February 28, 2017 / 6:56 AM / 6 months ago

Huawei staff fear cuts as smartphone profits disappoint

A worker adjusts the logo at the stand of Huawei at the CeBIT trade fair in Hanover, in this file picture taken March 15, 2015.Morris Mac Matzen/File Photo

HONG KONG/BARCELONA (Reuters) - Staff at China's Huawei Technologies Co Ltd [HWT.UL] are bracing for possible jobs cuts after internal memos highlighted intense pressure to improve earnings and an executive said the flagship smartphone business had missed internal profit targets.

Huawei, which rose rapidly to become the world's third largest smartphone maker, is aiming to narrow the gap with leaders Apple Inc and Samsung Electronics. But the company faces challenges after losing its top spot in China, the world's biggest market, to new contender Oppo last year.

Huawei's mobile unit missed an internal profit target for 2016 even though revenues exceeded targets, Richard Yu, head of its consumer business division that includes mobile device operation, told Reuters in an interview at the Barcelona Mobile World Congress this week.

"It is still profitable but the profit margin is very low," Yu said of the unit that contributes around one third to the group's revenue.

In an internal memo sent last Friday, Huawei Group founder and CEO Ren Zhengfei urged all employees to work hard, saying the company would otherwise "fall apart".

"Thirty-something strong men, don't work hard, just want to count money in bed, is that possible?," Ren said in the memo seen by Reuters. "Huawei will not pay for those that don’t work hard."

The remarks have unnerved some of Huawei's 170,000-strong workforce, 45 percent of which are in research and development, a division said by Huawei staff in online communities to be most insecure.

"Everybody is nervous," said a 36-year old engineer in Huawei’s consumer business unit who declined to be identified due to the sensitivity of the issue.

"We are now all thinking more of the next steps, realizing permanent employment with the company is no longer a given."

According to company insiders, Huawei maintained its 5 percent annual quota to eliminate the worst performers, but was seen indirectly pushing underperformers out by asking them to relocate to undesirable posts.

"Huawei does not have layoff plan," the company said in an emailed response, declining further comment.

STREAMLINING

Consumer business chief Yu said in his New Year's address to staff that the company needed to adhere to a "streamline strategy" in personnel as well as product portfolio as it must make profitability its focus in 2017.

    "We will seek to improve efficiency and profitability by focusing on organizations at all levels, every employee, and every detail, and strictly control costs and risks to ensure sound development, " Yu said in the memo, seen by Reuters.

    "We will not tolerate low-performing managers, and prioritize removal of managers who fail to make noteworthy improvements after working in a position for several years."

Huawei made a net profit of $5.69 billion in 2015.

In another sign of profit pressure at Huawei, which is unlisted and collectively owned by some 80,000 employees, the company cut its dividend to 1.53 yuan per share in 2016 from 1.98 yuan a year earlier, according to a shareholder source.

Huawei splashed out on international marketing campaigns last year, getting footballer Lionel Messi and Hollywood stars Scarlett Johannson and Henry Cavill as brand ambassadors.

But analysts said the spending did not win it as much market share as expected, as rivals piled in to fill a gap in the market left by Samsung after a costly recall of its flagship Note 7 smartphone in October.

"In marketing, we will control our budget," Yu told Reuters. "We are not spending too much on marketing and branding. We invest more money on technology and innovation, and in retail and services."

Huawei, whose main business is telecom equipment and services, said in December it expects 2016 revenue to rise 32 percent to $74.8 billion. It is due to release full results on March 31.

The company aims to catch up with Apple's service and Oppo's profit margin in three years, according to another memo sent last Friday by Ren.

Yet analysts expect tough year ahead as competition heats up.

"We don’t expect Huawei will easily regain No. 1 position in 2017 in China market, mainly due to less-developed distribution channel in low tier cities and rural areas," said Strategy Analytics analyst Linda Sui.

Reporting by Sijia Jiang in Hong Kong and Harro Ten Wolde in Barcelona; Editing by Anne Marie Roantree and Lincoln Feast

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