The reason why Huawei insisted on not going public was found

Huawei's just-released 2018 financial report also gives it the confidence to not go public.

According to the financial report, Huawei achieved revenue of more than 700 billion yuan and net profit of nearly 60 billion yuan in 2018. However, compared with Samsung Electronics, Huawei still has the shortcoming of low profit margin, and the key reason is the lack of upstream industrial chain. If Huawei wants to truly surpass Samsung, it needs to work hard on the layout of upstream industries to reduce its dependence on chip, panel and other suppliers.

Investing in the future

On March 31, at the 2019 China (Shenzhen) IT Leaders Summit, Yu Chengdong talked about the reasons why Huawei has not yet gone public. He said that a big part of the reason was because the core idea of ​​the founder Ren Zhengfei was to invest in the future. "In order to make their financial reports look good, listed companies will make short-term profits very high, but the characteristic of non-listed companies is that they invest a lot of money for long-term profits."

It is understood that Huawei is a private enterprise 100% owned by employees. In the early stages of development, Huawei took the path of internal financing, with senior management holding shares, and the equity was continuously diluted. Today, Huawei has a younger workforce, with an average retirement age of very early employees, high wages, and an employee stock ownership plan implemented through the trade union. Currently, the number of shareholders is 96,768, and the only participants are company employees. No government department or agency holds Huawei shares.

For a company of Huawei's size, it is inconceivable that it would not go public. After all, many companies use going public as a shortcut to "raise money". In an interview in the early years, Ren Zhengfei clearly emphasized that Huawei would definitely not go public. "The capital market is greedy. To some extent, not going public has made Huawei successful. One of the reasons why we can surpass our competitors is that we are not listed."

"Huawei is not short of funds," as Ren Zhengfei said, the reason why Huawei is not listed is related to its stable performance. Huawei's latest 2018 financial report shows that the company's global sales revenue is 721.2 billion yuan, a year-on-year increase of 19.5%; net profit is 59.3 billion yuan, a year-on-year increase of 25.1%. If calculated at the exchange rate of the day, this is the first time that Huawei's annual revenue has exceeded 100 billion US dollars, and it has also become the first domestic hardware company with an annual revenue of over 100 billion US dollars.

Specifically for each business, Huawei's operator business revenue was 294 billion yuan, basically the same as the previous year, accounting for 40.8% of total revenue; enterprise business revenue was 74.4 billion yuan, a year-on-year increase of 23.8%, accounting for 10.3% of total revenue.

It is worth noting that "the sales revenue of the consumer business exceeded that of the operator business for the first time, which is a structural change," said Guo Ping, Huawei's rotating chairman. In 2018, Huawei's consumer business revenue was 348.9 billion yuan, a year-on-year increase of 45.1%, accounting for 48.4% of total revenue.

According to the 2018 global mobile phone shipment report released by market research firm IDC, Huawei's mobile phone shipments reached 206 million units in 2018, and its market share increased from 10.5% in 2017 to 14.7%. Yu Chengdong said at the Huawei HiLink Ecosystem Conference 2019 held this month that Huawei's mobile phone shipments in 2019 will reach 250 million to 260 million units, impacting the world's number one market position.

Last year, R&D investment exceeded 100 billion

Huawei’s stable performance is inseparable from its investment in R&D and manpower.

The financial report shows that Huawei continued to maintain and increase its investment in research and development in 2018. The total R&D expenses from 2009 to 2018 exceeded 480 billion yuan, and the R&D investment in 2018 reached 101.5 billion yuan, accounting for 14.1% of sales revenue, ranking fifth in the "2018 EU Industrial R&D Investment Ranking" released by the European Union.

The 2018 EU Industrial R&D Investment Ranking shows that Samsung Electronics ranks first with 13.437 billion euros in R&D investment, and Apple ranks seventh with 9.7 billion euros. Huawei is the only Chinese company on the top 50. Although Huawei's R&D investment is less than Samsung Electronics, its R&D investment accounts for a higher proportion of its overall revenue than Samsung Electronics and Apple, which are 7.2% and 5.1% respectively.

In addition, Huawei's R&D staff reached more than 80,000 in 2018, accounting for about 45% of the company's total. Huawei's cash flow from operating activities in 2018 was 74.7 billion yuan, down from 96.3 billion yuan in 2017. Guo Ping said that the reason for the decline was that Huawei increased its R&D investment last year and appropriately increased inventory to face future uncertainties.

With huge R&D investment, Huawei's number of patents exceeds that of other companies. Data released by the World Intellectual Property Organization show that in 2018, Huawei submitted 5,405 patent applications to the organization, ranking first among all companies in the world.

Kang Zhao, editor-in-chief of Operator Finance Network, believes that high-intensity investment is an important reason why Huawei maintains its technological leadership. For many home appliance and Internet companies, the proportion of R&D has long been hovering at a low level of between 1% and 3%.

Regarding the future, Guo Ping revealed: "Huawei will insist on spending more than 10% of its revenue on research and development, and we expect to continue to grow steadily in 2019." Yu Chengdong said at the 2019 China (Shenzhen) IT Leaders Summit that this year is the first year of 5G commercial investment, and next year will see a large amount of investment.

Recently, there is news that Huawei will establish another R&D center in 2019. It has launched a strategic cooperation with Shanghai and plans to invest in the construction of a R&D center in Qingpu. It is reported that the land of Huawei Qingpu R&D base has been delisted. For this R&D center, Huawei has invested nearly 10 billion yuan.

The upstream industrial chain needs to be improved

Although Huawei's revenue and profits have increased significantly, its net profit margin is only about 8.2%. In comparison, Apple's total revenue in fiscal 2018 was US$265.595 billion, and its net profit was US$59.531 billion, with a profit margin of 22.4%.

Compared with Samsung Electronics, the gap between them is also obvious. In 2018, Samsung Electronics' sales were 243.77 trillion won, about 219.1 billion U.S. dollars; its profit was 58.89 trillion won, about 53 billion U.S. dollars, and its profit margin was about 24.2%.

In the view of industry observer Hong Shibin, although Huawei's mobile phone sales are increasing, it lacks a say in the upstream industrial chain. Samsung not only dominates the world in semiconductor business, but can also produce and sell display panels by itself. These are Huawei's shortcomings.

It is understood that Huawei spends a lot of money on upstream industries such as chips every year. According to the ranking of the top ten semiconductor chip buyers in 2018 released by market research company Gartner, Huawei's semiconductor spending last year exceeded US$21 billion, a 45% increase, making it the third largest chip buyer in the world. This means that nearly 20% of Huawei's 721.2 billion yuan in revenue was used to purchase chips and semiconductors.

In fact, Huawei is the only domestic mobile phone company that can mass-produce self-developed chips and install them on flagship phones on a large scale. In January this year, Huawei launched the world's first 5G base station core chip, Huawei Tiangang, and the world's fastest 5G multi-mode terminal chip "Balong 5000" at the 5G Conference and 2019 Mobile World Congress Pre-Communication Conference held in Beijing.

Nevertheless, Ding, an economic observer and editor-in-chief of Ding Technology, pointed out that as a super ICT giant, Huawei provides not only smartphones, but also a large number of communication network equipment and smart terminal products, so the scale of chips required is huge. There are too many chip categories for Huawei to take them all.

In order to achieve a more benign revenue and expenditure target and improve profit margins, Huawei has been stepping up its efforts to develop upstream industries. Recently, Huawei spent 330 million yuan to purchase 550 acres of land in southern Cambridge, England, to build its own chip factory. At the same time, Huawei has established chip research centers in Edinburgh and other places. As of the end of 2017, Huawei has invested about 2.34 billion US dollars in the UK, and Huawei plans to invest about 3.96 billion US dollars in the next five years, part of which will be used to build chip manufacturing plants.

Content Statement: The content of this article comes from Beijing Business Daily, and the copyright belongs to the author. Any views in this article are for discussion purposes only, and do not constitute any investment advice, nor do they represent the position of this public account. Users who invest based on this article and any other views of this public account must bear their own risks and responsibilities. This public account does not assume any responsibility for any consequences caused by this.