Huawei Takes #1 Global Smartphone Title. Can it Keep it?

Context (What Happened)

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Canalys reported that in Q2 of 2020, Huawei shipped the most smartphones of any vendor in the world, despite a global pandemic and its continued inability to access Google’s apps and services due to its inclusion on the U.S. Entity List.

Huawei press release: https://www.canalys.com/newsroom/Canalys-huawei-samsung-worldwide-smartphone-market-q2-2020

Analysis

Huawei’s “we’re number one!” claim is based on Canalys sell-in numbers, which claim that Huawei’s smartphone shipments only dropped 5% in Q2, compared to Samsung’s 30% YoY drop. Shipment tracking numbers are notoriously inaccurate, but Techsponential doesn’t track them, so for sake of argument, let’s assume that Canalys’ numbers are correct. This means that in the face of sharply lower demand due to the pandemic, Samsung stopped sending phones to carriers and retailers, while Huawei went nearly full-steam-ahead. Apple sales have rebounded in China during the quarter, and Apple’s profits lead the industry – by an enormous margin – so being the highest volume vendor isn’t necessarily the metric to shoot for. Still, Huawei is certainly excited about it

What’s going on? Three things:

1.       Huawei’s primary market is China, which emerged from lockdown during the quarter. Samsung’s biggest market is the U.S., which shut down for most of this quarter.

2.       Huawei is almost certainly stuffing the channel, especially in markets outside China. Canalys is tracking sell-in, not sell-through. Some of these phones are going to sit on shelves for a while before anyone buys them.

3.       There are extenuating circumstances – and some channel stuffing – but it is still enormously impressive that Huawei has managed to keep sales up despite the Entity List designation and a global pandemic. Huawei’s hardware is very, very good, and its brand inside China is incredibly strong.

But is Huawei headed for a fall? When Huawei was put on the U.S. Entity List, Techsponential’s headline was, “Huawei Placed on U.S. Tech Blacklist, Killing Huawei’s Consumer Device Business” because its Arm license was pulled, and it appeared certain that it would lose access to Intel chips and Microsoft software as well. The Arm license was quickly restored and Huawei has somehow avoided restrictions on its laptop line altogether (and we updated our report), but Huawei still has no access to Google’s apps and services. That makes Huawei’s situation apparently similar to Microsoft’s position with Windows Phone from 2010 - 2016: the hardware was often best of breed and the OS itself had vocal fans, but there were always critical apps that were unavailable on the platform. Despite offering to pay developers to port software to Windows Phone, the OS was doomed.

The Windows Phone analogy is accurate up to a point. Western consumers will not prioritize buying a Huawei phone to get an innovative RYYB imaging sensor over the apps they need to make the phone function like a phone from Samsung, LG, Xiaomi, or Apple. Huawei is shipping tools to help consumers sideload apps, but even if you can configure Google Maps, or Gmail once, they may not update, and many non-Google apps like Uber rely on Google Play for key functionality. In order to access the Chinese market, some Western developers will support Huawei’s App Store, but not if they built their apps using Google’s APIs and architecture for messaging, sync, updates, and more. Huawei is investing a billion dollars into building its own set of developer services to offset Google’s entrenched advantages, but if a software developer has not built a China-specific version of its app before, why would they do so now?

Huawei may be selling phones into foreign markets that will take them, but Huawei and Honor phone sales outside China are not good. This is not universal; there are parts of Asia and Russia where lack of Google apps and services is not a deal-breaker, but it’s a negative factor everywhere outside China.

Where the Windows Phone analogy fails is that Huawei has something Microsoft didn’t: an exceptionally large, captive home market. Huawei could remain the second or third largest phone vendor in the world even if it never sold a single device outside of China.

Huawei’s growth is severely limited as long as it remains on the Entity List, but it should be able to retain enough sales to fuel further R&D while it waits for the geopolitical situation to change. This is a company that plans in five and ten -year timeframes. Huawei’s ownership structure is famously opaque; it may not need growth to keep its owner(s) happy. Huawei can afford to be patient. It’s going to have to be.

Competitive Response

Challenging Huawei inside China is becoming increasingly difficult, though Apple has the best shot of doing so if it can broaden the ecosystem content available in the country and introduce new form factors. Apple should also play up the performance benefits of its silicon compared to Huawei’s Kirin, especially on the relatively inexpensive iPhone SE.

Huawei remains especially vulnerable in markets outside of China where its growth was strongest, especially for its value-oriented Honor brand. These include Eastern Europe, South America, and Indonesia. Other Chinese brands including Xiaomi, OPPO, and OnePlus are making inroads, while Samsung’s renewed focus on entry level and mid-tier devices is paying dividends, as well. With the Entity List designation now over a year old and with no signs of a change, these brands should aggressively advertise that their phones work with all local and global Android apps without making users jump through hoops or opening security holes.

To discuss the full implications of this report on your business, product, or investment strategies, contact Techsponential at avi@techsponential.com or +1 (201) 677-8284.

Avi Greengart