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Briefing Jul 9, 2020 05:15 am EqualOcean

Italy Considering to Rule Huawei Out from Its 5G Equipment Market

Analysis EO
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Analysis EO
Updated 6 hours ago ·

China's Data Center Industry: Set to Take Off

In the past 20 years, the cloud sector saw several critical technology developments, including virtualization, container, microservice architecture and serverless architecture. These innovations, combined with final customers' demand, have been bolstering the thriving industry in the United States. By comparison, China's cloud market is still at the early stage, which is indicated by the sector’s small share in the country’s GDP. Recently, Alibaba published its three-year CNY 200 billion plan, Tencent also disclosed a five-year CNY 500 billion investment in the 'New Infrastructure.' At a glance ► Unlike the western markets that are primarily driven by the demand, the Chinese data center industry, like many other sectors here, is likely to be pushed forward first by the government-designed roadmaps and large companies' business strategies. ► The main catalysts include cloud computing, 5G and Artificial Intelligence. ► We expect that the whole industry will thrive in the future. ► Local third-party data center companies present quite a few new investment opportunities. Industry development prerequisite From 2007 to 2009, the market experienced fast growth from a small market scale. The growth rate saw a spike, fueled by the 3G adoption cycle in 2009. Since then and until 2019, 4G adoption was the catalyst for data soaring. Data centers in China Like those in the US, there are retail data centers and wholesale data centers in China. Retail data centers refer to data centers with small power (generally less than 100 kilowatts), and clients are mainly small tenants, providing electricity, cooling, internet connection and maintenance services. Wholesale data centers are usually rent by the larger customer like cloud service providers, consuming more electricity. Some wholesale data centers are hyper-scale facilities and usually provide customization. There are three types of data centers in China. China Telecom (728: HK), China Mobile (941: HK) and China Unicom (762: HK) are currently owning the most data centers in the country, leveraging their operational history in the space. Their cabinets are usually standardized, which often couldn't fit customer's various needs. Large cloud service providers are building their data centers in recent years. Some third-party colocation providers are increasing their cabinets dramatically, targeting future needs. Besides, one key difference from the US is that the traffic or data is concentrated on giants like Alibaba (BABA:NYSE; 9988:HK), Tencent (700:HK), ByteDance and Baidu (BIDU:NASDAQ). Research showed that over 70% of internet traffic is from their applications. We think this also implies data centers clients' mixture. Data centers generating more revenue from big cloud players benefited from the relation, which provides business stability, higher and faster utilization and funding access. Building data centers surround tier-1 urban areas and policy-friendly places are trending. Like other data centers in the world, facilities' locations are always closed to metropolises, which lower the key performance indicator of a data center: latency. What is more, differently, the Chinese central and local governments implement some policies on the building of data centers, 'new infrastructure' and Real Estate Investment Trusts (REITs) trial projects all set to accelerate data centers expansion. Based on BOC International’s figure, there are 2.27 million data center cabinets in China currently, 1.50 million data centers are being built or planned, although it can't cover the upcoming demand. We expect the business shifting to cloud, 5G adoption and AI will be the upcoming catalysts for a countrywide data boom. China's cloud market With the rapid growth of China's cloud market, increasing downstream demand is on the docket. China's cloud penetration rate was much lower than the US level proven by the cloud revenue divided by IT spending. The reason is the late inception of the Chinese market. CAICT expects China's public cloud market size to increase at over 30% by the end of 2023. Currently, the Chinese cloud market is still in the early stage as the services mainly on Infrastructure as a Service (IaaS). Therefore, we expect the cloud market tends to move toward what happened in the US, which more revenue generated from Platform as a Service and Software as a Service. In the meantime, IDC will benefit from this trend especially. The baton: 5G era 5G's adoption means an unpredictable upside opportunity for data centers. By the end of June 2020, according to the figure disclosed by China Mobile and China Unicom, at least 108 million users registered 5G bundles in China. Over 400,000 5G towers have been built so far and the target is to install 800,000 in 2020. With the adoption of 5G, we believe that higher resolution videos, cloud gaming, and self-driving cars can lift up the whole demand for data. Specifically, consumers started to make and watch data-consuming videos mainly in 2k or 4k: horizontal display resolution of approximately 2,000 or 4,000 pixels. In the past several years. Still, the scenario was not very popular because of the lack of relevant content, unsatisfied internet connection and power systems. It seems these significant problems are gradually being cracked with consumers who are stepping into the 5G era. Apart from videos, the development of cloud gaming is going to lift the data consumption. It will be adopted quickly as all the conditions are set out better, including low latency, stability, prices of 5G bundles and game offers. For now, cloud gaming consumes lots of data. Google's Stadia project was recently tested under the 4G/5G cellular. The test results showed the one-hour 360p game would spend 2.7 GB data. The figure jumped almost fivefold to 12.7 GB when running a 1080p game. We expect more data centers are set to be built to lower the latency. Artificial Intelligence Artificial intelligence companies will also ignite the data centers industry as they need lots of data to train their models. Theoretically, the more data trained, the model performs better. For now,  Gartner stated that 85% of AI projections will fail. The compute for AI is difficult as lacking optimized hardware. It takes days or weeks for training models. We believe that AI training tasks will keep growing fast as the improvement of related semiconductor equipment.   International Data Corporation reported the AI server shipment reached 79,000, increasing 47% year-on-year in 2019 in China. The report also revealed that the AI software market hit USD 2.89 billion. The whole market including hardware was USD 6 billion. Even the market is still in the early stage, we keep positive on its prospects.

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Aug 7, 2020 04:49 pm ·

Huawei TWS Sales Surge 50%, 120% More PC Sold

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Aug 6, 2020 11:43 am · US Department of State

US Increases Pressure on Huawei and Co, Launches 'Clean Network'

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Analysis EO
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Analysis EO
Aug 4, 2020 10:41 pm ·

1H 2020 China Smartphone Market Overview: 5G, New Types, Lower Prices

► The Chinese smartphone market is recovering steadily, thanks to the country's economic rebound and the excitement around 5G. ► By June, over 60% of the phones sold in China were 5G-enabled. ► During the first half of 2020, the prices for 5G smartphones got lower and lower, with a 40% decline by June. ► Chinese vendors were aggressively pushing new product series in the first half, with 216 new models being rolled out.  ► Huawei for the first time surpassed Samsung as the largest smartphone shipper globally, which is a result of Huawei's drive to expand product lines and price segment coverage. ► OPPO and vivo, as the second and the third vendors in the Chinese market, both encountered severe problems in channels and marketing. ► Xiaomi is in desperate need of a hard push in its smartphone segment.  ► Apple's lower price strategy turned out to be quite efficient: it brought the company a 35% year-on-year growth in China.  Overall shipments are rising – thanks to the economic rebound and local 5G phone hype Economic rebound On July 16, China reported its GDP of the second quarter of 2020, indicating an economic growth of 3.2%. Meanwhile, the US saw the most significant GDP recession for the past two centuries, with a 32.9% decline. The comparably strong economic rebound in China results from the successful virus suppression and the government's expansive fiscal policies. As consumer goods, smartphones lie in the scope of the government promotion plan in China and consequently saw decent overall performances during the first half-year of 2020. 5G hype Besides the favorable macroeconomic environment, the hype of replacing 4G mobile phones with 5G ones in China also contributes to smartphone sales. Though it will still take years to realize the full coverage of the next-generation network, Chinese telcos and smartphone vendors have already been lavishly promoting 5G cellular data packages and 5G-ready communication devices. “5G smartphones are thriving with 39 million units shipped in China in Q2 2020, up 260% from Q1,” said Louis Liu, a Canalys analyst. The 5G subscribers in China had already surpassed 100 million as of July 2020. The chart above reveals that the percentage of 5G smartphones is climbing rapidly, with promotion from all sides. On the one hand, the vendors are compressing their margins to compete for 5G phones market shares, which further pushed consumers to buy a 5G one since there is no price difference with 4G. On the other hand, there is actually no choice for Chinese consumers since all the newly released flagships or featured ones in 2020 are 5G-enabled, except for iPhones. The 5G function is becoming a default for Chinese vendors. In June, over 60% of phones sold were 5G-enabled. Compared with 20% in January, the growth is stunning. Though the shipments of 5G phones keep rising, the selling prices have been declining drastically as well, as a result of the price competition. From January to June, the average selling prices for 5G phones dropped by 43% from USD 645 to USD 369. The lowest price for 5G phones now is under CNY 2,000. Vendors that have already developed overseas channels have considered pushing lower-priced 5G phones to overseas markets where the 5G infrastructure is ready, such as South Korea, Japan and some European countries. For instance, OPPO is expanding to the Japanese market with its 5G phone Find X2, and Xiaomi is heading for South Korea to compete with local Korean companies on 5G terminals. Aggressive new releases Canalys believes, “a mature e-commerce channel in China is critical to the Chinese smartphone market recovery.” The online sales channels are indeed crucial for the first quarter's sales. However, for the second quarter, as most cities in China have terminated the quarantine policy since March, reopening shopping malls and pulling people back to workplaces, the online channel might not serve as the foremost contributor. Per EqualOcean's analysis, the surge in Chinese smartphone sales in the second quarter is credited to the hard work of the top smartphone vendors – Huawei, OPPO, vivo and Xiaomi (01810:HK). The phone vendors reckon the year of 2020 – the second year of the 5G era, as the key time to occupy the market since the demand for 5G-ready phones is organic as the 5G network rolls out. Consequently, during the first half-year, Huawei, OPPO, vivo and Xiaomi, along with other relative niche brands in China, released a total of 216 new models, where 5G specs account for nearly 50%. Huawei – humble and focused As the news of Huawei outcompeting Samsung (005930:KR) reveals, Huawei smartphone's milestone of championing the global shipment is primarily due to the excellent performance of the Chinese market compared with other regions in the world, which are still under the shadow of the pandemic. Though the region’s economic and health status matters a lot, Huawei mobile's success is not purely exogenous as the company's overseas shipments plummeted 27% in the second quarter due to the US-China tension and the pandemic. The substantial growth of Huawei at 8% in 2Q 2020 in the Chinese market, which is declining, is more important to address since efficient strategies could have a longer-term effect on the company's performance than the temporary market turbulence.  The first strategic move of Huawei is to satisfy the demand of ultra-low-end phones and lower the overall pricing. The pricing strategies for its spring flagship P series did not differ much from the last year – they even rose a bit higher. However, the Changxiang and Changwan series targeting the low-end segments started to draw on Huawei's marketing resources and even enjoyed their own press launches this past June. According to iyiou.com, a sister publication of EqualOcean, Changxiang 10, which is priced under CY 1,000, topped the 618 shopping festival smartphone sales and surpassed the second Huawei Nova 7 SE by 53%. The second is still about the company's commitment to the consumer business sector as the core of other segments. According to Huawei's interim press release, this sector saw a 2% increase compared with 2019, accounting for 56.34% of the total revenue. The year 2020 is a tough time, especially for Huawei, as the pressure is being applied from every direction. The company's answer is to pool all resources to boost the consumer business and cut expenditures on non-central businesses such as the investment in optical cables. Though its Huawei Mobile Services (HMS), which is a replacement of the Google one, is one of the core strategies that Huawei bears to thrive long-term, it does not affect the sales much in China's market since Chinese consumers do not depend deeply on Google services in the first place. OPPO and vivo – awaiting shifts In China, OPPO and vivo (OV) together released 16 new series in the first half-year of 2020, covering prices from USD 300 to 800. This is quite the typical style of the two company's aggressive marketing approaches. Though OV are comparably less troublesome in terms of external pressures, the shipment declines are still apparent, at around 20%. The plight for these two companies is mainly from three sides – offline sales declines, overseas market declines and the brain drain. The pandemic and the livestreaming shopping hype, to some extent, forced consumers to purchase online. The shift of people's buying behavior struck the two’s sales, which mainly happen in their offline outlets. However, with the announcement that OPPO is launching the online platform which integrated OPPO, realme and OnePlus, and life gradually going back to normal, the distribution capacity of the pair is not likely to be in huge trouble in the second half-year. The anti-China sentiment in the overseas market, especially India, the second-largest smartphone market, is more worrisome as the Chinese vendors are now contemplating a worst-case scenario whereby they could possibly lose the whole 100 million-strong Indian market. One of the foremost crises for OPPO during the first half of 2020 was the dismissal of OPPO's Vice President Brian (Yiren) Shen, a legendary figure in the smartphone marketing circle. Brian is the one who came up with a household slogan 'Charge for five minutes, talk for two hours' and pushed OPPO's marketing to a climax with lavish endorsement activities that covered almost all kinds of trendy variety shows. With Brian leaving the table, it remains suspicious whether OPPO will maintain its high exposure to the market through new approaches. Xiaomi – reserving or drained? In the Chinese market, Xiaomi's first half was rather conservative, with just the Mi 10 series and the upgraded version of last year's Redmi K30 Pro greeting the world. The price range is not as wide as its main counterparts and is perfectly included within their coverage. The marketing side did not tell a story of Xiaomi's diligent work in its smartphone sector, as the Mi 10 series does not have a celebrity endorsement while the previous two generations invited big 'cast members' (Kris Wu and Roy Wang) with high popularity in China. Quite the opposite to Huawei's strategy of focusing on the main business, Xiaomi resorted to the non-central product family by broadening the product and service boundaries. Though the interim report of Xiaomi is still in the air, it is apparent that Xiaomi's smartphone segment will stumble and the loss is likely to be compensated by the revenue from financial services and IoT products. Facing the pressure from Huawei, Xiaomi's Chinese smartphone business is desperate for denser product layout with quality. Xiaomi's management seems to have realized the pessimistic situation of its smartphone business and therefore embrace the former ZTE Mobile CEO as the smartphone division head. Apple – the best performer The performance of Apple's (AAPL:NASDAQ) iPhones in China is as gorgeous as the company's renowned designs, with 35% year-on-year growth, while Huawei is at 8% – the other top five vendors all have declined to present. The number of 35% showed the low-price strategy is really working well in China. For the first time, Apple officially participated in the middle year shopping festival in China with a 20% discount for the iPhone 11 series and a discount of CNY 200 for the iPhone SE, plus some additional installment payment discounts. If counting the channel discounts and shopping subsidies, the iPhone SE was priced under CNY 3,000 on Pinduoduo (PDD:NASDAQ). Notably, iPhones are the only high-end specs being not 5G-enabled and still witnessed such growth. If the upcoming iPhone 12 with 5G empowerment is still priced competitively, further growth could be expected – even when the market's patriotism is ready for Huawei. However, it is also dangerous for the iPhone to fall in the price competition trap in the Chinese market at the cost of losing the delicate design and fine quality. Balance matters.

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