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Both Huawei and ZTE have taken the mobile industry by surprise. Their rise in the last couple of years is nothing short of impressive. These firms are not only winning significant market share in the cheap smartphone war they are also making inroads in wireless telecom equipment. The latest IDC data for Q4-2012 showed that for the first time ever two Chinese firms have secured two spots amongst the five leading global smartphone players with Huawei at number 3, behind Samsung (OTC:SSNLF) and Apple (NASDAQ:AAPL) while ZTE is at number 5, behind Sony. But of the two, Huawei, in particular, is creating disruption beyond just the low-end of the smartphone industry by challenging Ericsson (NASDAQ:ERIC) and Cisco (NASDAQ:CSCO) in telecom equipment.

ABI Research reported the top of the 2012 market share for mobile infrastructure Radio Access Networks (RAN) was shared by Ericcson and Huawei at approximately 24% of the market each. Huawei and Samsung are the only two companies among the leading players of RAN industry whose market share increased in 2012.

Mobile infrastructure RAN Market Positions 2012

1

Huawei

1

Ericsson

3

Nokia Siemens Networks

4

Alcatel-Lucent

5

ZTE

Telecom equipment and smartphones are Huawei's main verticals and the company is gaining share in both of them. The performance of Huawei in mobile infrastructure RAN is even more startling. While Ericcson leads in total sales, Huawei is gaining ground quickly.

Last year, Huawei netted telecom equipment sales of $25 billion, around 29% less than Ericsson's in the same period but this might change in the future. For the current year, Huawei is expecting total revenues, including telecom equipment and smartphone sales, of more than $35 billion and has estimated a net profit of $2.4 billion, a 10% increase for both product lines. On the other hand, Ericsson's annual sales for 2012 were flat at $35.17 billion and its net income dropped significantly by 53.2% to $910 million. The fall in profits came as the sales of network equipment slumped by 11% to $18.11 billion. It's pretty obvious where the sales loss came from.

The rise of Huawei has come largely in emerging markets where it now plays a dominant role, especially China. While Huawei is the market leader in Asia Pacific and EMEA* region, it is virtually non-existent in North America where the leading positions are held by Cisco, Alcatel-Lucent (NYSE:ALU) and Ericsson. But, what it is doing is effectively preventing strong growth for the previously dominant global leaders in these new markets. So, while the easy story for U.S. and European multinationals has been simply to think China and Southeast Asia are big and the growth is a given, as we're seeing in smartphones and other technology product areas, reality is different and companies like Huawei and Lenovo are the reasons why.

In the U.S., Huawei received a vote of no confidence from the U.S. Congress, which advised American companies to stay away from Huawei as it poses a "security threat". Just a few weeks later, Huawei's executives received a warm welcome from the British Prime Minister. In Europe, Huawei employs 7,000 people and in UK alone, it plans to invest an additional $2 billion creating hundreds of valuable jobs in a nation desperately in need of them. So, while the U.S. is playing classic soft-protectionist games by invoking a Cold War-era Red Scare Europe is saying thanks for bringing some of the lost jobs back. Last year, Huawei earned $1.3 billion (4% of total sales) in U.S. telecom and networking equipment.

Meanwhile Cisco has also released its quarterly results for Q2-FY2013 beating Wall Street's revenues and earnings expectations. It reported a 5% increase in quarterly revenues to $12.1 billion and income, excluding special items, increased by 6.2% to $2.7 billion or $0.51 per share. However, the company's forecast disappointed investors. It is expecting revenues to increase by just 4%-6% in Q3 from the previous year amid sluggish economic environment and challenging growth prospects in China and Europe. Although Cisco hasn't mentioned Huawei it has become apparent that the company is creating problems for Cisco's growth in Europe and the emerging markets, complicating its turn-around story a bit.

Cisco

Ericsson

Stock 6M

7.3%

27.0%

P/E

11.8

45.9

EPS

1.74

0.27

Yield

2.7%

2.0%

ROA

7.2%

4.0%

ROE

17. 8%

4.2%

I've been a fan of Cisco's story for most of the year and its modular approach to server and network implementations. It has and continues to serve them well. And the stock has not gotten carried away with the story so there is likely still value there for those that want relatively cheap exposure to technology infrastructure. But, hard-charging Chinese firms are complicating a number of storylines and investors should attenuate expectations accordingly.

Source: Huawei's Rise Complicates Mobile Infrastructure Story