<Editor's Pick> Huawei: Farewell to “Honor”, and the future can still be expected

Oct 21, 2020 Other HUAWEI

On October 15, according to Reuters, sources with knowledge of the situation said that Huawei is in talks with Digital China, as well as other potential buyers such as TCL and Xiaomi, to discuss the sale of its subsidiary brand Honor. The deal is likely to be an all-cash transaction with a smaller final size and a total transaction price of between ¥15 billion and ¥25 billion.

The assets to be sold have not yet been finalized and could include the Honor brand, research, and development capabilities, and related supply chain management businesses, sources said. Among Digital China, TCL and Xiaomi, Digital China has become the most likely buyer due to its status as a major distributor of Honor mobile phones.

Subsequently, this news was widely forwarded and reported by the media. In this regard, TCL, Xiaomi replied to GeekPark that they are not aware of it, while Honor said no comment.

The first time the Honor brand was sold was in a research report published by Tianfeng International analyst Guo Ming-Chi on October 7. Guo Ming-Chi, after analyzing Huawei's overall mobile phone business, believes that a sale of Honor is highly likely. He predicted that the sale of Honor would lead to a win-win situation, with Huawei being able to both circumvent the ban and develop high-end models.

However, according to Deep Web, a source close to the president of Honor, Zhao Ming, had internally denied Honor's sale in mid-September. Huawei doesn't have enough incentive or guarantee that the sale will circumvent the ban, and leaving Huawei will also hurt Honor's ability to command a premium price.

On October 12, some media broke the news again, glory business, or will be split into independent operations. Huawei officials then immediately denied. The growing rumors in the market have added more uncertainty to the fate of Honor, as there is indeed decision logic behind the Honor sale rumors that is consistent with objective circumstances.

 

A logical rumor

Several industry sources have addressed the rumors of the Honor sale, expressing to GeekPark that it's highly likely.

"It's very likely, and it must be sold. A month ago, I revealed the news to the public one after another, and Honor has already talked for several rounds, and the buyer must have a foreign or U.S. background," said Sun Yanbiao of First Mobile Research Institute. Telecom analyst Liu Qicheng also believes that Honor is definitely possible to be sold. Honor as Huawei's power source to fight against Xiaomi, in recent years also gradually has its own brand awareness. It is easy to have some kind of internal competition with Huawei. Huawei is currently facing many challenges, there is no more ability to support Honor.

In 2011, Huawei created a new Honor line to fight against the Internet phone brand Xiaomi. Two years later, Honor operated independently in order to have a clearer division of labor and not affect the premium tone of the main brand. Huawei mainly hit the high-end mobile phone market where Samsung and Apple are located. Honor is the main Internet online channels, covering the low-end mobile phone market.

The effect of a dual-brand operation, with two strands hitting the market together, is obvious. With Huawei's advantages and support in technology research and development, marketing channels, supply chain, and brand endorsement, Honor has quickly become a "new force" in the Internet mobile phone market. On the one hand, Honor is down to fight Xiaomi with almost "cloning"; on the other hand, Honor is helping Huawei to reap more market share in mobile phone sales.

In 2017, Honor's phone sales overtook Xiaomi to become the No. 1 brand in China's Internet phone rankings, evenly matched with Huawei's main brand sales. In 2018, despite the shrinking global smartphone market, Huawei + Honor still grew at a rate of over 33%, making it the number one handset manufacturer in China in terms of shipments.

In the last two years, with Huawei and Honor operating on their own, the boundaries have become clearer, with two sets of PR teams and separate statistics on handset sales. The relationship between Huawei and Honor has also become more complicated and delicate, with "left and right hands playing against each other" and the sound of fights between low- and mid-range product lines being heard all the time.

In the special context of the U.S. ban, Huawei may need to make some trade-offs in its terminal business and even its Honor mobile phone business.

Since last year, the United States has three blockades of Huawei. Huawei is unable to produce high-end chips through third-party vendors like TSMC, or purchase mid- to high-end phone chips from third-party chipmakers like Qualcomm and MediaTek. After the expiration of the US ban on September 14, Huawei's terminal business can only rely on stockpiled chips to keep it afloat, and chips have become a heavy load on the terminal business.

"Now Huawei's priority is still to survive,” Liu Qicheng said. The biggest realistic problem facing Huawei's mobile phone business is that "chip inventory is not enough for two brands.” Biao Sun believes that this is also a very critical "knot".

So, at this point somehow Honor will be less important. Huawei will also, in extreme cases, skew more resources towards high-end product lines, and never the less profitable mid- to low-end product business. According to research firm Canalys, Huawei's smartphone business accounted for 26% of its total sales in the second quarter of this year.

Honor account for a higher percentage of sales, while its profits are negligible. According to Reuters, Honor's revenue in 2019 was around ¥70-80 billion with a net profit of less than  ¥5 billion.

It's easy to see how the shrinking business strategy could be Huawei's next move.

 

Huawei can still look forward to the future

From the perspective of Huawei's development path, the success of the terminal business was an unforeseen "accident".

Although Huawei's consumer business is the first thing that comes to mind when consumers think of Huawei, it's only been just over two years since Huawei's consumer business revenue surpassed that of the carrier. Huawei started out with switches, routers, and other businesses. The carrier business, including network equipment, wireless and service solutions, is Huawei's foundation and strategic high ground.

Since its inception, Huawei's consumer business has been clearly positioned and targeted as a "special unit" outside of Huawei's core business.

Ren Zhengfei has publicly stated that Huawei must go the route of profitable high-end phones. Huawei's consumer business is just a support industry, the purpose is to make money and responsible for the delivery of funds, so as to help the carrier business in the global charge.

The first to be affected by the three US bans on the blockade is Huawei's mobile phone business.

Not long ago, at HUAWEI CONNECT 2020 conference, Guo Ping, Huawei's rotating chairman, admitted in a media interview that survival is Huawei's main line of business now. Huawei's 2B business, including base stations, is adequately stocked, but mobile phone chips consume hundreds of millions per year, and mobile phone reserves are still actively seeking a solution.

In mid-to-late September, Intel and AMD were licensed to supply Huawei, meaning that the impact of the ban on Huawei's cloud and consumer PC product lines was cushioned and reduced.

So, of Huawei's four major business segments: carrier business, cloud and computing business, enterprise business, and consumer business, the consumer business line of mobile phones will be the "shortboard" in the barrel theory.

When the mobile phone business no longer fits the original positioning and fails to play a role in boosting other business segments, there is reason to believe that even Huawei's entire mobile phone business will have to face "strategic abandonment". Of course, "Huawei can't give up all the mobile phone business now, and the current inventory can be maintained for at least two years, Sun Yanbiao said.

Although Huawei will suffer heavy setbacks as a result, the root business remains solid. With the convergence of 5G, IoT, and AI, Huawei's consumer business is seeing more opportunities, with not only mobile phone hardware but also IoT accessories and automobiles potentially becoming new growth areas.

With the mobile phone business stalled or even facing the possibility of being abandoned, Huawei is set to grow even more aggressively in those areas where it still has room, so that the company, which relies on "sustained growth" to sustain its system, can find new opportunities.

Excellent enterprises are often admired for their ability to adapt to circumstances and their courage to face the challenges of the future.

 

This is an article from WeChat official accounts GeekPark(ID: geekpark), written by Qianqian, translated by Linda Yang.