Firm Flies on as a Shot-Up Shturmovik
In an interview on July 4 with the Financial Times, Huawei founder Ren Zhengfei revealed that this is his favourite image of his company — a photo of a shot-up Shturmovik, a Russian Il-2 ground-attack aircraft riddled with shell holes but still in the air. Produced by the thousand in the Second World War, the slow-moving Il-2 had a reputation for being able to take fearful punishment and still fly on, as it does here.
Just as the Il-2 was armoured around the engine, fuel tank and crew, and could take widespread hits in the wings and elsewhere in the fuselage, Zhengfei argues that as long as Huawei is protected around its key internal capabilities, short-term impacts to its sales do not compromise its long-term survival.
Here is an IDC assessment of “battle damage” in the second quarter where Huawei was most immediately vulnerable — its smartphone sales.
Huawei announced on July 30 that its revenues were up 23% in the first half of 2019, continuing the upward climb of recent quarters, and that it sold 118 million smartphones — 24% growth over the first half of 2018.
This upbeat announcement made light of the impact of the US adding Huawei to the so-called Entity List, which prohibits US corporations from commercial relations with it.
US Decision Estimated to have Brought Down Smartphone Sales by a Third
The US announced it would add Huawei to the Entity List in the middle of May, already halfway through the second quarter, which meant that only one half of shipments could be affected by the ban. If Huawei had continued the momentum it had managed in the last couple of quarters, it might well have shipped more than 75 million devices during 2Q, bearing in mind its recent upward momentum. In the event, it shipped 58.7 million, according to the IDC Worldwide Quarterly Mobile Phone Tracker. From this, it would appear that shipments in the second half of May and in June were brought down by at least a third by the ban. In a comment in the first week of August, Richard Yu, the head of Huawei’s consumer businesses, put the effect of the ban to date at around 10 million smartphones.
Huawei maintained the strongest momentum in the second quarter in Asia/Pacific, with shipment growth of nearly 17% year on year and around 13% over the last quarter. But this was all down to China, where shipments rose in the second quarter by 27% to an all-time high of 36.3 million phones. Huawei’s share, which had been increasing in the last few quarters, also hit a record, of 35.3%.
Huawei’s exports in Asia/Pacific to countries outside China, at 2.74 million, were down by more than two-fifths over the previous quarter.
Europe is the most important export region for Huawei. Looking at the region at its broadest and including Russia, it accounts for towards half of all its exports. These were pushed down to around the same level as in the same quarter last year, cutting out big increases in the intervening quarters.
Exports Fell from Half to Two-Fifths of Production
The Honor brand did not prove less susceptible to the ban than the main Huawei brand; in fact, the opposite was true, with Honor shipments taking more of a hit. A reason for this may have been that the Honor 20, the latest flagship phone to be launched (on June 21 in Europe), was seen by consumers as a risky purchase in terms of future Android support, as Google announced after the Entity List decision that it would be able to provide commercial support (i.e., preload access to the app store and Gmail support) on future Huawei models but would continue to do so for existing ones. Huawei did not extend its reassurance of money-back guarantees to buyers of Huawei brand phones to Honor devices, and my colleagues in Asia/Pacific believe that Honor suffered in this region as a result.
What access Huawei will have in future to commercial relations with US companies is still unclear. President Trump announced on meeting Chinese leader Xi Jinping at the G20 meeting in Hawaii at the end of June that Huawei would be able to have such arrangements as long as there were no threats to national security, which appeared to imply that Huawei’s smartphone operations could be back to normal with US suppliers. The US Justice Department later said that while Huawei would stay on the Entity List, waivers would be issued for specific cases.
Future Commercial Relations with US Companies Still Unclear
As I write this, at the beginning of August, very few further details of which US companies will be allowed to have contracts with Huawei have emerged, and no announcements have been made on any waivers that have been approved.
So Huawei’s smartphone operations will be weighed down through at least the first half of the third quarter by much of the same uncertainty.
The head of Huawei’s smartphone operations, Richard Yu, admitted on August 8 that the company’s target of 300 million smartphones was now problematic. A figure of at best 250 million now looks more probable.
Huawei no longer has much chance of overhauling Samsung as the number 1 global smartphone vendor this year. In Europe, mobile operators have reported that the Korean firm has been the main beneficiary of Huawei’s problems with the US government, with the other smaller Android brands rarely taking much of the share that Huawei has relinquished. Samsung’s shipments went up 6.0% year on year in 2Q to a global figure of 76.2 million. Its share against Huawei was up, though only marginally on the previous quarter.
Samsung should retain its crown this year
The Big Three Chinese rivals to Huawei, Xiaomi, Vivo, and OPPO, had a respectable quarter, but they did not gain noticeably in export markets. Together, the Top Five global Android vendors, these three Chinese players plus Huawei, and Samsung accounted for 75.4% of Android shipments, against 74.3% in Q1 – so the consolidation trend continued despite Huawei’s travails.
One of the reasons the smaller Android brands are not making a big push against Huawei while it is weak is that they are expecting Huawei to unleash a big new marketing campaign if its status with US suppliers for its smartphones is normalised.
Even if that normalisation occurs fairly soon the company has taken a big knock from which to recover. Going back to the photo at the beginning of this blog, Bloomberg said that founder Ren Zhengfei said in early August in an internal letter to staff that this last quarter “Two bullets fired at our consumer business group, unfortunately, hit the oil tanks,” so the shturmovik was not just hit in the wings.