Huawei Investment & Holding Co., Ltd. 2013 Annual Report Contents Letter from the CEO 2 Letter from the Rotating and Acting CEO 10 Business Highlights in 2013 14 Five-Year Financial Highlights 15 Letter from the Chairwoman 16 Core Values 20 Management Discussion and Analysis 21 Industry Trends 49 Independent Auditor’s Report 54 Consolidated Financial Statements 55 Summary and Notes Risk Factors 106 Corporate Governance Report 108 Sustainable Development 129 Abbreviations, Financial Terminology, and 143 Exchange Rates 2 Letter from the CEO Letter from the CEO Apply the spirit of the tortoise to catch up with the Dragon spacecraft There is a fable about the race between a tortoise I. Large companies are not necessarily and a hare. The hare was born a fast runner, but synonyms for complacency or conservativeness; during the race, it had a rest from time to time, it is not inevitable for them to perish, or taking an afternoon tea or having a nap on the otherwise we would not strive to be one. grass. The tortoise surpassed the hare and won the race in the end. Can BMW match Tesla’s pace? This has been an issue of debate for some time at Huawei. Most Huawei is like a big tortoise. In the past 25 years, believe that Tesla vehicles represent a disruptive we have crawled along, not seeing the flowers on innovation and will surpass BMWs. I think that the road. While many people have become rich, BMW may not lose the game if they take an open riding on the rising economy over the last two approach to improve themselves. We know there decades, we still are on our journey of hard work are several elements of a car: powertrain, smart and dedication. When we look up to find in front driving (from on-line map, automatic shifting, of us the likes of Dragon spacecraft and Tesla, bump shielding, all the way to unmanned driving), and look at ourselves – the clumsy way we move mechanical wearing, and safety and comfort. BMW ahead, we can’t help but think, “Can we catch up is strong in the last two areas, and they can and surpass them?” catch up too on the first two if they are open Letter from the CEO 3 and progressive. You could argue of course that 1. We must stay focused. We are a company with Tesla can buy the capabilities they don’t have, but limited capabilities and resources. We can only I’m not saying BMW has to reinvent the wheel catch up with or surpass US companies within to establish themselves in the first two areas. limited areas. A force applied over a smaller BMW needs success, not a narrow sense of pride surface area can get us larger pressure, and then that everything has to come through its own breakthroughs would be possible. The Strategy innovation. & Development Committee proposed the idea of surpassing US companies and enjoying the Huawei is like BMW, in that we are also a big ride, and I guess maybe that’s because they are company. We live in an information society that is confident in our profitability in the next few years fast-changing with lots of disruptive innovations. and want to invest more in the strategic areas. Can we continue to survive? Admit it or not, this However, we can possibly surpass US companies is a question right in front of us. It took us 25 only when our area of focus is as big as the years to build a good platform and accumulate tip of a needle. If we enlarge the focus area to some resources. Those are our treasures, as they the size of the head of a match or the end of a came after loads of money being wasted by our stick, surpassing US companies will be out of the executives and experts into projects and products question. that had failed. Of course the money wasted comes from what you have earned in the first We only allow employees to leverage their initiative place, and more importantly without such wastes, and creativity along the main route, or in other we would not be where we are today. We value words in areas of our strategic business focus. Blind the success we have gained through learning from innovation would simply disperse our investment our failures. If we continue to be progressive, and energy. Businesses that are not on the main with the courage to shatter our own vested route have to learn from successful companies, interest and embrace new things, Huawei may not maintain stable and reliable operations, and keep necessarily lag behind. When we spot a strategic the management system rational, effective, and opportunity, we can catch up quickly by pouring simple. We must avoid innovating blindly. If there in tons of resources. Different ways of investment is cry for innovation everywhere, that will be a can be used, not just by piling up people. This death song for us. is quite different from the way small companies approach innovation. People are the most valuable. The age of Big Data might be terrifying, because Employees who are open-minded, progressive, nobody knows exactly what is Big Data, and data brave to break established advantages and keep traffic will be incredibly huge. The Big Data I’ve up with the times are our most solid cornerstone. been talking about is different from the industry With such people in the company, we can possibly definition. The industry looks at Big Data from catch up with the Teslas of the world. information search, not data size, point of view. 4 Letter from the CEO As Wu Hequan from the Chinese Academy of The network might loosen what has kept people Engineering said, data creates value only when it within bounds. Without this bondage, can we still is mined, analyzed, inducted, and utilized. By Big press forward like a torrent? Many people are Data, I mean the surging and overwhelming data amazed when they hear us sing the song Huawei streams, and the fact that no one knows how People. They wonder why so many people are still much data has to be transmitted and stored. Of singing such a song in such an age. At Huawei we course, we hope what is transmitted is all useful still have a nucleus of several thousand people. information, but we cannot stop garbage from United together, they rally and lead the rest of being transmitted and stored back and forth, 150,000 employees. We will definitely win. which makes Big Data even bigger. Don’t get lured by the success of the Internet. We are an Internet 2. We must continue to be dedicated. The tortoise company too, in the sense that we produce “iron in the fable is a symbol of persistent effort, and sheet” for pipes that transmit data streams for such a spirit of Huawei must not change. The the Internet. Moving forward, there will be fewer tortoise spirit also means that our effort and companies that can produce “iron sheet” for pipes dedication should be sensible. We don’t need our as wide as the Pacific Ocean; companies that run people to have their blood boiled up because that the pipes will be in the number of hundreds, and cannot power up the base stations. What we need companies managing information in the number of is a controlled passion that allows our people to thousands. Don’t envy the prominence of others; work intensely but with order. Value creation has don’t get so stirred about the Internet. Employees to be the yardstick for everything we do. who have such passion should come down-to-earth and try to use the Internet approach to optimize We must be conscious of the power of the United our internal supply transactions toward higher States. They have advanced systems, flexible efficiency and timely and accurate operations. Our mechanisms, clear property rights, and respect annual turnover of commercial notes, including and protection of individual rights. With such a internal handovers, has exceeded CNY2,500 billion, sound business ecosystem, the US has attracted the expected to reach 5,000 billion pretty soon. And world’s best talent, in the number of hundreds of we have more than 5,000 points of supply. There millions, to invent and innovate on the American is significant value there, from improving contract soil. The light that never goes out in the Silicon accuracy and reducing waste via thorough analyses Valley continues to shine. The US is not lagging of contract scenarios. Why not do the “Internet” behind; it is still a model for us to learn from. Isn’t internally to better connect our operations? We Tesla a good example? Catching up will never be as have to remain focused, for decades, on improving easy as coining catchwords. Too many catchwords our capability for the information pipes. Don’t tow are a waste in management. “Enjoying the ride” as our huge ship away from the main route. Eric Xu put it, means we make constant effort for development, fearless of failures or sacrifices. All the work has to be measured by the value created. Letter from the CEO 5 Will ultra-broadband be the last battle in the With the establishment of the 2012 Laboratories, electronic equipment manufacturing industry? I we intend to use the tool of self-criticism to don’t know what others think about it; but to question ourselves, our status quo, our future me, it will. If we fail in the ultra-broadband age, thoughts, and the questioning itself.