Huawei takes aim at Samsung, needs some smart ideas

Written by on June 7, 2016 in Guest Blog with 0 Comments

horsmanSoftware is all that can save Huawei from rivers of blood. Huawei has said once again that it wants to be the number one in smartphones before, but this time I think that it is serious. Richard Yu, the CEO of Huawei’s consumer business re-iterated this intention at the Converge Technology Conference in Hong Kong and stated that he was prepared to be patient.

  • The problem is that although Huawei makes reasonably good margins in hardware, I think its profitability in smartphones is 2-4% in the best instance.
  • I have long believed that no-one has any real differentiation in Android smartphones and the only reason that Samsung makes a good return is because it has a huge scale advantage as it out ships its nearest competitor more than 2 to 1.
  • This is similar to what Nokia was able to achieve in its heyday when it commanded 40% global market share and EBIT margins of 20-25%.
  • This means that in order to avoid a bloodbath of brutal competition with Samsung, Huawei has to differentiate its products such that consumers are willing to switch from Samsung to Huawei without Huawei having to cut prices further than it already has.
  • Without that differentiation, Huawei will have to not only overtake Samsung in terms of volume but maintain at least a 2 to 1 advantage in terms of unit shipments in order to make 10-12% EBIT margins.
  • Even it gains a lot of share and becomes equal with Samsung by taking out all the smaller players who command around 30% of the market between them, all it will achieve will be a loss of profitability at Samsung as its volume advantage is eroded.
  • I think that achieving this goal without differentiation will be excruciatingly expensive and could easily force the Huawei’s consumer business into loss making territory for a long period.
  • Given that the outlook for infrastructure is deteriorating and that the ecosystem companies such as Facebook have declared war on network equipment (see here), I suspect that the willingness of the network business to subsidise this ambition will be limited.
  • Hence, the answer for Huawei has to be based in software.
  • There are two ways to do this.
    • First. Create compelling software and services that users love drive them to choose Huawei devices over the competition.
    • This will give Huawei the ability to price its products at a premium and gain share without having to compete solely on price.
    • With Google dominating the services offered on Android outside of China this will be difficult without beginning to compete directly with Google.
    • Second. Use software to ensure that Huawei phones work optimally with its other consumer electronic products.
    • This would then make a user who has a television or a smartwatch and so on to buy a Huawei smartphone, again giving some of the needed differentiation to increase pricing.
  • For Huawei I think that the market in China is more open than it is in the rest of the world.
  • This is because Google is absent in China and none of the big ecosystems have yet established a meaningful level of control over the hardware in the way that Google has.
  • Furthermore, Huawei’s app store is No. 5 in China with 8% market share giving it a beachhead from which to launch some differentiation.
  • I don’t think that Huawei’s software offering and its level of expertise in this area is nearly good enough yet to offer any real threat to Samsung but the intention is clearly there.
  • Either way this is going to be a long haul as Samsung shipped 2.7x more smartphones than Huawei did in Q1 16A (Counterpoint Research) despite the fact that Huawei gained a lot of market share over the last 12 months.
  • I still like Samsung for 2016, as I think Huawei remains a long way from offering a real challenge, but Samsung does need to start taking mitigating action now.

This article was first published on RadioFreeMobile.

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About the Author

About the Author: Dr Richard Windsor is the founder of Radio Free Mobile which is an independent research provider. The research helps clients to understand and evaluate the players in the digital ecosystem and presents a unique perspective on how all the pieces fit together in an easy to read and digest way. The product is available on a subscription basis and counts members of the handset, telecom carrier, Internet, semiconductor and financial industries as its subscribers. RFM is the land of the one man band meaning that Dr. W. also makes the tea. .


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