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Huawei may face make-or-break scenario as troubles snowball

Paul Lipscombe
June 20, 2019

How the current saga of the Chinese vendor pans out will be crucial to its future on a global scale

Less than 10 years ago, the name Huawei was barely known among UK consumers.

The Chinese company supplied Vodafone with data modems and that was about the extent of its activity on the mobile side.

Then, somewhere around 2009, the Chinese dragon stirred. Word arrived that it planned to become a leading UK provider of smartphones, with Mobile News getting wind of this through more than just a press release.

James Blackman, editor of the publication at the time, revealed that Huawei (known in the office as Who Are They?) had made him an offer he couldn’t refuse as a press officer.

Soon after that, mobile industry heavyweight Mark Mitchinson (Nokia, Brightstar, Carphone Warehouse) got the call and decamped to Huawei’s Basingstoke office amid a UK recruitment drive by the vendor.

Huawei’s surge

Last year, Huawei’s aspirations came true when it broke the duopoly of heavyweights Samsung and Apple. After years of dominating the smartphone arena, there was another gunslinger in town, shipping a barely imaginable 59.1 million smartphones in the first quarter of this year.

Until Huawei made big gains last year, it wasn’t a household name, or even one that many people could pronounce properly. But now, it regularly appears on the news – and not always for the right reasons.

The world’s second-biggest smartphone manufacturer faces all kinds of uncertainty. For a start, the Trump Administration placed Huawei on the US Entity List, which requires foreign companies to have a licence before trading with American businesses.

The telecoms world was then stunned on May 19, when this led to Google being obliged to bar Huawei from updates of its Android operating system and access to some of its services such as GMail via the Play store, including the latest security updates.

The knock-on effect was almost immediate. Chip designer ARM, which provides processors for Huawei smartphones and 5G base stations, suspended all business with the company in the wake of the blacklisting.

At the same time, Vodafone and EE pulled the Huawei Mate X 5G from their respective 5G launch line-ups.

Paused: Huawei has paused the Mate X, while EE and Vodafone pulled the Mate 20 5G from initial 5G line-up

Trump has since postponed the licence restriction on Huawei for three months, saying that the vendor could still be included in any further trade deal.

US Treasury secretary Steven Mnuchin backed this up on June 9, claiming that Trump might relax restrictions on Huawei if progress is made in the trade war with China.

Crucial time

Nonetheless, the events could create a make- or-break scenario for the vendor, and CCS Insight chief of research Ben Wood fears for Huawei’s consumer division.

“All this news is a major blow to Huawei’s consumer business. It had largely weathered the storm created by bans on products because of its strong position on network infrastructure,” he says.

IDC associate vice president Francisco Jeronimo expected these types of knock- on effect following the decision to place Huawei on the Entity List, adding that he thinks it may be a challenge for the company to continue operating in some key markets.

“After the announcements were made, the implications began to be very real for Huawei,” he says. “Internationally, it could become very difficult. It’s a politically motivated decision and it is a shame for Huawei that it has been caught up in a trade war.”

Iris IoT Solutions MD Stephen Westley was stunned about the Google restrictions. “I was in disbelief when I heard it, because it’s likely to have massive repercussions for Huawei. There will be no winners for the mobile industry; it won’t be a good outcome.”

The trade war between the US and China has turned into the world’s largest poker game. The past year has seen the US lobbying other countries, including Australia, Canada, New Zealand and many more in Europe to shun Huawei’s 5G infrastructure and equipment amid fears of espionage.

Pangea sales director and O2 veteran Bernie McPhillips likens the situation to “playground bullying” of the vendor. “It’s unprecedented how political this has become,” he said.

“Huawei has put on a brave face despite all this. A number of steps have been taken against the organisation from companies around the world.”

Canalys senior analyst Ben Stanton adds the situation with the US has “made it clear that Huawei is being used as a scapegoat.”

Past tussle

This is not the first time that a Chinese telco has encountered difficulty with the US. In 2017, the US accused ZTE of violating a trade agreement by doing business with Iran and North Korea.

This led to months of disputes that eventually cost ZTE $1 billion to continue operating and get restrictions lifted on the use of key components.

Huawei is now facing something similar, according to Stanton, who questions the volume of evidence presented so far.

“What has surprised me is the lack of evidence against Huawei from the US administration,” he says. “With ZTE, there was clear evidence against them. With Huawei, the allegations have frequently been around the company having the potential to share intelligence with the Chinese government.

“These are hard for Huawei to disprove, as there is yet to be any evidence against them. If the US had any major evidence against the vendor, then I’m sure it would have released. They’re desperate for a number of major allies to drop Huawei.”

Wood also sees the similarities between Huawei’s position and that of ZTE. “The US administration is trying to put as much pressure on the Chinese government as possible in order to influence trade negotiations,” he says.

Jeronimo, meanwhile, says that some operators have told him they have not seen issues with Huawei.

“I think there are concerns, but I’ve spoken to a number of operators that have randomly checked Huawei stock for any malicious behaviour and haven’t found anything,” he says.

“When we see countries such as the UK and Germany – two of the biggest economies in the world – saying that they are willing to work with Huawei, I think it shows there is a dependency on the vendor.”

With EE and Vodafone’s omission of the Mate X smartphone from their 5G line-ups, Jeronimo says, however, that the operators had little choice but to pause its availability. “They had to take this decision, as it wouldn’t be safe for them to sell a Huawei device that may not be able to be used in the way intended,” he says.

“Consumers won’t buy Huawei smartphones if they aren’t able to get full use of Google, and this presents a challenge for operators trying to sell them.”

Stanton agrees that it would make little sense to stock the Mate X, saying: “There’s no point in trying to sell people in the UK a premium smartphone that can’t offer all of its services. A lot of operators won’t want to take the risk. The Mate X was a notable omission, but there are other brands that can step in.”

For Westcoast, the UK’s main B2B distributor of Huawei phones, the recent uncertainty has already had an impact. The company’s head of mobile Darren Seward says it’s a waiting game, but that Westcoast is still confident in Huawei – which he labels “tenacious and persistent”.

“We have seen cancelled orders as a result of the news, but have also still seen orders come in and people are waiting to see how it all plays out.

“There has been a lot of investment in the UK from operators on Huawei and, similarly to us, they would like to see a return on investment – so we’re not prepared to write them off.”

Trump Administration’s placement of Huawei on US Entity List had knock-on effects

Lacking clarity

Wood says it still remains to be seen how things will pan out. “There is still little clarity on the exact restrictions Huawei will face, but the uncertainty alone will dent the confidence of distributors and consumers,” he says.

Having worked so hard to reach second place globally in the smartphone market last year and then maintain that position, the vendor’s market share is expected to come severely under threat.

With a global market share of 17 per cent in the first quarter putting it just four percentage points behind Samsung, many analysts had expected Huawei to claim first place this year… but not any more.

“Huawei will lose market share and sales very quickly,” says Jeronimo in the wake of the media storm.

“Operators won’t focus on Huawei’s devices, especially if the next smartphones don’t come with Google services.

“There will be little point in operators pushing Huawei and, if there is no agreement in place with the US, then we can expect to see revenues and market share figures decline.”

Consumers will also lose confidence in the brand, Wood predicts. “The uncertainty is damaging to Huawei’s device business. Coverage in the mainstream media will unsettle phone owners, sales channels and potential buyers,” he says.

Stanton agrees: “If the restrictions are enforced, then it will decimate Huawei towards the back end of this year. There will be no way that Huawei can continue to operate at the same capacity as it currently does.”

The uncertain situation is expected to leave the door open for Samsung, which Stanton says is well-placed to regain some of its lost share to Huawei.

“Samsung has really revamped its series this year, and this is an unbelievable opportunity for it to take back some high-end market share that Huawei has gained,” he says.

But McPhillips thinks consumers’ pockets will be hit if Huawei is forced out of the market.

“The customer will end up fronting the costs of it all. Huawei has offered consumers more choice at competitive prices, and if there is less competition then devices will cost more.

“Bigger players such as Samsung and Apple can charge more,” he says. “Less competition could also lead to less innovation, which is something that Huawei has driven in the past few years.”

Shockwave

Google’s restrictions have, meanwhile, sent shockwaves through the industry that will have shaken Huawei, with its smartphone business outside China being heavily reliant on the search giant’s services.

Many observers, however, believe that Huawei has plans for an operating system to rival Android and iOS.

“The company has previously stated it is working on its own operating system as an alternative to Android, but it is highly unlikely Huawei has anything that could immediately replace Google’s operating system,” says Wood.

Stanton suggests the situation has been equally difficult for Google.

“There is no way that Google would have wanted to pull its services from Huawei unless it had been ordered to do so,” he says.

“Google will want its services to be on every phone. If Huawei and China develop their own OS, that could deal a blow to Google’s plans in China.”

Jeronimo believes that Huawei could collaborate with other Chinese brands, encouraged by vendors in that country alone accounting for 43 per cent of global smartphone shipments last year.

“Chinese companies need to be less dependent on American technology,” says Jeronimo. “This whole situation has the potential to change the smartphone landscape in the coming years.

“I wouldn’t be surprised to see Chinese brands coming together to build a third, alternative major OS.”

Other Chinese vendors could face similar challenges in the US to Huawei in the long term

He adds that the likes of Oppo and others could face similar challenges in the US in the long term, even if they currently benefit in terms of their competitive situation against Huawei.

Huawei has filed a lawsuit in the US in a bid to speed up proceedings with a view to halting what it calls “illegal” action against the company. Chief legal officer Song Liuping has said, meanwhile, that the addition of Huawei to the Entity List sets a “dangerous” precedent.

“Politicians in the US are using the strength of an entire nation to come after a private company. This is not normal. Almost never seen in history,” he said. “There is no gun, no smoke. Only speculation.”

Resolution ahead? 

Seward is confident, however, that Huawei will overcome the ban.

“Huawei is tenacious and persistent, and will find a way to resolve this issue,” he says. “It has made great strides in the UK, with almost 20 per cent market share. If this ban is upheld, it will have a negative impact on the whole industry.”

It’s difficult to predict what the future holds for Huawei, though. Whatever the outcome, McPhillips says the coming months will be key.

“I’ve seen the birth and near-death of BlackBerry,” he says. “The market can change so drastically and Huawei wouldn’t be the first massive international company to fall into trouble, so the next few months are critical.”

For Stanton, the whole saga is make-or- break for Huawei, with its fortunes set to go one of two ways.

“It could either be a case of Huawei being included in a trade deal, where there might be a short-term dip and it can get back on its feet,” he says. “Or it could be the end of Huawei as we now know it, and it will recede from international markets and focus on China.”

Will the big smartphones launches be a thing of the past for Huawei?

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