Huawei – Halves and thirds

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Market share gains only tell half the story.

• Huawei’s consumer business has had an excellent Q4 14A as far as market share goes but like almost every other Android vendor it is barely making money.
• During 2014A, 75m smartphones where shipped meaning that 24.3m where shipped during Q4 14A.
• This represents a market share gain to 6.5% of the smartphone market which is a pretty big jump from the 5.2% it held in Q3 14A.
• Huawei has been very aggressive in pushing it’s mid to high end smartphone strategy and its Honor and Mate brands have fared pretty well in the overseas market.
• In Q4 14A Huawei shipped 49% of its smartphones in the Chinese market compared to 57% in Q3 14A (Counterpoint).
• Consequently, it looks like most of the success the company has had in gaining share has come from overseas markets.
• This is encouraging because all of the Chinese vendors have had difficulties in making a splash beyond their home market.
• Huawei is ambitious in its expectations for 2015E expecting to ship 100m units compared to RFM’s estimate of 91m.
• This will require a further market share gain which will be more difficult to achieve given the ambitions of Xiaomi and a resurgent Lenovo.
• Huawei expects to achieve this by creating “extraordinary brand experiences to consumers and realising dreams for people everywhere”.
• Unfortunately, all anyone seems to dream about at the moment is owning an iPhone 6 and the only appeal that Huawei can offer is half the experience at one third of the cost.
• Like most of its peers, Huawei is without an ecosystem which means that it can only really compete for consumers’ attention on hardware and price.
• This will ensure that profitability in 2015E remains under extreme pressure and may even decline from the 3% that RFM thinks it earned in 2014A.
• Huawei’s best chance of achieving this will be to team up with one of the three ecosystem players in China and offer their ecosystem exclusively on its handsets.
• Getting in now at the ground floor will give Huawei some leverage as it has reach to mobile users in a way that Alibaba, Tencent and Baidu do not.
• Consequently it may be able to negotiate a revenue share or better pricing for its devices that would help lift its margins from their current low level.
• This would work in China but elsewhere, Huawei is likely to remain a seller of commodity products and so faster growth outside of the home market is likely to harm profitability rather than help it.
• Improved profitability through scale is always a possibility but it will have to reach 10% smartphone share before any effects are likely to be felt.
• Consequently, while Huawei will focus its publicity on the top line, it is the bottom line that will dictate its ultimate success and sustainability.
• Handsets are no longer a prerequisite to sell infrastructure and I would not be surprised to see Huawei have another go at selling its handset business.
• One of the large Chinese ecosystem contenders with money to spend would be an obvious port of call.