Source: Fresh Dates Classroom
September 1865, Shanghai.
Under the planning of Li Hongzhang, the governor of Liangjiang, the Jiangnan Machine Manufacturing Bureau, the largest arsenal in modern China, was established.
Li Zhongtang famously said that he showed a vision that surpassed his contemporaries: "If China wants to strengthen itself, it is better to learn foreign sharp weapons; if it wants to learn foreign sharp weapons, it is like looking for a tool to make instruments, and it is better to teach its methods without having to exhaust its people." ”
In 1867, the Jiangnan Manufacturing Bureau copied the German Mauser 11 mm breech rifle, which was the first rifle produced in modern China. However, as a government-run enterprise, the bureau has strong habits and low management level, and various drawbacks have gradually emerged.
In 1871, the Jiangnan Manufacturing Bureau began mass production of Remington-style breech rifles, each costing as much as 17.4 taels of silver, while the cost of foreign products was only 10 taels of silver.
What is more expensive than the foreigners? Lord Zhongtang was furious and paid for the import of foreign guns.
This highlights a topic that is still worth exploring, that is, to make a product does not mean that a product can be done well, and behind it involves a series of factors such as management, technology, and processes, which is a highly complex system engineering.
In the same year that the Gangnam Manufacturing Bureau was founded, in Finland, far away in Northern Europe, engineer Frederick Edstein also opened a factory. Located on a river in the town of Tampere, this small factory is mainly engaged in the production of wood pulp and cardboard. No one expected that more than a hundred years later, this small workshop would grow into a famous company - Nokia.
Big waves, ebb and flow. Today, in the communication equipment industry, there are only four remaining first-tier manufacturers, namely Huawei, ZTE, Sweden's Ericsson, and Finland's Nokia.
Since the United States added Huawei to the entity list in 2019, the entire industry has moved forward in an unprecedented and peculiar way under the influence of external forces, and has departed from the usual cyclical fluctuations. Chinese manufacturers are struggling to support themselves under the dual pressure of the market and supply chain, while Western manufacturers continue to break into the vacuum of the global market and run wildly.
Two years have passed, what is the situation of major manufacturers? What is the trend of the industry?
This article will compare and analyze the annual reports of the four major equipment manufacturers and find the rules from the data. The main focus is on the following dimensions:
- Revenue overview: sales and profit
- Revenue segmentation: by business and region
- Financial soundness: cash flow, assets and liabilities
- R&D investment: personnel and funds
For ease of comparison, the following exchange rates are used in United States dollars:
▊ Revenue overview: sales and profit
In 2021, the revenue ranking of the four major equipment manufacturers is Huawei, Ericsson, Nokia, ZTE, maintaining the pattern of "one super, two strong, one follow".
In the 2021 Fortune Global 500 list, Huawei ranks 44th, Ericsson ranks 480th, and Nokia ranks 485th. The lowest revenue on the list is $24 billion, and ZTE is constantly approaching this threshold.
Huawei's operating profit was $19.1 billion, with a margin of 19.1%, occupying the top spot. Ericsson and Nokia's operating margins are both around 10%, and the situation is getting better. ZTE had the lowest profit margin at 7.6%.
Huawei's 2021 sales plummeted by $39.9 billion year-on-year, down 28 percent, and revenue declined for the first time in nearly two decades. Under the repeated suppression of the United States, the momentum of Huawei's rapid development over the years has been greatly curbed.
In contrast, the revenue of the other three companies has shown a steady upward trend. ZTE, in particular, has a 13% year-on-year increase in revenue in 2021. ZTE has reached a settlement with the U.S. Department of Commerce in 2018, and it faces a more relaxed business environment than Huawei.
Huawei's operating margin in 2020 fell slightly year-on-year, but it soared to 19.1% in 2021, which is not a common sense change considering the situation it faces. According to its annual report, the "other net income and expenditure" for 2021 amounted to $9.5 billion, mainly including "net income from the disposal of subsidiaries and businesses" of $9 billion, thanks to the sale of the "Glory business" and "subsidiary hyperconfusion (server products)".
That is to say, Huawei's operating profit in 2021 will come from business sales, and if this factor is excluded, the operating profit margin for the year is 10%, which should better reflect the actual operating conditions.
Ericsson's profit margin reached 13.7% in 2021, and the growth rate has slowed down. Nokia's operating margin soared from 4% to 9.7% in 2021, and overall profitability increased significantly. ZTE's profit margin also improved significantly, reaching 7.6%.
▊ Revenue segmentation: by business and region
Revenue by business
Sales of Huawei's consumer business fell sharply by 49% year-on-year, and the proportion of revenue shrank to 38%. The operator business decreased by 7% year-on-year, accounting for 44% of revenue, and became the largest business again.
Enterprise business bucked the trend by 2.1%. Huawei's recently established major legions are to form breakthroughs in various vertical fields, "sprinkle beans into soldiers", and shape new growth poles to offset the decline of operators and consumer businesses. However, the business base of enterprises is small, and it is still extremely challenging to quickly make up for the decline in overall revenue.
Ericsson's network business increased by 1.1% year-on-year. 2021 is a year of rapid development of global 5G, but Ericsson's network revenue has not increased significantly, in large part because China's sales have decreased by $1 billion year-on-year, which is estimated to be related to the "god assist" of the Swedish Telecommunications Authority.
At present, Ericsson has 172 global 5G contracts and 121 commercial 5G networks.
Nokia's mobile network business fell 6.5 percent year-over-year, mainly due to a decrease in its north American market share, with competitors including Ericsson and Samsung. At present, Nokia has 214 global 5G contracts and 74 commercial 5G networks.
Nokia's network infrastructure business increased by 13.9% year-on-year, mainly including fixed network and submarine cable business. Huawei is being suppressed, and Ericsson has no fixed-line business, which objectively provides Nokia with a larger market space.
ZTE achieved overall growth in various businesses, especially the consumer business, with an increase of 59%. The growth rate of government and enterprise affairs by 16% shows an active layout in vertical industries.
Revenue by region
Huawei's revenue in various regions showed a trend of overall decline. The main battlefield, China, saw the largest decline in revenue, reaching 30.9%. Europe, the Middle East and Africa, as a major overseas market, saw revenue decline 27% year-on-year. The overall market situation remains grim.
The North American and European markets, as Ericsson's base, both grew significantly year-on-year. Northeast Asia saw the largest decline, mainly affected by the Chinese market.
The North American and European markets are Nokia's base, both of which grew year-on-year. Greater China revenue increased 2.3% year-over-year, primarily due to the recovery in the Chinese market.
In addition to the Asian region, ZTE as a whole showed a growth trend. China grew by 14.7% year-on-year, with the highest growth rates in Europe, the United States and Oceania at 23.8%. The U.S. "Clean Network" program did not have a significant impact on ZTE's overseas sales.
▊ Financial soundness: cash flow, assets and liabilities
Huawei's cash and cash equivalents at the end of 2021 decreased by $7 billion year-on-year, a decrease of 25%. Both Ericsson and ZTE saw significant growth, with Nokia down slightly by $200 million.
Taking the past three years as the timeline, Huawei's net cash flow from operating activities fell sharply by US$8.8 billion year-on-year in 2020. A further $3.9 billion year-over-year increase in 2021, which, when broken down, found a significant decrease in cash from the sale of goods and services, while a greater decrease in cash paid to suppliers and employees led to an increase in net cash flows.
The net cash flow from operating activities of Ericsson, Nokia and ZTE increased year on year, reflecting the robustness of the ability of operating activities to access cash.
In terms of asset-liability ratio, the four manufacturers are in the range of 55% to 70%. ZTE had the highest debt ratio at 68 percent; Nokia had the lowest, at 56 percent.
In terms of overall operational efficiency, Ericsson had the highest total asset turnover rate at 81%, followed by ZTE at 72%. Huawei had the highest per capita sales at $510,000; it was followed by Nokia at $290,000.
▊ R&D investment: personnel and funds
Huawei has the highest number of R&D employees, reaching 107,000, accounting for the highest proportion, at 55%. Ericsson has the fewest R&D employees and the lowest proportion, in stark contrast to the other two companies.
If you look at it from another angle, it leads to a question worth thinking about. Huawei is known for its high-intensity work in the industry, which means that its R&D department should work more intensively than Ericsson. Under this premise, the proportion of Huawei R&D employees is still twice that of Ericsson. As a former king of wireless, is the overall efficiency of Ericsson's R&D system better?
With the past three years as the timeline, major companies are constantly increasing their investment in research and development.
In the past three years, Huawei has invested a total of $65.3 billion in research and development, followed by Nokia with a total of $14.5 billion. As a typical knowledge-intensive industry, sufficient R&D investment is a necessary condition for maintaining industry leadership and building industry barriers.
▊ Comparative company studies
From the above annual report data, we can see the differences between the various companies. Huawei, in particular, shows obvious uniqueness. To this end, the author adopts the method of "comparative company learning" to compare the characteristics of the four major equipment manufacturers horizontally, and tries to explore the similarities and differences and laws.
This article focuses on two factors:
1. Listing or not
Among the four major equipment manufacturers, only Huawei is not a listed company, which is very different. The purpose of companies choosing to go public is to leverage more funds through stock market leverage to expand the scale of operations. ZTE is listed in Shenzhen and Hong Kong, Ericsson is listed in Sweden and the United States, and Nokia is listed in Finland, France and the United States, all of which can obtain multi-party financing channels.
If Huawei is not listed, it has one less important financing channel. However, it chooses the method of internal full shareholding, and obtains funds through endogenous force to obtain funds and reinvest. This approach creates two by-products: one is to deeply bind employees and the company beyond the scope of conventional contractual relationships; the other is to provide stronger material incentives for employees through considerable stock dividends.
Of course, there are drawbacks to listing, the company is responsible for shareholders, and every move is in the spotlight of the public. Companies need to release various financial reports on a regular basis, and each report discloses that either meet analyst expectations and the stock price rises, or does not meet expectations and the stock price falls. This brings the most intuitive market value fluctuations, and constantly stimulates the nerves of investors. Therefore, listed companies often focus on short- and medium-term strategies, maintain performance growth and improve profitability to cope with the doubts of the capital market.
Huawei is not listed, it is not kidnapped by capital, it can develop a long-term or even radical strategy, so as to seize the commanding heights of the industry.
2. Industrial relations
Huawei is strivers-oriented, while Western companies are people-oriented, and there is an essential difference between the two. If their purposes are reversed, there is a strong sense of contradiction because every company's genes are different.
Huawei adopts a heavy push-pull management method. On the one hand, it provides incentives beyond the industry level to attract employees to run continuously; on the other hand, it uses strict rules and regulations and value education to prevent employees from slacking off. Huawei's grab for surplus value is fierce, but it will set aside more profits and employees to share, and this unique distribution mechanism is the basis for its rapid development over the years.
But can Huawei maintain this mechanism of high returns all the time?
This is premised on the company's rapid development, once the growth slows down, the incentive is bound to decrease, and the balance is easy to break. As a result, Huawei sometimes takes a "sporty" approach to activating organizations.
For example, in 2016, it sent more than 2,000 domestic R&D personnel overseas to participate in the expansion of the first-line market. This kind of operation is rare in the global business community, and it is a fantastic story in the eyes of Western friends.
This "carrot + stick + slogan" management method also has certain limitations.
For many "post-70s" and "post-80s", "material scarcity + collectivism" is deeply engraved in the memory of childhood, and when they join Huawei, it naturally fits the company's unique mechanism and culture. However, for the "post-90s" and "post-00s", they grew up in an era of "material abundance + information explosion", paying more attention to personal feelings and self-realization, and the effect of "carrot + stick" will be reduced.
According to a graduate employment survey, the most popular emerging occupation after 95 is anchor or Internet celebrity. For the new generation, they have more choices, and the model of deeply binding themselves to a company or even "996" every day is no longer the first choice.
Western companies use a light push-pull management approach. The relationship between the enterprise and the employee is a regular contractual relationship, and there is not much other factor and too much mission. Reward and punishment measures are more moderate, adopting a more traditional distribution method and relying heavily on a mature process system. In terms of execution, the two Nordic companies may be weaker than Huawei, but the balance of pushing and pulling is less affected by external changes and is more stable.
Western companies promote a more neutral corporate culture based on universal values, relying on the self-management of employees based on contractual relationships, regardless of their age or country. In a relaxed and free atmosphere, the work can still run in an orderly manner, and coffee and vacation do not affect the release of high-quality products. Why?
The core of Western companies is based on the modern enterprise system precipitated from the era of large-scale industry to the information age for more than a hundred years, and the operating system derived from it. This is a process based on the experience of countless enterprises rising and falling, by major companies, major business schools, top consulting companies to work together, constantly refine mature methodologies, and iterate in practice. The optimal operation mechanism formed by years of running-in, coupled with the silent corporate culture of moisturizing things, has approached the management realm of "doing nothing".
▊ Conclusion and outlook
In the past two decades, the communications industry has been in a period of rapid development. Especially in mobile communications, from 3G to 4G to the current 5G, the evolution of each generation of technology has brought about large-scale network investment, the commercial use of each generation of network will stimulate a large number of new applications, and the outbreak of each round of new applications will promote the expansion of the network. Communication equipment manufacturers have enjoyed the dividends of the development of the times in every wave. As Chinese manufacturers, Huawei and ZTE continue to expand in the global market and have joined the first echelon.
However, with the arrival of 5G, the impact of geopolitics on the industry is intensifying. The "long-arm jurisdiction" of the United States is like a sword of Damocles, hanging over all equipment manufacturers, and Chinese manufacturers have been the most affected.
Huawei is still on the U.S. Entity List, and with the restrictions of the "clean network," its momentum has been greatly curbed, and sales have fallen for the first time in two decades.
Ericsson and Nokia have frequently attacked in the first round of 5G, and have won considerable 5G contracts and completed the first round of layout. In April 2021, the 3GPP officially named the 5G evolution technology 5G-Advanced, and plans to start standardization from Rel-18. Major operators around the world are also actively exploring 5G-Advanced business scenarios, and it is expected that the two Nordic companies will continue to occupy a favorable position in the next wave of 5G.
ZTE reached a settlement with the U.S. Department of Commerce as early as 2018, and the compliance observation period ended in March this year. ZTE's supply chain can operate normally, except for the limited markets of some developed countries, the overall operating conditions are relatively stable.
2021 can be said to be a turning point for the entire industry.
Under great pressure, Huawei's revenue began to decline sharply, while the other three manufacturers showed a steady growth trend. In the future with this timeline, if there is no major change in the external environment, it is expected that the development trend of this "scissor difference" will continue, and the industry pattern will further differentiate.
For Huawei, "surviving with quality" is still the main goal at present. In the case of shrinking operator business and consumer business, finding a new blue ocean is a top priority, including the establishment of major armies, the expansion of vertical markets, as well as entering the automotive industry and cooperating in car manufacturing.
But nothing can be achieved overnight, and Huawei is now in a race against time to build a new growth pole as soon as possible. If revenue and cash flow continue to be under pressure, it is expected that Huawei may also control the scale by selling assets in exchange for valuable cash flow. In addition, in the case of a sharp decline in revenue, how to maintain the cohesion and stability of more than 100,000 employees is also a very challenging thing.
This change in the industry continues to this day, bringing a lot of inspiration to the Chinese people. Although the model of division of labor and cooperation in the global industrial chain has long been deeply rooted in the hearts of the people, once the international political and business environment changes, this model will in turn become a constraint, and even directly crush an enterprise.
For the domestic industry, not only to have a "sharp weapon", but also to have a "tool to make", and strive to grasp more discourse power in the upstream of the industrial chain, such as advanced process lithography machine, core chip, high-end EDA software, etc., in order to avoid being controlled by people.
Of course, there will be thorns on the way forward, but win-win cooperation will continue to be the theme of this world.
The rolling Yangtze River flows into the sea in the east, and it is unstoppable.
(End of full text)
Resources:
[1] Huawei Annual Report 2021.
[2] ZTE Annual Report 2021
[3] Ericsson Annual Report 2021.
[4] Nokia Annual Report 2021.
[5] Jiangnan General Bureau of Machine Manufacturing, Baidu Encyclopedia
[6] Huawei built 15 legions in front of and behind the scenes, the financial world
[7] Huawei's car BU expands to 14 major divisions behind: two forks in the road and its cost, Tech Planet
[8] What happens to Huawei if it doesn't pay dividends? Financial magazine
[9] This generation of workers does not want to 996 anymore, and the rice boss wears it
[10] One Hundred Years of Turbulence: Chinese Enterprises 1870-1977, Wu Xiaobo, CITIC Publishing Group
[11] "Long-Arm Jurisdiction" in the United States, Gao Wei, China Finance and Economics Press
[12] "Strivers-oriented, Huawei Human Resource Management Outline", Huang Weiwei, CITIC Publishing Group
The author of this article is Qiu Ming, a senior practitioner in the communications industry.
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