Program Director, Mobile Phones, CEMA
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Launching a mobile phone business from the starting point of a big international business in telecoms infrastructure has worked stunningly well for Huawei. Strong financial backing, operations in many countries, a detailed knowledge of mobile phone technology and numerous local country offices have all have been important to its success in launching smartphones.
What Are the Other Brands Doing?
Looking at the history of brands in the phone business, however, every major Western telecoms gear manufacturer tried the same thing Huawei has done. And none of them is still in the business. If the brand name is still there, it’s a license deal with some other company.
There were five main Western manufacturers of network gear: Motorola, Nokia, Alcatel, Siemens and Ericsson.
Motorola, Nokia, Alcatel and Siemens
Motorola was a major network equipment vendor when it launched the world’s first mobile phone in commercial production in 1984. It went on to become a global name in phones, but sold its phone operations to Lenovo in 2014.
Nokia‘s preeminence in the feature phone era is history and does not need recounting here, nor does its fall: it sold its phone business to Microsoft in 2013. The Nokia name has come back via franchisee HMD, which has only a loose connection to Nokia Corp.
Alcatel also went into the phone business, but in 2005 licensed the brand name to its Chinese partner TCL, which still uses the name. Siemens was a major feature phone supplier until it sold its mobile phone operation to BenQ, also in 2005.
The Nokia story veers from this script, but the central criticism of these initiatives was that mixing the yin of the consumer electronics business of making and selling phones sat poorly in company culture terms with the yang of producing network gear. Network gear companies sold to telcos, a notoriously monopoly-like type of business, often in that era with little cost pressure.
Making and selling phones was in contrast a consumer business and also much of the time a tougher proposition. Unable to turn a sufficient profit in phones, the telco gear companies got out.
(You can even notice the cultural difference among the analyst community in my company — those who do telecoms network research are almost all rugby fans, whereas the consumer devices analysts like football or are not into sport at all.)
Ericsson, the last major Western telco gear maker of the era to mention here, and one of the earliest to get into phones, understood the issue sooner than most and in 2001 turned to a joint venture with Sony. In the end it decided that was not enough of a solution and in 2012, before most of its rivals had dispensed with phones, Ericsson sold out completely to Sony.
This criticism still rings true in some ways with Huawei. Go to new phone launches by Huawei and compare them to those of Samsung. The Koreans have really got it worked out — they choose their most charismatic executives and the presentations are flawless, typical of the company’s well-oiled marketing machine. Huawei events are still much more patchy (though getting better), with Chinese execs with poor English going on for too long about phone features many consumers do not care much about. And anyone attending a Huawei annual analyst event is left in no doubt that the telecoms infrastructure execs rule the show and that the phone business is a recent add-on.
Samsung is now the global leader in the phone business, a mantle it took over with the decline of Nokia. It was well calibrated as a company to do so. It does have a small network infrastructure business, but the company is basically an out and out broad-based consumer electronics company, whose product line extends across TVs and fridges and air conditioners as well as phones. It has scale and it has global reach, including in many emerging markets, and above all it is a well-honed consumer marketing machine.
So why, when coming from a direction that did not work for other players, is Huawei doing so well against Samsung?
Huawei is at a relatively early stage in its phone maker evolution, and the outcome is not at all evident for it yet (nor is it for ZTE, the second Chinese telco gear company that got into phones, albeit with less success).
Huawei, in market terms, shows a few of the weaknesses typical of the “out of hardware gear” vendors, including its relative weakness in many emerging markets. Huawei, for instance, has hardly any share in India. But mostly it looks as if it has learned from the others’ demise. It has a remarkably aggressive company culture, and this drive enabled it to make rapid inroads into the telecom gear market against more staid rivals, many of which had to shed staff as a result of the competition.
In smartphones, Huawei has got it right by aiming for quality products and quickly establishing the manufacturing ability to make them:
- First, by going for scale, being ambitious and aiming for richer markets where consumers can afford such devices.
- Second, by moving beyond the heavy reliance on telco retail typical of many brands that came from a telco gear heritage. Huawei actually sells a smaller proportion of its phones through telco retail than does Samsung.
- And third, by moving away from the parent company B2B culture and establishing a second brand, Honor, which is run very independently of the Huawei brand, enabling it to be nimbler in moving into new channels. Honor initially focused on online retail and, though that focus has ebbed, it still helps Huawei overall sell much more through etailers in percentage terms than Samsung.
A View Into the Future
Times have changed. Phones have become much more complex technically and as the phone business moves towards 5G and the potential of edge computing, the future looks set to favour big companies with a broad range of technology strengths. Huawei is attempting to rival Samsung to develop its own 5G processors to challenge Qualcomm’s strength as a supplier, whereas even Apple is relying heavily on Intel to help it avoid being reliant on Qualcomm.
Huawei’s timing is falling to its advantage. As the smartphone business consolidates, as it is doing fast, it looks like just a few winners will take all, and Huawei is a Chinese industrial champion with, it appears — as much as is possible in understanding its Chinese financing — no difficulty in raising capital for its expansion.
It has very fast momentum for such a large company. Huawei has been projecting growth of around 15% this year, but it achieved an increase of more than a third in the first two months of this year, according to company executives reported recently by Bloomberg. With annual revenue topping $100 billion in 2018, it is still well behind Samsung ($219 billion), but growing quickly. Its smartphone revenue grew 45% last year, accounting for more than half of its revenue for the first time and more than making up for flat results in its carrier business.
That proportion could move up further. While the rise of Huawei has a touch of Manifest Destiny about it in China’s emergence as a technology superpower, politics are more and more a threat — US opposition to Huawei becoming a key supplier in 5G in countries allied to the US could stymie its advance in telco gear. The phone business is so far fairly insulated from this, and at its current rate of progress could become much bigger.