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An incredible situation for Huawei: Do or die

With effect from August 19, American companies including Google are prohibited from selling products and services (like Android) to Huawei

Jun 15, 2019 by Moulishree Srivastava
An incredible situation for Huawei: Do or die

When the US government blacklisted Chinese smartphone manufacturer Huawei last month, it set off a chain of events leading to the company summoning Vinod Kumar*, a sales representative at Huawei, along with 100 other executives.

The call was to apprise them of what had happened and train them to handle queries from buyers.

“We were told that despite the ban by US, nothing was going to change for the company or customers. There won’t be a shortage of our flagship smartphones. Huawei would also soon launch its own operating system HongMeng or ARK,” Kumar said.

With effect from August 19, American companies including Google are prohibited from selling products and services (like Android) to Huawei, and the Chinese giant is leaving no stone unturned to ensure the perception that business is as usual.

There is an eerie silence about the company’s operations in India.

Several industry experts who previously spoke about the ban declined to comment now citing various reasons. Some said that media reports were creating negativity around the brand.

Huawei’s retail chain partners are busy trying to paint a rosy picture, that of the ban causing minimum impact on its smartphones sales. On the flip side, most retail chains seem to have limited Huawei smartphone models — P30 series and Honor 8X. Older models have not been available offline for the last few months — an indication that Huawei may have seen this coming.

Meanwhile, Amazon and Flipkart are running a clearance sales for various smartphone brands.

Impact is sure

Analysts tracking the industry expect a dip in Huawei’s sales because of the development.

“Huawei had been gaining a bit of a momentum in the premium segment recently, and the premium segment user is always a learned user. They understand what the OS is and are a bit more cautious around security,” said Faisal Kawoosa, founder and chief analyst at research firm Techarc.

“Although it would still take some time for figures to come out, the ban is likely to have an impact.”

Anshul Gupta, an analyst at research and advisory firm Gartner, said, “Whatever is happening, it is certainly creating some negativity around the brand. That will certainly affect the demand for their smartphones. But as far as the situation is concerned, they are the same as they were three months ago when the ban was not in place.”

Some industry experts believe the demand for Huawei’s flagship phones in India is the same. “Huawei’s recent strides in smartphone innovation have been incredible. As such, the headroom for growth in India remains high with the right marketing and messaging for consumers,” said Prabhu Ram, head- Industry Intelligence Group at CyberMedia Research.

“The current P30 flagship phones remain unaffected due to the ban by US . The consumer sentiment towards Huawei ban is ambivalent. If the ban persists, it will have tough consequences for the company, and slow down its sales in India.”

However, brand loyalty in the premium smartphone segment—Rs 25,000 and above—is generally high and it does not see as much churn as the entry-level segment, Ram said. “So, Samsung users stay loyal to Samsung, OnePlus users remain mostly with OnePlus. There is very little brand switching, from competing brands to Huawei, or vice-versa.”

Huawei is the world’s largest telecom equipment manufacturer and second largest smartphone maker after Samsung. It shipped a total of 206 million smartphones in 2018. Its smartphone business contribute up to 45% of its revenue, which crossed USD 100 billion for the first time in 2018.

At USD 107 billion, Huawei’s revenue is just behind Google, which earned USD 136 billion last year.

“Huawei consumers’ sentiment remains unaffected as it’s still early days, and the entire export ban is still in its infancy. From a consumer perspective, it is still tough to predict the outcome post 90 days. In such a fluid situation, users stand to lose by selling their device on the basis of pure speculation and panic, for mere peanuts."

It’s important to note that all the devices sold before the ban will have access to Google services. Only future devices will be cut off from Google Play Store, Google services and non-open source parts of Android.

According to a retail executive, there is significantly lower demand for Huawei’s flagship devices including P30 as compared to previous months. And those who are interested are concerned about the ongoing issue with Google.

Huawei’s chance to build an ecosystem

Roughly 49% of Huawei’s smartphone revenue comes from China and the remaining from overseas markets, according to a report by Counterpoint Research. “Within the overseas markets, Europe accounts for 23%, and will probably be the most affected,” the report noted.

India, the world’s second largest smartphone market in the world after China, is not yet a significant revenue earner for Huawei, but remains a potential aspirational market.

The company commands almost 4% market share with its Huawei and Honor brands in the country and gives tough competition to Samsung, Google and OnePlus in the premium segment.

After London and China, Huawei launched its new flagship smartphone Honor 20, Honor 20 Pro and Honor 20i in India despite US sanctions earlier this month.

A faction of analysts expect things to be resolved before the ban kicks in.

“That ban hasn’t been imposed yet. We don’t know whether the ban will be imposed after two months or if there will be a resolution midway,” said Gupta.

Huawei is reportedly negotiating with the US through Google. Earlier this month, the search giant warned the Trump government that the export restriction on Huawei would risk national security.

In a recent Bloomberg report, Huawei chairman Liang Hua has acknowledged that Google is working with the US Commerce Department to find a solution. He said Huawei has not negotiated directly with the US government and is waiting to see how talks through Google evolve.

“In the short term, there is some impact on our business,” the report quoted him saying. ‘In the long term, we will have to develop our own operating system and ecosystem.”

Ten thousand developers on the grind

In fact, Huawei, which is known for its “wolf-like” culture and “all or nothing” philosophy, had been aware of its vulnerability — the dependence on American companies — for a while now.

According to a report in South China Morning Post, Huawei had started working on its own operating system back in 2012 to counter the rising dominance of Android. It finally revealed its hand in March this year amidst the increasing tension with the US.

After the ban was announced by the US on May 19, Huawei CEO Ren Zhenfei told CNBC in an interview that Huawei’s operating system could be ready by the fourth quarter of this year. He also said the operating system will support all Android apps and would come with its “App Gallery” as the default app store.

But the company has stressed that the operating system will be launched only if it receives a permanent ban from using Google or Microsoft products.

Speaking to the media a week after the sanctions, Zhenfei said the company had for long run a “spare tyre” or Plan B strategy.

"Even if there is an insufficient supply from our partners, we will face no problems. This is because we can manufacture all the high-end chips we need ourselves. In the 'peaceful period', we adopted a '1+1' policy – half of our chips come from US companies and half from Huawei,” he said, according to a report in The Register.

Huawei has assigned as many 10,000 developers to work across three shifts a day in offices in Shanghai, Shenzhen and Xi’an to try to eliminate the need for American software and circuitry, Bloomberg reported, citing sources.

As things stand now, Huawei’s OS is unlikely to be rolled out before the 90-day grace period is over. In that scenario, Huawei may use modified version of open-source Android OS in its smartphones, till it is ready with ARK OS.

“Huawei has made substantial contributions to the development and growth of Android around the world. As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefitted both users and the industry," the company spokesperson told The Passage, in an email response.

"Huawei will continue to provide security updates and after-sales services to all existing Huawei and Honor smartphone and tablet products, covering those that have been sold and that are still in stock globally.”

“All major app companies are US-based. So if Google is not supporting, they will also not support,” said Kawoosa. “Even if Huawei comes out with its own OS and own alternative of WhatApp and other apps, the problem is will they be interoperable? Because at the end of the day WhatsApp is also a US company. Then how would you bring users on your ecosystem?”

“It is do or die situation for Huawei,” said Kawoosa. As per CMR’s Ram, if the ban comes into play, Huawei will stay strong in China, lose out in most global markets, and India will also be a tough call. Despite the challenges ahead, Huawei is running the show quite spectacularly — with 5G trials, R&D or new launches.

A Xiaomi employee based out of Beijing said rumour in the industry is that Huawei is looking to control over 50% market share in the domestic market from the current 30% to offset the demand drop in Europe.

“While the US export ban situation is still fluid, it remains a double-edged sword,” said Ram. “If, unlike ZTE, Huawei does not fail and fold, and is able to rebuild itself with its own OS and independent apps ecosystem, Google stands to lose Huawei’s over 200 million smartphone base globally."

*(Name changed as per request)

Moulishree Srivastava

Moulishree Srivastava is a Bangalore-based tech journalist. She focuses on emerging Indian startups and unicorns. She can be reached at moulishree@thepassage.cc.

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