Xu said this week during an analyst summit that the restructuring was aimed at “enhancing the position of the cloud business” and would serve as “part of the company’s initiative to strengthen software” as Huawei tries to reduce its demand for chips. US sanctions currently deny Huawei access to the most advanced chips, hitting its ability to make cutting-edge smartphones and network gear.

Earlier this week, Huawei’s cloud unit also announced an ambitious product release schedule for 2021.

Huawei began its cloud business in 2010 but the unit only began to come to prominence in the past few years. In January 2020, cloud services and AI were combined to create a new business group, putting it on an equal footing with Huawei’s three core revenue drivers – consumer, carrier and enterprise.

In the past year, Huawei’s cloud revenue increased 168 per cent. In the fourth quarter, Huawei Cloud became the second-largest player in China with a 17.4 per cent market share, according to research firm Canalys.

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“Most hardware businesses, including Huawei, already have large software capabilities, typically embedded into hardware,” said Matthew Ball, chief analyst at Canalys. “Huawei’s software aspirations are in line with the industry, but they have been accelerated by the current situation … the software push should boost Huawei Cloud’s capabilities with new customer services.”

Xu said the company had wanted to “drive synergies between the cloud business and its server and storage businesses” but said this had generated some problems, leading to the decision to separate the two units again.

The changes come as Huawei reels from the impact of US sanctions, which have forced it to put less stress on devices that are dependent on US-origin technologies and more emphasis on software and services.

“Huawei’s cloud business is not entirely exempt from the impact of US sanctions … its development also relies on the company’s chip inventory,” said Ethan Qi, an analyst at research firm Counterpoint. “However, [the cloud unit’s consumption of chips] is much smaller than that of the smartphone business, so we should not see a big problem for hardware production at its cloud business this year.”

But as a late entrant in a highly competitive field, Huawei will face challenges.

“It will be very difficult for Huawei to catch up in the competitive public cloud sector, with big rivals including Alibaba Group Holding and Tencent Holdings, both of which have already made enormous investments [in the sector] and pledged to invest trillions more in future,” said Qi, adding that Huawei had a strong position in private cloud due to having the government as a long-time client.

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China’s cloud infrastructure market is growing rapidly amid rising demand for digital services in the world’s most-populous nation. The value of its cloud market rose 66 per cent to US$19 billion in 2020, while global market value rose 33 per cent to US$142 billion, according to Canalys. China is the second-biggest cloud market in the world behind the US.

Alibaba is the biggest cloud services provider in China, with a 40 per cent share in the fourth quarter of 2020, followed by Huawei at 17 per cent and Tencent Cloud at 15 per cent, according to Canalys.

Alibaba Cloud, the data backbone of the Chinese e-commerce giant, pledged last year to invest an additional 200 billion yuan (US$30.5 billion) over three years in its cloud infrastructure. Meanwhile, Tencent vowed to invest 500 billion yuan over five years in new digital infrastructure, including a new network of large data centres, with a million servers deployed at each site.

Qi said cloud will play an increasingly important role at Huawei. “I do not think Huawei will sell it. Cloud is a fundamental technology and capability that will provide essential support for its consumer business as well smart vehicles.”

Alibaba is the owner of the South China Morning Post.