Chinese tech giant Huawei reports flat profit in 2016

Huawei net profits up just 0.4%
Huawei net profits up just 0.4%

SHENZHEN, China — It's a mixed bag when it comes to Chinese tech giant Huawei, where profits are largely flat and sales continue to rise.

Net profit edged up 0.4 percent to 37.1 billion yuan ($5.3 billion) in 2016, while overall revenue jumped 32 percent to 521.6 billion yuan ($75.1 billion), according to the company. Profit growth was much weaker than analysts expected, though sales came in line with the company's own guidance released earlier this year.

Huawei holds firm as the world's third-largest smartphone maker, but the company is starting to feel a pinch. Both profit and sales are no longer rising as quickly as before, and analysts say increased spending on R&D and marketing are beginning to thin out margins. Indeed, net profit margin sat at 7.1 percent for 2016 — the lowest rate in at least a decade.

But executives continue to defend Huawei's position. "Margins ranging around 7 percent is appropriate," said acting CEO Eric Xu.

The firm's enterprise unit, involved in developing smart solutions for areas like urban planning and transport, is the smallest in terms of sales, but saw the fastest growth at 47 percent.

Moving forward, the company will also need to consider broader economic conditions, he said.

The Shenzhen-based company remains extremely ambitious, and has continued to spend massively on R&D, shelling out 76.4 billion yuan ($11 billion) to further its business.

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While payoff from today's investments could still be a few years away, CFO Sabina Meng emphasized the company's commitment to continued innovation.

"Products are the most basic building block," she said. "We will make the necessary investments on the resource side."

Huawei was able to capitalize on Samsung's recent smartphone woes, but the hot release of its new flagship Galaxy S8 phone will mean increased market competition, said Nicole Peng, China director at tech research firm Canalys.

"2017 is going to be less easy, and more challenging," she said.

The company has set high targets, aiming to reach $150 billion in sales by around 2020.

But to do so, it may need to rethink pricing strategy, said Kitty Fok, managing director of IDC. Huawei has in the past lowered the price of its offerings in order to be remain competitive.

Analysts say Huawei's investment in R&D, particularly in developing the 5G networks, put the company on track to lead the way in setting overall industry standards — a move that could turn quite positive for the firm's financials.

Huawei is also developing in line with a larger China initiative, dubbed "Made in China 2025," which aims to grow ten key high-tech sectors and support growth.

The U.S. remains an important market for Huawei as the company continues to seek growth, analysts say. But that as well remains an uphill battle — the company holds only 1 percent of overall market share when it comes to smartphones, lagging far behind leaders like Apple, according to data from Canalys.

Concerns over national security have also continued to weigh on its expansion into the U.S., according to experts.

For at least the next few years, however, the company doesn't anticipate opening new branches, and there are no plans in the works for large scale overseas acquisitions, Meng said.