Commentary on Political Economy

Monday 14 September 2020



Huawei courts app makers despite sanctions threat to its devices

In the second quarter of this year Xiaomi overtook Huawei’s sales in Europe, according to Canalys © AP

At Huawei’s annual developers’ conference, the company made a difficult pitch to the thousands of longtime partners in attendance: to continue making apps for its devices, despite not knowing how much longer Huawei would be able to make smartphones.

As Zhang Ping’an, Huawei’s head of consumer cloud, said: “Without apps, our phones are not ‘smart’ phones.”

After the first round of US sanctions in 2019, the company rapidly expanded its own smartphone software to reduce its reliance on partners who can no longer do business with it, such as Google and Facebook.

Yet amid all the optimism from the developers attending the conference, Huawei never discussed the problem of the latest round of US sanctions head on. From September 15, Huawei will be unable to buy any chips that were made using US technology, meaning the end of its smartphones as they are currently designed.

“They will adjust production capacity, and try to extend their lifespan, but by the second half of 2021, Huawei still faces the risk of having no phones to ship, both domestically and internationally,” said Jia Mo, smartphone analyst at Canalys.

Huawei’s engineers have been working overtime to find ways forward despite the sanctions. At the conference, the company announced that its new operating system, HarmonyOS, would launch on smartphones next year. Its unique advantage, the company argues, is that it will provide the first major unified system for smartphones to connect to internet of things devices.

Line chart of Global market share by unit sales (%) showing Huawei’s rapid handset growth

Borrowed time

Huawei’s consumer division is coming off a run of rapid growth, overtaking Apple to become the world’s second-biggest smartphone vendor in 2018. In the first half of 2020, Huawei came extremely close to winning the top spot, boosted by sales in China. In the first few months of China’s Covid epidemic, many Huawei stores sold out of tablets.

But despite this recent strength, the company’s consumer division faces an existential threat, with developers and Huawei staff at the conference appearing to be equally in the dark as to how the company could make phones next year, after its current chip inventory runs out.

Asked how the smartphone division can survive, Vincent Wen, a Huawei executive who works with app developers, told the Financial Times: “That’s the kind of question you should ask our senior leadership.”

One employee said that the company was still resolving complex supply chain questions, and wanted to keep a low profile. That marks a contrast to the bullish confidence of founder Ren Zhengfei, who actively courted foreign media last year.

China’s ban on Google has handed Huawei an advantage in having developed its own software ecosystem. The Chinese developers present at the conference are already bought-in to using Huawei Mobile Services, the suite of apps the company uses for the Chinese market, where Google Mobile Services is blocked. For HMS, as with any ecosystem, there’s an entry cost for new developers, who require a month or more to convert their apps, said a gaming app company manager.

“But it could bring us more users overseas,” the manager added.

Since it is so difficult for Chinese firms to develop apps for a banned platform, Huawei’s switching from GMS to HMS gives them a chance to easily get their apps out of China. Domestic developers say they feel well supported by Huawei, which takes a much smaller cut of app revenues — below 15 per cent — compared with Apple and Google, which take 30 per cent.

Foreign app developers face a very different choice, said Rich Bishop, chief executive of AppinChina, a major publisher of international apps in the Chinese market. “Outside of China, foreign app developers are focused on iOS and Google Play, and will be reluctant to spend time adapting their apps for Huawei,” said Mr Bishop.

All that is predicated on Huawei still being able to make the phones themselves. When asked about the company’s survival, some developers were doggedly loyal: “Even if Huawei can’t sell more phones next year, we still have hundreds of millions of existing users.” Most reserved judgment, saying that they would “wait and see”.

“We should be fine this year, as Huawei is still able to launch new products this year. But next year, we will see,” said another gaming company executive.

The new challengers

The shortage of Huawei devices is already being felt. Canalys estimates that Huawei has 70m-100m devices’ worth of components left to sell — less than what it sold in the first half of 2020 alone. The company is trying to lower sales and stretch out production, in an attempt to prolong its relationships with factories and sales channels, said Mr Jia.

Huawei’s smartphone competitors are already circling. Privately, rivals talk about their respect for Huawei and its leadership in China’s tech industry. Nobody wants to publicly declare their encroachment for fear of sounding crass or politically insensitive.

But the movements are clear: in the second quarter of this year, Xiaomi overtook Huawei’s sales in Europe, according to Canalys. In September, Oppo raised its sales target for the second half of 2020 by 30 per cent.

While there was no clear challenger as large as Huawei, Ben Bajarin, analyst at Creative Strategies in California, said BBK Electronics, which owns Oppo, Vivo, OnePlus and Realme, was best positioned, thanks to its portfolio of brands that can target different regions.

China’s tech sector is flourishing but could wither at any moment because we don’t have roots

Wang Chenglu, head of Huawei consumer software

“Patriotism might be able to push Huawei’s target consumers to Oppo,” said an Oppo marketing team employee. “We’ve also persuaded some key opinion leaders who used to support Huawei to be Oppo fans instead, which is a key part of our rebranding.”

Finding common cause with Chinese partners may also boost Huawei’s most radical offer to its partners: lean on our entirely self-developed app platform and you will not suffer possible US sanctions.

“China’s tech sector is flourishing but could wither at any moment because we don’t have roots, especially in software,” said Wang Chenglu, head of consumer software.

Richard Yu, chief executive of Huawei’s consumer division, added that the company wanted to help internationalise Chinese apps like TikTok — which currently faces US sanctions that would kick it off Apple and Google’s stores.

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