According to news reports and press and social media announcements by high-ranking members of US government, the US government has put Huawei on its so-called "Entity List" of the Bureau of Industry and Security (BIS).  Our read on this is it similar to what happened with ZTE during C2Q18 last year, a move that severely curtailed ZTE's shipments and revenue until ZTE made concessions and was removed from the list.  Many, but not all, Huawei products use technology only available from US suppliers. US-made semiconductors are the most significant Entity List target that Huawei needs to ship its products.  Significant US semiconductor suppliers to Huawei include Intel, Xilinx, and Broadcom.  

Huawei is such a significant vendor in many of our coverage areas, including Mobile Radio Access Networks (RAN), Ethernet Switching, and Servers, for instance, that we feel it is a good time to point out that 2019 market-level estimates may be at risk.  Additionally, since Chinese cloud services players, like Baidu, Alibaba and Tencent cannot delay their capital infrastructure build-outs, alternate suppliers may benefit.

We think it comes as no surprise to Huawei that the US is putting it under pressure.  Just over a year ago, we attended the Huawei analyst summit (April 16, 2018) and its then-chairman said in response to the question "Will Huawei find alternate suppliers for data center products, "Today, Intel is the dominant player.  Our point of view, we look forward to a more diversified landscape; but we work with Intel mainly now."  Additionally, at Huawei's most recent analyst summit (mid-April 2019), the three main keynote speakers, all high-ranking executives of the company spoke about how much progress Huawei has made in developing in-house semiconductors and what its plans are to continue developing more.  We do, however, think that despite Huawei's diversification efforts that it still has significant reliance upon key US chip companies.

Huawei hosted 700 analysts and media participants in Shenzhen China last week to attend its annual analyst summit, nick-named HAS2019.  The company's high-level message was simple - the company is an innovator and is moving down the stack into semiconductors and is partnering with and funding university projects to develop basic research.  This year’s message was different from than the prior-year meeting, but several transformative events have occurred between this meeting and the prior year's, most notably the 2Q18 shipment ban on ZTE, the US / China trade dispute and US efforts to thwart Huawei’s participation in the 5G infrastructure of its allies.  Interestingly, during HAS2019, the Apple and Qualcomm announced their chip-supply and patent settlement, Samsung announced its foldable phone (which has been met with criticism), and Ericsson & Swisscom announced that the operator went live with its 5G network.  All three of non-Huawei events highlighted the importance of Huawei’s chips and innovation announcements.

The company made announcements in its main keynote presentations on day one about seven different chip projects delivered recently or planned shortly.  Chip-level is unusual for what are typically high-level presentations from a keynote-level presentation.  These chips (seen in accompanying pictures) are:

• Ascend 310/910.  Artificial Intelligence (AI) chip for cloud (leads to its Data Center Ethernet Switch iLossLess cloud service)
• OptiXtreme H6 oDSP.  Optical transmission Digital Signal Processor (DSP).
• Hi 1822.  FC/IP chip used for products including Solid State Drives (SSDs)
• Atlas 200 AI acceleration for AI computing intended for September 2019 announcements at Huawei Connect
• Tiangang 5G Basestation chipset
• Balong chip series intended for 5G smartphones and other Customer Premises Equipment (CPE)
• Kungpeng ARM chips for computing

The company shared more details about other chips in breakout sessions on the second and third days of the conference, as well.  The point we are making, though, is that upper-level management provided significant detail about semiconductor developments at Huawei.

The company shared more details about other chips in breakout sessions on the second and third days of the conference, as well.  The point we are making, though, is that upper-level management provided significant detail about semiconductor developments at Huawei.  Another relevant semiconductor-related point to make is that the company is de-emphasizing its reliance on Intel-based architecture and instead is focusing on devices such as ARM-based processors, as well as GPU, FPGA and NPU semiconductors.
We would be remiss if we did not mention some of the system-level announcements and observations related to 5G that were made at the HAS2019 conference, which include:

• MU-MIMO.  Of Huawei’s 70,000 shipments of 5G base stations as of the show, 97% were MU-MIMO based.  The company expects MU-MIMO to be deployed not only in urban areas but also in rural areas.
• SingleRAN Pro.  The company is taking an architectural approach that is different from what some service providers in the world want; it is delivering an integrated product approach where multiple frequencies and base stations are integrated into the same enclosures.  This converged approach is different from the architectural approach being promoted by some smaller vendors like Altiostar, Mavenir and Parallel Wireless, which uses the O-RAN standard and features a disaggregation between various components like antenna and base band processing.  Huawei’s rationale is that it is less expensive on capital spending and operational spending to use the integrated approach.
• Converged Mobile Packet Core.  The company plans to have 1H19 commercial availability of its 2G/3G/4G/5G NSA/5G SA packet core system.  In slides depicting this product, it prominently features chip systems such as GPU, FPGA, NPU, and ARM but specifically excludes x86 references. 
• Huawei expects to deliver its first 5G phone in November 2019

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even more follow on

Today, Amazon announced that it will acquire eero, a consumer mesh WiFi equipment company that as of 3Q18 had 13% revenue share.  In 3Q18, the  consumer mesh WiFi market measured just over $150M, which was up just over 34% Y/Y.  The number one player by revenue was NETGEAR in 3Q18, followed very closely by Google, who had retained the number one spot for the 5 quarters before 3Q18.  Now, with Amazon's acquisition of eero, just three players will have well over 3/4th of the consumer mesh WiFi market.  What's interesting here is that two Internet titans, Google and Amazon, are attempting to disrupt the consumer networking market that up till 2015 was dominated by hardware players such as NETGEAR, Linksys, TP-Link, D-Link  (consumer WiFi vendors) and adjacent players such as Technicolor, Arris, Huawei, ZTE and Nokia (Broadband Customer Premises Equipment vendors).

So, what does it mean that now both Amazon and Google are battling for primacy in the home networking market? 
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It is complementary to their interactive speaker business.  Both Amazon and Google have introduced various hardware products for the home, but most successful have been both of their interactive speaker products, which for Amazon has been the Echo and Dot and for Google Home.  These speakers are generally in an "always-on" mode, which allow them to listen to all sounds nearby, and which also means they are generally always connected to the WiFi devices in the home.  By always being connected, these speakers consume much of the available WiFi bandwidth in the home, deteriorating the available spectrum for other devices.  One obvious solution, which is being made available by wireless chip giant, Qualcomm, is to integrate WiFi chips with speaker chips.  That's the direction that both Amazon and Google may pursue - to integrate Home with Google WiFi and Echo with eero.  This will mean that multiple WiFi mesh devices will also represent multiple interactive speakers in the home, all while combating the over-use of WiFi spectrum in the home.
These Internet giants can, and probably will, attempt to overwhelm the market with low prices, subsidized by primary businesses.  We already see that Google's price for a 3-pack is 37% lower than eero's comparable system.  Our working theory is that Google has been selling close to no margin and that eero has been experiencing a 30's percent margin.  This is probably not good news for the following companies who either do have gross margins above 30% or we assume do, like NETGEAR, TP-Link, D-Link, and others mentioned above.

​The main theme of the the Huawei HAS 2018 meeting keynotes was Artificial Intelligence and, secondarily, nearly ubiquitous networks connections across the world.  Huawei expects 86% of enterprises to have experimented with AI by 2025 (<5% in 2018).  It is leveraging AI across nearly all its products and will offer a full stack AI solution to all Huawei partners at its @Huawei Connect 2018 conference (Oct 10, 2018).

More specifcially, Huawei is using AI to elevate products & solutions to new levels: cloud, networks, devices, EI, SoftCOM AI, and Intelligent phones.  The company's strategy has changed over time and is now AI-focused:

2006-2011: Single strategy: All IP
2012-2017: SoftCOM: All Cloud
2017+:     All Intelligence: SoftCom AI (autonomous networks / services 2.0) - this reduces operating and maintence costs

The company expects that networks will be 10x more efficient in the operation of equipment as a result of AI.  

By 2025, Huawei expects 440M AR/VR users, 40% of cars to be 'connected," 80% of users with access to mobile broadband, usage of 1 Gbps / user / day (versus .03 in 2018) and 20B connected devices worldwide.


Connected Devices Forecast (Huawei) by 2025: 40B sensors and 100B connections.  This thinking is based on data including that there are: 

• 4B livestock in the world
• 300m streetlights
• 1.8B utility meters
• numerous bike programs in major cities
• numerous greenhouses

The company's product lines are very diverse; to wit, the company introduced a helmet for the blind, which will be available soon.  

Huawei expects NB-IoT (LTE-based IoT capability) to reach almost full coverage in China in 2018.  Additionally, the company expects NB-IoT to reach 100 networks by the end of 2018 (versus 39 in 2017) and to be available on 1.2M base stations (from 0.5M in 2017) and to be connected to 150M connections (versus 10M in 2017).  

The company boasted about several developments:

1. Chipsets for cloud data center systems.  The company highlighted its internally developed Atlas (intelligent cloud hardware).
2. The company expects its cloud services will become one of major 5 clouds.  Uses smart NICs for CPU optimization and is 'open.'
3. The cloud service from Huawei will be low cost because Huawei makes all the equipment necessary to build this cloud
4. Internet of Vehicles system was was built for Group PSA (French auto company known for the Peugot brand)
5. 5-An example of the company's "Intent-Driven Network" was its AI-based premium home broadband for a better user experience on Chinese based PON systems in use today.  Real time data collections allows 40% reduction on door-to-door service and fault prediction of 85% of Wi-Fi faults and 30% of all network faults.
6. AI-enabled, software-defined cameras are now available that perform low-light feature extraction (e.g. facial detection/comparison) over 85% of the time.  And, using the Huawei AI chip, it can outperform CPUs by 25X and GPUs by over 6x.
7. VR/AR will create a $2.7 trillion ecosystem in the future.  The company reminds the audience that it demonstrated teh first CloudVR Proof of Concept at the March 2018 MWC conference.

Q&A after keynote:
Mr. Eric Xu, Rotating Deputy Chairman of Huawei dodged several important questions relating to trade tariffs, cloud business unit revenue targets, growth rates of each major business units, specifics about AI full-stack claims made during the keynote, and instead focused generally on the AI theme.  Xu did, however, however, answer a handful of questions that were quite interesting:  Huawei won't acquire DRAM, Flash companies; and that 5G is not so revolutionary - it is just an evolution following LTE. Additionally, Xu mentioned that in 2H18, Huawei will launch end to end 5G solutions  and by 3Q19, it will launch 5G capable phones.  Xu said Huawei will continue to work with Intel on x86 for the foreseeable future.

More Q&A specifics:
Trade Tariffs and ZTE.  (In a moment of levity, however, Eric Xu smiled when the words ZTE were mentioned - recall that a day earlier, ZTE was penalized by the US).  We will focus on our customers and will ultimately survive. 

Cloud 1.5B by 2020, will you hit the target?  Will offer cloud services to telco service providers.  Huawei smartphones will leverage the Huawei cloud.  Enterprise customers will consume cloud services such as video, computing.  In future, trend will be enterprises will move to hybrid cloud and public cloud will take a major share.  Huawei cloud provides compute/storage/networking to enterprises and government.  200K x86 servers in Huawei cloud.  Revenue with external customers - won't share it with you - maybe .  

AI chipset question:  We don't position chipset as a standalone business - won't sell to external customers.  Will be used to differentiate Huawei products.  Smartphone - we use multi-vendor strategy always; in other worlds; have multiple Qualcomm, NTK and others.  Remain committed to multi-vendor strategy.  Don't want vendor lock-in, however.  If we only have one vendor, what might happen to our smartphone business, Xu asked.  

Enteprise business growth? Declined to comment on specifics, but said he encourages each to grow rapidly.  

How do customers get to 86% AI usage (the question was asked by an audience member by incorrectly referring to the statistic that was made during the keynote - specifically, Huawei said AI experimentation will be 86%, not AI usage)?  Will give clearer answer at Huawei Connect 2018.  For now, can share that we will use AI on ourselves first, then help customers on various functions such as finance, human resources, networks, etc.  

Supply chain - will you acqire your suppliers?  We do joint innovation with suppliers to meet Huawei's needs; push multi-source strategy, however.  Will not invest in DRAM, display, flash.

5G wasn't mentioned much in the presentation, why?  We don't have as high expectations as some others; 5G is just one of many products we offer and is just a natural evolution from 4G.  You don't have a fundamental difference between 4G and 5G - consumers just see faster speed and lower latency.  LTE already support autonomous driving.  Past couple years, governments have regarded 5G as too important.  June 2018, will only address eMBB - faster speeds.  2019 - will have fully 5G compliant system that does low latency.  4G is pretty robust; we don't see 5G as a national coverage network - it'll just focus on city centers.  However, once one carrier announces 5G, then all others must.  50% of Chinese have wireless connection capable of 4K but there are still no 4K stations.

2H18, end to end 5G solutions available.  3Q19, will launch 5G capable phones.

Share trends for Huawei at operators.  Revenue growth of telecom services is a challenging topic.  This revenue growth topic is why titan operators express concern about moving to 5G; instead, Huawei thinks moving to improved intelligence will assist operators.  Video will become more and more important as telcos become media companies too.  

Will AI become a privacy concern?  Any technology has double-sided effects.  With AI, some believe it can be dangerous.  Xu believes in the wisdom of man.  Look back to history of mankind, and our humanity can do same for mankind.

Will Huawei find alternate suppliers for data center products?  (Xu also smiled about this question before answering).  Today, Intel is dominant player.  Our point of view, we look forward to more diversified landscape; but we work with Intel mainly now.

Nokia was bullish on its technology developments and cautious on telco capex.  CEO Rajeev Suri described the telecom market as having tough market conditions and expects telco equipment market revenues down in 2018.  He said the Swedish competitor pricing aggressively and that it will be difficult to keep share in China with 5G ramp.  He said Nokia is executing on plan to grow non telco verticals – and it will take 3+ years before it is sizable enough to potentially offset telco challenges.  He emphasized a key strength is its focus on cost reductions.  He highlighted success in cable MSO market and that its FP4-based router will ship in a few days.  Suri thinks 5G could roll out in China first, maybe tied with US.  Nokia CEO's comments were quite similar about 5G rollout timing expectations compared to comments made at Huawei’s recent conference (2019 initial deployments; chipsets 2019; broadening deployments in 2020).

Some more details from Rajeev Suri's presentation:
Ericsson.  We were surprised that the CEO of Nokia took the opportunity to take some digs at Ericsson.  He said that Ericsson is pricing aggressively; it also shared some quantitative statistics about competitive take-outs of Ericsson installed base. He argued that it has broadest portfolio in industry (fixed, software are examples).  

China.  Two interesting comments about China – a) will be difficult to maintain share in China as 5G rolls out, b) China might be first to deploy 5G.  
Emphasized that Amazon Web Services is making a presentation at this conference.  Said its new FP4-based routers are more efficient than any competitor and will be so for at least the next year.

Other presenters made comments about 5G mainly.  Here are some interesting comments:
Artificial Intelligence.  The company has a lot of network automation technology that is it working on but would not share details about this technology.  We guess Nokia is more open with its customers and that it'll make announcements at MWC '18 in Barcelona.
5G Radio.  Beamforming is a key technology that will be highlighted in 5G.  Also, the company's separation of Stage 1 and Stage 2 MIMO processing makes the bandwidth needs from baseband to array be much less than competitors.  Additionally, the company explains that its expected systems will have dramatically higher efficiency than competitors - again, the company kept its secrets here under wraps.  Late 2018 will see first 5G deployments, going into 2019.
IP/Optical.  Basil Alwan, President IP/Optical division said the first FP4-based product went to production end of the last week.  Major customers will take shipment before the end of this quarter.  The company will ship its 57 Terabit router during 1Q18.  SD-WAN will replace MPLS VPNs over time, perhaps at a rapid pace.  

Service Provider presentations:
Amazon Web Services IoT.  Satyam Yadav, GM of AWS IoT made a presentation at this meeting.  The presentation focused on how Amazon's IoT software and its services would be used in a partnership with Nokia to deliver Amazon IoT services.  
Sprint.  Ron Marquardt, CTO.  He is not sure how much customers might pay for lower-latency connections available from 5G.  Now that the uncertainty of the T-Mobile US acquisition is beyond us, Sprint says it is rapidly focusing on spending to upgrade its network.  Sprint also said it plans to deal with fewer vendors in the future.
Elisa. The Finnish operator presented data about its extraordinary data traffic growth and its per-subscriber data usage being far above competitors as well as other service providers in the world. 
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This week, we attended the Global Mobile Broadband Forum, held in London, and found several interesting points we thought we would share.  Much of the focus of the conference was about 5G wireless networks, and since the show was in London, many of the service providers who we met with and listened to were European.  The sponsor of this event was Huawei.

• 5G is expected to deliver 10 times the bits per second for each dollar spent compared to LTE.  This is according to Johan Wibergh, CTO of Vodafone. 
• 2 year payback on microcells (small cells).  Telus EVP Eros Spadotto explained that the Canadian operator installed small cells in locations where 10% of traffic was occurring, and shortly after they were installed, these began carrying 30% of traffic.  Telus believes it met untapped demand.  The company views its strategy going forward to be installing more small cells and no more macro sites.
• The 5G timeline appears to be for end of 2018 Fixed Wireless deployments, 2019 mobile trials and 2020 commercial deployment.  We consider the following in assessing this timeline: 
  • According to Huawei, the Chinese government is pressuring China Mobile to be first to deploy 5G Mobile.  Additionally, Huawei's work with radio chip companies leads it to believe that the 5G capable chips that enable smartphones will not be available in early 2018, and its assessment it will take a year to make 5G smartphones once the chips are available, so 2019 is the earliest smarphones can be available.  Huawei says it expects to deliver its own 5G CPE hardware for fixed mobile by later 2018.
  • BT Group CEO Gavin Patterson expects to have 5G commerical in 2020 
  • Deutsche Telecom CTO Dr. Bruno Jacobfeurborn expect 5G in 2020
  • Orange SVP Radio Arnaud Vamparys expects 5G commerical launch in mid 2020
  • Telefonica CTO, CIO Enrique Blanco expects 5G not before 2020
  • Softbank VP Mobil Networks Makoto Noda expects 5G in 2020 before the Olympic Games
  • NTT DoCoMo CTO Hiroshi Nakomura expects 5G to be commerically ready in early 2020.
• Huawei said millimeter wave 5G won't be used for outdoor mobile, only potentially indoor and fixed wireless.  28 Ghz and similar frequencies are not suited for weather and obstacles, according to the company.
• Huawei, like others large vendors, expects cellular baseband processing for the lower layers (PHY and MAC) will remain a specialized hardware function.  However, higher layer functions such as cell selection may end up in virtualized systems running CPUs.  We heard similar viewpoints from baseband processor company, Caviuum, at the MWC Americas show a couple months earlier.
• Tower sharing is a major trend for the future.  All things being equal, as tower infrastructure gets shared by multiple operators, this reduces capital spending.  We expect tower sharing to be a major trend, which will put pressure on capex for many years to come.
• There are two camps in 5G, largely surrounding spectrum and major vendors.  The first camp are Western vendors (Nokia and Ericsson) and the US operators, who seem to be embracing relatively low frequencies for 5G as well as millimeter wave, and then there is the 3.5 Ghz frequency camp, which has suporters in China, Europe and major vendor, Huawei.  We realize this may be an oversimplification of the industry dynamics, but there's a case to be made that China + Europe may end up with a supply chain somewhat unique from the US-centric chain.
• IoT is a major trend, and from what we heard from most operators is it'll be running on LTE for a long time, despite how 5G is expected to be a big IoT capable network.  
• 5G business case still not there yet.  Most European operators are saying they haven't seen a compelling business case to deploy 5G yet (BT, DT, Orange) and Telefonic said it'll deploy 5G when it needs to competitively.
• Fiber good.  Microwave not mentioned.  Every European carrier that we met or who spoke with (plus Telus in Canada) expects to deploy fiber to cell sites and made no mention of microwave.

Last week we attended Huawei Connect conference in Shanghai which is turning into a massive event for Huawei with significant customer attendance.  It was tons of fun to talk to customers, catch up with friends, and the different parts of Huawei while on the show floor.  While there are ton of highlights from the show, here are a few highlights that peaked our interest.

• Huawei became the first vendor to offer an 802.11ax Access Point (AP).  Sampling now and shipping in early 2018.  We ran into quite a few engineers on the show floor that were very proud of being the first vendor to announce a product in this space and learned quite a bit beyond the spec sheet.
• Huawei customers are broad based and growing significantly.  We ran into many large customers, especially from western Europe, that are looking to partner with Huawei beyond just point product purchases.  In some cases, this was campus switching and WLAN, in others it was DC switching and campus.  Huawei is doing a very good job of providing solutions and not just point products and customers are embracing it.
• 1% of customer spend.  Huawei consistently highlighted that it was only targeting 1% of customer spend, leaving the other 99% to its partners.  We found this interesting that as Huawei grows they are trying to assure their partner community that they will not go after the entire software and solution stack and instead focus on the pipes and compute.  In areas of IoT they would integrate deeply with those partners, but the goal was to provide a complete selection directly to the customer.

There were a ton of other highlights, we are happy to discuss, if anything sparks your interest, let us know.