H U A W E I I N V E S T M E N T & Huawei Investment & Holding Co., Ltd. H O L D 2012 Annual Report I N G C O . , L T D . Copyright © 2013 HUAWEI INVESTMENT & HOLDING CO., LTD. All Rights Reserved. GENERAL DISCLAIMER THE INFORMATION IN THIS DOCUMENT MAY CONTAIN PREDICTIVE STATEMENTS INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE FUTURE FINANCIAL AND OPERATING RESULTS, FUTURE PRODUCT PORTFOLIO, NEW A TECHNOLOGY, ETC. THERE ARE A NUMBER OF FACTORS THAT COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS N TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN THE PREDICTIVE STATEMENTS. THEREFORE, SUCH N U INFORMATION IS PROVIDED FOR REFERENCE PURPOSE ONLY AND CONSTITUTES NEITHER AN OFFER NOR AN A ACCEPTANCE. HUAWEI MAY CHANGE THE INFORMATION AT ANY TIME WITHOUT NOTICE. L R E P O R T Printed on environmentally friendly paper. 2 100% post-consumer content, acid-free & chlorine free paper. 0 1 2 A Message from the CEO Might from a Small Hole, Benefits from One Source on one goal and remained dedicated. We have never wavered. Now we have 150,000 employees. Just as water jetting from one hole, our efforts have achieved something amazing. This is “might from a small hole”. We focus on our strategy to sharpen our global edge in a particular field. A sharp competitive edge proves that we do not need to have background to establish ourselves among the global leaders. In addition, we adhere to the principle of “obtaining benefits from one source”. Our EMT declaration has made it clear that all income of our most senior executives and key employees is confined to such items as salaries, incentives, and bonuses offered by Huawei. No income from outside Huawei is allowed. We have established organizations and systems which prevent anyone at Huawei, from the most senior officers down to the execution level, from gaining benefits by devouring collective interests through affiliate transactions. Over the past 20 years, our benefits have basically been derived from one source, thus creating a climate of united dedication among our 150,000 employees. We are aware that there are still many areas for improvement The New Year Message, “Focus on Strategy, Simplify in our management; we are endeavoring to improve Management, Increase Efficiency”, from our Rotating them. I believe our human resource policies will become and Acting CEO, clearly presents our objectives for the more and more scientific if we adhere to the principle of new year. We must focus on our strengths, fully leverage “obtaining benefits from one source”. Consequently, our the capabilities of our organization, tap into the self- employees will be more and more passionate about their motivation and creativity of our staff members along the work. Then there will be nothing we cannot conquer. fairway, and produce greater results. If we can adhere to the principles of “gaining might from As we know, water and air are among the most gentle a small hole and obtaining benefits from one source”, stuff in the world. That’s why water and breeze often Huawei will not be the next to fall. However, if we carry praise. We also know that this same gentle air can diverge from these principles, Huawei will probably be send rockets into space. The high-speed exhaust that the next to fall. History tells us that if large companies results from the burning of rocket fuel can generate miss a turning point and start to decline, few of them tremendous thrust through a small hole in a device called can reverse the situation by restructuring themselves. a de Laval nozzle; the air expanding out of the nozzle can Naturally, we would hate to fall; so we must restrain propel mankind into space. Water is as soft as a beauty, ourselves, observe rules, and stay united and dedicated. yet it can cut through steel plates once highly pressurized and forced through a small hole. This is “might from With lofty aspirations and esprit de corps, we are striding a small hole”. Huawei is an ordinary company and across the Pacific Ocean. our employees are ordinary people. In the past, our appraisal system focused on commonalities rather than individualities, and therefore failed to appropriately widen the gap between employees with respect to compensation and benefits. This practice frustrated some employees who had striven to create value. As a result, many excellent employees left Huawei. We ordinary ones Ren Zhengfei stayed behind. Over 25 years, we have focused only Chief Executive Officer Contents 1 Letter from the Rotating and Acting CEO 3 Business Highlights in 2012 4 Five-Year Financial Highlights 5 Letter from the Chairwoman 7 Brand Promise and Brand Attributes 8 Management Discussion and Analysis 32 Market Trends 36 Independent Auditor’s Report 37 Consolidated Financial Statements Summary and Notes 80 Company Information 82 Risk Factors 84 Corporate Governance Report 104 Sustainable Development 116 Abbreviations, Financial Terminology, and Exchange Rates 1 Letter from the Rotating and Acting CEO Letter from the Rotating and Acting CEO By focusing on the pipe business and effectively improving operations quality, Huawei achieved CNY220.2 billion (US$35.35 billion) in sales revenue and CNY15.38 billion (US$2.47 billion) in net profit in fiscal year 2012, steadily increasing operating performance. The ubiquity of broadband networks and services, networks. Our carrier software business continued the massive number of applications that result to grow rapidly. Our SmartCare service redefined in instantaneousness and fragmentation of industry standards for customer experience information, and the demand of device users for management (CEM) and comprehensively enhanced a personalized experience combine to present user-experience-driven solution capabilities. a series of challenges and opportunities to the Information and Communications Technology (ICT) Our Enterprise BG launched competitive data industry. By focusing on the pipe business and center switches, storage products, panoramic effectively improving operations quality, Huawei telepresence, and other solutions. Our Consumer achieved CNY220.2 billion (US$35.35 billion) in BG built a solid foundation on product design, sales revenue and CNY15.38 billion (US$2.47 quality, and cost. In the fourth quarter of 2012, billion) in net profit in fiscal year 2012, steadily we entered the list of the world’s top three increasing operating performance. smartphone makers for the first time. At present, our products serve more than three billion people Our Carrier Network Business Group (BG) further around the globe. consolidated its position in the industry: Our wireless business maintained steady growth. Our As communications become an integral part of fixed network products and solutions have been life, we believe that demand for communications deployed by most carriers worldwide. Our routers is not closely related to economic cycles and is continued to hold an advantage in the carrier only moderately impacted by the financial crisis. market. Additionally, our optical transport and The reason is that communications services are optical access products further established their characterized by small-money consumptions and leadership positions. We launched SoftCOM, the communications market is fully competitive. the industry’s first software-defined networking As pipes carry heavy traffic, we deploy products and (SDN) technology architecture in end-to-end carrier solutions by focusing on information transmission, Letter from the Rotating and Acting CEO 2 forwarding, storage, processing, acquisition, the scope of our strategy and focusing on the and presentation. Providing user experience pipe business will help improve our global characterized by high bandwidths, multiple competitiveness. services, and zero wait time is our mission and responsibility. We will continue to increase We fully assume our responsibility globally as a strategic investments in the pipe business. Our corporate citizen while proactively responding to aim is to make information pipes “wider, faster, concerns and needs of all stakeholders, including and larger” and develop Huawei into one of the customers and governments. In 2012, we released great companies that lead the ICT industry. Huawei Cyber Security White Paper, which inspires thought and discussion about the nature of cyber As we seek effective business growth, we expect security. We will strive to ensure the stable and that Huawei, a company with 150,000 employees, secure operations of customer networks and will continue to be the preferred partner of our businesses. We will further increase openness customers. “Gaining might from a small hole” is and transparency, and actively communicate a principle which affirms our customer-centricity with others. We will integrate more proactively and guides us to always focus on external into the local communities in which we operate, customers for our growth. “Obtaining benefits create more jobs, and contribute more taxes. All from one source” is a principle which places these efforts will help boost the competitiveness, focus on high-performing employees, and guides economy, and prosperity of local communities. us to adjust internal relationships and determine who we count on for corporate development. The responsibility of our management team is to By attempting to invert our performance maintain the health and vitality of our company. appraisal mechanism in 2012, we delegated the In the past year, we encountered many challenges. decision-making authority to customer-facing roles Our good performance