren Zhengfei mentioned that these talented teenagers were like loaches, drilling invigorating Huawei's organization and activating Huawei's team.
Under the program, the top graduates can earn up to $2.01 million a year after joining Huawei. Guo Ping revealed information on March 28 that Huawei has recruited more than 300 "talented teenagers" in the past two years.
Guo Ping revealed that in 2022, Huawei plans to recruit more than 10,000 fresh graduates.
3
Guard disc logic
Now, how to guarantee a stable rhythm?
To ensure a high proportion of R&D investment, it is important to have a healthy level of cash flow and net cash. Cash flow is like blood, and healthy cash flow is a prerequisite for the survival and ability of a company to continue to operate.
In 2021, Huawei's operating cash flow was 59.7 billion yuan, an increase of 69.4% year-on-year. Huawei's net cash (cash and short-term investments minus interest-bearing liabilities) was RMB241.2 billion, up 11.9% year-on-year. After being included in the entity list in 2019, Huawei's asset-liability ratio continued to decline, from 65.6% in 2019 to 57.8% in 2021.
Meng Wanzhou said that Huawei's financial resilience and ability are improving, and such financial results are the foundation for ensuring continuous investment in the future.
In the long run, in the face of real challenges, Huawei has come to its own conclusions and come up with solutions. Compared with the general approach of laying off employees in the event of a crisis and taking the initiative to shrink the front line, Huawei's choice of the solution tests the decision-making wisdom of decision-makers, and also tests the coordination of the actions of a super-large enterprise with a total of 195,000 employees.
Before this "winter", Huawei was not smooth sailing. The global IT bubble from 2000 to 2003 was a hurdle. Before 2000, Huawei maintained rapid growth. After 2000, the growth momentum took a sharp turn for the worse, from 2.27 per cent in 2001 to negative growth in 2002, when it did not return to its previous growth until 2003.
At that time (2001), Ren Zhengfei wrote in the article "Spring in the Northern Kingdom" that winter will always pass, and spring will definitely come. Riding on the winter, recuperating and strengthening the internal transformation, it will surely usher in the melting of residual snow and the flow of streams. It is difficult to start a business, it is difficult to keep it, and it is not difficult to know the difficulties. In this rapidly changing information society, only those who are afraid can survive.
After 20 years, the crisis reappears, and the reasons for the winter are different, but the logic of wintering is the same in origin. On March 28, Ms. Meng concluded her speech with one sentence. She said that Huawei's greatest wealth is talent storage, thought storage, theoretical storage, engineering storage and method storage, as well as internal process management storage. "These are the real values of Huawei behind the data."
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