On August 29, 2023, Huawei propelled its new model Mate 60 to the public without notice in advance.
Huang Yuanpu, the founder of EqualOcean, initiated a survey on RED with the theme "Are you optimistic about Huawei's development." 804 people participated in the survey, with over half still holding a positive view on Huawei. In the comments section, EqualOcean finds that many users expressed anger towards the US sanctions, believing that the sanctions have hindered Huawei's globalization process but have confidence in its future development.
The data provided by Huawei confirms the views of the majority. On August 11, Huawei released its financial performance for the first half of 2023. During this period, Huawei achieved sales revenue of RMB 310.9 billion, a year-on-year growth of 3.1%, with a net profit margin of 15.0%. In the first half of 2022, Huawei's sales revenue was RMB 301.6 billion, experiencing a year-on-year decline of 5.87% and a net profit margin of only 5.0%. This counter-trend growth surprised many people as they believed it would be difficult for Huawei to recover quickly during the downturn in 2021 and 2022. Some even thought Huawei might collapse. The steady performance of its ICT infrastructure business, growth in terminal revenue, strong growth in digital and cloud business, and continuous improvement in the competitiveness of the smart car business in the first half of 2023, led many to exclaim, "Huawei has come back to life."
As a global company, Huawei's development story in the international market is highly representative. After experiencing severe sanctions and challenges, how was Huawei able to survive? In this article, EqualOcean will attempt to answer this question.
Luck and Strength Enable Firm Footing in International Market
The European market, with its advanced communication technology and industrial foundation, was one of the early and heavily invested markets for Huawei. Huawei's development in Europe over the past 20 years serves as a model for its successful international expansion and reflects the progress made by Chinese high-tech companies in the evolving world.
It is well known that Huawei's two major businesses in Europe are selling base stations and smart terminals. In the early 2000s, when competition was fierce in the European market, Huawei, as a relatively young Chinese company, was not well-known. At that time, Chinese companies were synonymous with "low price, low technological content, and low added value." Huawei's primary business in Europe initially focused on telecommunication operation business, competing against a series of well-established European telecom companies such as Ericsson, Nokia, and Siemens, which dominated most of the market. Huawei had yet to gain recognition in the mainstream European communications market and held only a negligible market share. Unlike its smooth expansion in Latin America, the Middle East, and Africa, relying on labels like "low price" and "good service," Huawei faced a more arduous and tortuous path in Europe.
Initially, Huawei could only enter the European market through agents, introducing its 10G SDH optical network products to markets like the UK, France, and Germany. In 2003, Huawei won the CDMA450 project contract from European telecom operator Inquam, successfully entering markets such as Portugal, Germany, Romania ruˈmeɪniə, Russia, and Sweden for this mobile system.
In 2004, a crucial year for Huawei's telecommunication business in Europe, the company established its European headquarters in the UK, shifting its strategic focus to the high-end European market. In April of the same year, Huawei won the bid for the local network expansion project of Swedish telecom operator Banverket Telenät, covering the entire country and distinguishing itself in the fiercely competitive Nordic telecom market. In December, Dutch mobile operator Telfort purchased Huawei's WCDMA 3G project technology, further enhancing Huawei's reputation in the European market. However, an unexpected turn of events occurred when Telfort was acquired by another operator, Royal KPN after Huawei successfully completed the distributed base station construction project. The abandonment of the distributed base station delayed Huawei's significant expansion in the European market for two years.
The ToB (business-to-business) segment in the communications field has a large scale and long construction cycle. Once a cooperation partner is selected and a contract is signed, the cost of replacement becomes prohibitively high. Therefore, early-stage technology and quality must be solid to establish trust. This trust-building process contributes to brand recognition and long-term development. Although Huawei's distributed base stations were abandoned by Telfort, in 2006, Vodafone, the world's largest mobile communication operator, recognized the strength of Huawei's distributed base station technology. In order to compete with its rivals, Vodafone adopted Huawei's distributed base stations. Huawei's previous efforts had not been in vain, and this collaboration paved the way for rapid expansion into higher-end European markets, establishing a foundation for gaining a reputation.
During the collaboration with Vodafone, Huawei began expanding its consumer business in Europe. Unlike their carrier-related ICT infrastructure business, Huawei's consumer business faced more challenges. In November 2005, Huawei signed a global procurement framework agreement with Vodafone, starting from 2006, to provide customized mobile phones for Vodafone's operations in 21 countries. Through the "operator network + customized smartphone" model, Huawei made headway in the European market.
From the perspective of industrial upgrading, companies that solely engage in DM manufacturing are always at the mercy of carriers. They operate silently behind the scenes as "sweatshop workers," with the majority of profits being taken in the chain. This approach does not offer significant benefits for brands and long-term development. In the first five to six years, Huawei accumulated experience as an ODM manufacturer in the low-end market and stubbornly rooted its consumer business in Europe.
In 2011, Yu Chengdong, one of Huawei's key figures, took charge of Huawei's consumer business. In 2012, he made a Weibo post that was considered a historic "document" in Huawei's development:
Since taking over Huawei's consumer business, we have made several major adjustments: first, transitioning from being an ODM white-label operator to becoming an OEM with Huawei's own brand; second, shifting from low-end to mid-to-high-end smart terminals; third, giving up highly popular but low-profit ultra-low-end feature phones; fourth, introducing Huawei HiSilicon quad-core processors and Balong chips; fifth, embarking on the path of Huawei's e-commerce; sixth, starting the Emotion UI design for user experience; seventh, establishing the goal of being the number one in hardware.
From the subsequent development process, Huawei's expansion in the European market and even its entire consumer business within the group followed these seven guidelines. In 2012, Huawei released its first proprietary branded smartphone, the Ascend P1, which started much later compared to its carrier business and didn't achieve expected sales. While the OEM business had not yet gained a firm footing, the ODM business saw a significant decline, putting considerable pressure on Huawei's consumer business.
According to reports, the devices that truly established Huawei's position in the high-end smartphone market in Europe were the P9, Mate 9 Pro, and P20. These three models were first released in 2016. In the four years before becoming "hot-selling" devices, Huawei faced challenges in its smartphone development journey due to a lack of experience in targeting consumers (toC) and the rapid early-stage development of mobile internet. Established brands like Samsung held long-term advantages. Nevertheless, during these four years (2012-2015), Huawei's smartphone shipments experienced significant growth. Data shows that Huawei's smartphone shipments increased from 32 million units in 2012 to 108 million units in 2015, successfully ranking among the top three global smartphone manufacturers. After overcoming this tough challenge in Europe, Huawei replicated many successful experiences to penetrate local markets in other regions, solidifying its position as a truly global company.
In the international market, Huawei transitioned from relying solely on its telecommunications business to having a dual focus on telecommunications and consumer businesses.
Dealing with US Sanctions: Huawei's Consumer Business Takes a Hit
In May 2019, the US government, led by President Trump, issued an "Entity List" targeting Chinese high-tech companies. As a result, Huawei and its more than 70 affiliated companies were significantly affected.
Prior to this, Huawei's consumer business, particularly its smartphones, had become a representative Chinese brand in the high-end smartphone market, securing a top-three position alongside Samsung and Apple in major international markets. Just as Huawei was about to take the top spot, a heavy blow from the US government sent its consumer business plummeting. During the sanctions period, Huawei lost support for 5G chips and Google stopped cooperation, resulting in Huawei phones being unable to use Google Mobile Services (GMS) and losing access to Android system updates.
Unlike the B2B business, the smartphone market is fiercely competitive with numerous brands, and consumers can easily switch to other brands. Without the ability to bundle with Google services, Huawei phones became virtually unusable for many users. After experiencing a brief recovery in early 2020, Huawei's consumer business saw a significant decline worldwide. According to data, in 2021, Huawei's consumer business revenue dropped nearly 50% year over year, accounting for only 38.2% of total revenue. In 2022, Huawei's terminal business revenue, renamed from "consumer business," reached only RMB 214.5 billion, representing an 11.9% decline year over year. The international market share of Huawei phones, which was once among the top three, rapidly fell to outside the top five in various statistical reports.
On the other hand, Huawei's telecommunication business, another major segment, had reached its peak around 2016 before the sanctions. As mentioned earlier, the construction cycle of B2B telecommunication business is relatively long, demanding strict technical requirements. While policy factors can have an impact, business interactions among companies consider multiple factors, and switching equipment providers comes at a high cost. Following the sanctions, Huawei's ICT infrastructure business was not as heavily affected as its consumer terminals. Ericsson, previously defeated by Huawei in Europe, slightly increased its market share during the initial period of Huawei's sanctions. However, data from 2021 and 2022 shows that Huawei's 5G devices maintained their dominant position in the global market.
EqualOcean believes that Huawei lost only "one leg" with its consumer business being impacted by US sanctions. Looking at Huawei's development after the sanctions and the overall state of the smartphone market, it is evident that smartphones, as a low-margin business, experience market fluctuations as inevitable phenomena, which can have adverse effects when they constitute a significant portion of a company's operations. Huawei has never claimed to be or aimed to become solely a smartphone manufacturer; strategically, Huawei may not want smartphones to be a pillar business.
Therefore, while ordinary consumers may think that Huawei would collapse due to US sanctions, Huawei has stubbornly persevered. The fundamental reason is that the sanctions did not strike at the core of Huawei's business. In Huawei's annual reports before and after the sanctions, consumer business, particularly smartphones, did not occupy much space. Instead, the focus was on the ICT infrastructure business, which remained Huawei's primary business. The 2019 Huawei annual report stated, "ICT infrastructure business is one of Huawei's core businesses," and the latest 2022 annual report data shows that ICT infrastructure revenue accounts for over half of Huawei's total revenue.
In recent years, Huawei's annual reports highlighted various ICT infrastructure projects. Besides projects within China, Huawei's ICT infrastructure business expanded into regions such as Japan, South Korea, the Middle East, Latin America, and Europe, providing continued services and implementing new facilities. Huawei not only supplies communication equipment but has also entered areas such as the Internet of Things (IoT), cloud computing, and artificial intelligence (AI). In Europe, Huawei has partnered with multiple companies to launch a range of IoT solutions, seeking new growth points in the European market. In emerging markets like the Middle East, 5G and cloud services dominate, and Huawei increasingly deploys its latest and most advanced technologies there. After the "leg" of consumer business was hit, Huawei's cloud computing, intelligent vehicle solutions, AI, and other businesses emerged as supporting "crutches," steadily contributing to the company's revenue through enterprise-focused operations.
EqualOcean believes that Huawei's flexible and diversified business layout is a crucial factor in its ability to withstand sanctions without collapsing. Huawei's high investment in research and development has been widely praised, and it is undoubtedly an important factor in its survival. When faced with unexpected setbacks, relying solely on one aspect of the business would quickly deplete the funds dependent on high R&D investments. In the face of absolute financial depletion, any attempts requiring resource allocation would be severely limited. Huawei has never put all its eggs in one basket. Therefore, even when its smartphone business was impacted, there were sufficient funds available for research and development, assisting Huawei in overcoming difficulties. Frankly speaking, judgments made by ordinary consumers based on the hardships encountered with Huawei phones are mistaken in assessing the company's overall development.
In 2023, Huawei's consumer terminal business experienced a new dynamic following the sanctions-induced downturn. In May 2023, Huawei held a large-scale product launch event for its new smartphones in Munich, Germany. This was the first major overseas launch event by Huawei in nearly four years. During this period, Huawei's HarmonyOS had already covered over 200 million Huawei devices, and several of its HiSilicon chips as well as its self-developed intelligent smartphone display, Kunpeng Glass, had been introduced. According to media reports, Huawei's Consumer Business Group COO, He Gang, stated in an interview in March 2023 that Huawei had overcome many challenges in recent years, including the development of more than 13,000 alternative components. Foreign teardowns showed that the localization rate of Huawei Mate40 series reached 60%, and the localization rate of Mate50 was even higher at 72%. According to IDC data, in the second quarter of this year, Huawei regained a top-five position in the Chinese market with a 13% market share, achieving a remarkable 76.1% year over year growth.
In 2023 All signs indicate that with the improvement in the domestic market, Huawei's consumer terminal business will once again venture into the international market. However, it is difficult to predict where the focus of its smartphone business will be as it returns to the international market. From current actions, it seems that Huawei still values the European market as a brand stronghold. The important variable for Huawei's re-expansion in the European market will be whether European countries will follow the US or not in implementing similar policies. EqualOcean believes that if Huawei wants to regain globalization in its smartphone business in the future, as much effort will need to be put into public relations as in research and development. After years of absence from the international market, "rebuilding trust" will be the key phrase for Huawei to return to the international smartphone market.