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Huawei pulls R&D spending from Australian arm

Huawei Australia has reduced its research expenses by more than a hundred-fold, spending just AU$81,000 during 2016 after spending AU$8.3 million in 2015 and AU$10 million in 2014.

Huawei Technologies Australia spent just AU$81,000 on research throughout 2016, the Chinese networking giant has revealed in its annual financial results report to the Australian Securities and Investments Commission (ASIC).

The diminutive figure was over 100 times less than the AU$8.3 million Huawei spent on research in Australia during 2015, which was itself an 18 percent drop from the AU$10.1 million it spent on research in 2014.

According to Huawei, research has been removed as a cost for local businesses by restructuring the company's policy on research and development (R&D), with all R&D spend now coming from Huawei headquarters in Shenzhen.

"There was been a change of policy, with HQ managing all R&D costs globally," Huawei told ZDNet.

"Huawei Australia continues to invest in innovation, including through the National Innovation and Training Centre in Sydney, the IoT lab with James Cook University in Cairns, and with our carrier and enterprise partners."

During 2016, Huawei's notable Australian carrier projects included conducting a series of narrowband Internet of Things (NB-IoT) technology trials across Melbourne in partnership with Vodafone Australia, performing a 5G trial with Optus that attained speeds of 35Gbps, and working with Optus to switch on its 4.5G network.

Since the reporting period concluded, Huawei also opened its NB-IoT research lab at James Cook University in Queensland in order to provide R&D opportunities around applications, smart devices, and sensor networks.

But while Huawei Australia provided the equipment and technology for this lab, Huawei has now told ZDNet that the cash injected into the research projects came directly from HQ.

Despite the considerable hundred-fold drop-off in research spending, AU$314,000 of Huawei's taxable income was excluded under the Australian government's R&D tax incentive in 2016 -- AU$60,000 more than last year.

Huawei's decision to remove R&D spending from its Australian business follows biotechnology firm Cochlear last year warning that the government's R&D tax incentive could cause companies to send their research projects overseas because basing R&D projects in Australia means companies pay more income tax there.

"Recent changes announced as part of the omnibus bill, as well as further proposed changes, will materially reduce the R&D tax benefits to Cochlear in Australia," Cochlear chair Rick Holliday-Smith said in October.

"There may be little or no apparent impact from changes to taxation policy in the first year, but over time we may see the loss of an increasing amount of research investments to overseas jurisdictions. Unfortunately, the impact of these decisions can only be fully understood over the longer term."

A review into the R&D Tax Incentive by chair of Innovation Australia Bill Ferris, Australia's Chief Scientist Alan Finkel, and Secretary to the Treasury John Fraser last year also recommended that the government focus more on encouraging research; otherwise, it will risk impacting the program's long-term continuation.

Globally, Huawei spent 76.4 billion yuan on R&D during 2016, which amounted to 14.6 percent of its total revenue.

While this was 28.2 percent more money than it spent on R&D in the year previous, the figure was down by 0.5 percentage points as a measure of Huawei's total revenue, which the company said was "a result of rapid growth in revenue and increased efficiency".

Huawei has traditionally put much focus on its R&D activities, with around 45 percent of its total workforce made up of R&D engineers. It also owns and contributes to many R&D and joint innovation centres across the globe, including a AU$30 million National Training and Innovation Centre in Sydney, a 5G Innovation Centre in London, and an NB-IoT lab in the United Kingdom.

During its Australian results report, Huawei also announced a pre-tax profit of AU$19.5 million, marginally higher than in 2015, but its profit after tax fell from AU$14.1 million to AU$12.1 million due mainly to higher expenses across income tax, distribution, and administration. Its income tax expenses rose from AU$4.5 million to AU$7.5 million between 2015 and 2016.

Revenue for the calendar year was AU$673.3 million, up by just 5 percent year on year. This marked a slowdown in Huawei's Australian revenue gains; last year, revenue increased by 32.7 percent.

A breakdown of its 2016 revenue saw the sale of goods fall by 11 percent to AU$446.3 million, while services rose by 25 percent to AU$144.7 million and revenue from construction more than tripled, from AU$26.9 million to AU$82.4 million.

Huawei Australia's cash and cash equivalents jumped from AU$36.5 million to AU$61.2 million as of December 31.

Huawei last month reported its global financial results for 2016, reporting a full-year net profit of 37.1 billion yuan, up by just 0.4 percent year on year despite a rise in revenue of 32 percent to 521.6 billion yuan.

According to Huawei, a rise in net profit did not accompany its rise in revenue due to the increasing success of its consumer business, which shipped 139 million smartphones during the year for a global smartphone share of 9.5 percent in Q4 2016.

Huawei noted in its yearly highlights that as of the end of 2016, it had delivered more than 2 million virtual machines and 420 cloud datacentres for government, utilities, telecommunications, energy, and finance companies; worked with 3GPP on 5G standardisation, including the development of Polar Code; and teamed up with some of the biggest automotive companies in the world to work on connected cars.

Huawei also said its smart city solution is now used in over 100 cities across more than 40 countries; its public safety solution serves over 800 million people in more than 200 cities and 80 countries; its financial cloud and big data infrastructure is used by more than 300 financial companies globally; and its energy solution is serving more than 170 power companies across 65 different countries.

Overall, Huawei said it has worked with over 500 partners on cloud computing solutions in more than 130 countries and regions.

Updated at 4.30pm AEST: Huawei Australia has halted most of its research spending in Australia, but Huawei HQ is continuing to spend on R&D projects in Australia.