Sofa Analytics # 240. What will happen to Honor after the sale, Huawei’s strategy

Hey.

In the trade war, Huawei is using every opportunity to preserve development potential and survive US sanctions. The company has been under unprecedented pressure, both political and economic, for two years. In recent history, there is not a single example when a private company was attacked by the largest economy in the world in the person of the United States and at the same time this company remained afloat and continued to develop. America’s control over a number of key technologies allows Huawei to gradually complicate life, and the company has to come up with ways to replace these technologies and create their own analogues. This process is not fast, but it has begun, and it is impossible to stop it. He said many times that America, having not achieved the destruction of Huawei in the first year, has created a real competitor for itself and the IT world will soon be divided into spheres of influence. For the first time, we will have a strong alternative to what American companies are offering, and America will ultimately lose from this. It will be good for the whole world, since the confrontation between America and China will create a multipolar world in technology and force different blocs to come to an agreement.

But at the moment, Huawei needs to survive and not lose the assets that the company has created in previous years. One such asset is the Honor brand, which was created to be similar to the main Huawei brand.

Sofa Analytics # 240. What will happen to Honor after the sale, Huawei's strategy

Honor has a slightly different positioning, this brand was created for online sales, a youth audience, and, as a result, prices for similar models are slightly lower. At the same time, the lineup of smartphones, tablets and accessories is very similar to that of Huawei, since the R&D between the companies was actually the same. The choice of a particular brand has always been a matter of a specific market and brand perception. For example, in Russia, the Huawei brand was unable to achieve popularity in the early years, but the Honor brand quickly changed this situation and even brought the company to the leaders of the smartphone market in 2019. Many buyers did not even know that Honor and Huawei have the same roots, they perceived Honor as an independent company. Interestingly, when the sanctions against Huawei were announced, it affected the sales of the parent company in Russian retail, and Honor remained intact, people did not consider him a victim of the imposed sanctions. In their perception, it was a separate company.

Inside Huawei, even before the start of the sanctions, the Honor brand was taken out as a separate legal entity, a completely separate company. Its own set of counterparties, its own strategy in the market, a staff that does not overlap with Huawei. If initially both brands shared a number of functions, for example, lawyers, accounting, logistics, then from that moment everything was divided. The management’s desire to build a wall between the companies was adamant, at that time this could be explained by the task of increasing competition within Huawei, making the closest colleagues rivals in the struggle for market share. But it is possible that Huawei was expecting sanctions and it was a move aimed at keeping Honor as an independent company.

Reuters reports that Huawei plans to sell the Honor brand to an association of independent investors. The article can be found here.

According to a Reuters source, the buyer is Digital China, which is Honor’s distributor in China. The deal is worth 100 billion yuan ($ 15.2 billion), all of which will be deposited in real money, no shares or stakes in the company. The co-investor is the government of Shenzhen, as well as a number of technology companies.

Why does Huawei need this deal, what it will bring to Honor and how the market situation can develop both in the world and in Russia – let’s discuss these issues, they are not as simple as it might seem at first glance.

Keeping Company – China’s Evasion Maneuver

Honor employs about 7000 people around the world, with offices in a dozen countries. But if in Russia the company overtakes Huawei in sales by a large margin, in other countries the situation is exactly the opposite, where the Huawei brand prevails. It is difficult to single out the Honor brand in total sales, since all research companies unite Huawei / Honor, rightly considering them as a single whole. For example, let’s see what share of the company took in the Chinese market in the second quarter of this year.

Sofa Analytics # 240. What will happen to Honor after the sale, Huawei's strategy

Let me remind you that in China the absence of Google’s GMS for Huawei / Honor does not play any role, in this market Google services are not in demand, where Android initially comes without them. Therefore, we see the strengthening of Huawei in the home market, this is compensation for the loss of sales in foreign markets. The sanctions are such that the company cannot purchase components, produce its own processors and, as a result, compete on an equal footing with other manufacturers. This is the survival mode that Huawei is trying to get Honor out of.

Selling a company for real money is a rather rare case, usually transactions include a share in the company or other arrangements. But here is a special case when they want to show Honor as an independent company, divorced from Huawei, with no ties to it. This is a maneuver in which the updated Honor is automatically removed from the US sanctions, since it has nothing to do with Huawei. Since Honor is on the Commerce Department’s sanctions list, after the transaction, the new owners will have to demand that the company be removed from it, formalities can take from one month to six months if American officials want to study all the details and make a decision based on them. But at first glance, there should be no obstacles here, since formally these will be independent companies.

The controversial point is that the new owners will be able to lift sanctions from Honor, and in America they will consider that the company is independent, exactly as it looks on paper. Let’s assume for the time being that this will be the case and the politicians will allow Honor to work as before. On the side of Honor are the suppliers of components, since for them it is sales, because the company is a strong player and is able to raise their revenue. Therefore, many companies will bother for Honor, including Qualcomm lobbyists.

It looks interesting what Honor gets when it breaks up with the parent company. In addition to employees, these are several development centers that can continue to work on new devices, but the most important thing is the developments in the field of processors from HiSilicon, which will allow them to continue their development. Huawei faced the fact that Kirin processors cannot be produced under US sanctions, all third-party factories use American equipment or technologies in one part or another, as a result, they cannot provide their services to Huawei. It is impossible to create your own similar equipment in one year, it will take from 4 to 7 years, inside Huawei they are already actively developing this area and investing billions of dollars in it. But a gap arises when it is necessary to keep engineers, programmers and load them with work. They should not lose their qualifications, be able to develop processors and other components at the level of the best companies. Huawei has invested huge amounts of money in developers, this is a piece goods, so to speak. Outside of Huawei, there is no job for all of them, since the world does not need so many processor and component developers. This means that people will lose their qualifications, they will simply be out of the market.

Sofa Analytics # 240. What will happen to Honor after the sale, Huawei's strategy

Huawei does not put all their eggs in one basket, so some of the developers go to R&D Honor, where they can continue to work and keep their expertise at the proper level. An important point to understand is that this does not mean that Honor receives all of Huawei’s work, this does not happen. Through the licensing mechanism, the company gains access to processors, Huawei technologies, but cannot transfer them further. In fact, Honor is becoming a development center that continues to create technology. Their return transfer is possible through cross-licensing, but this path is closed, since Huawei is under sanctions and Honor will not be able to provide anything to the company, at least legally. I don’t see any point in considering the fact that one of the employees will transfer all the developments to Huawei, this will surely happen. But what is more interesting is that Huawei may well buy Honor back after some time, and no one can prohibit it, since the company is not decisive from the point of view of individual markets. For example, in theory, the US antitrust authorities could intervene in the deal if Honor were present in the US market and held a significant share. But there is no company in this market.

An obvious path to retain both employees and their skills, one that will raise questions for almost everyone in America. But it is impossible to prove this formally, so everything depends on how this deal will be perceived. Previous actions by the US administration show that no evidence is needed if the company is considered a threat, and therefore all possible means are used to restrict development and work in the market. There is a high probability that this will initially happen with Honor, and this point should not be discounted. And it introduces uncertainty, as it negates all of Huawei’s steps in this deal to preserve Honor and its team. But let’s assume America won’t restrict Honor for some reason. What happens then?

Independent Honor – foreign markets, new lineup

In fact, there are no obstacles for independent Honor to obtain GMS. Google will be happy to start working with the company and give access to their version of Android. At the same time, Honor does not plan to use Huawei’s HMS, and will abandon AppGallery on its devices. This is a necessary step in order to dissociate itself from Huawei and show its complete independence. And here we come to an important point: all of Honor’s actions will be directed to foreign markets, the company will actually reduce its activity within China to a minimum. The reason is obvious and lies on the surface, the Chinese market is important for Huawei to keep sales at a high level. This is the division of markets, which plays into the hands of both one and the other company.

The pressure on Huawei in foreign markets is such that operators are reducing the share of the company’s smartphones, and it is necessary to spend remarkable efforts to sell them. And the company’s share in the same Western Europe is declining. Honor’s release will turn things around. The bet will be made on exactly the lineup that the company has today, for some time there will be no flagships with the maximum cost (similar to the Mate line from Huawei). But this does not look like a big problem, the model range will change rapidly to meet market conditions, we know that the company is able to create competitive solutions. Honor will quickly gain market share, since it knows how to do it and the team remains exactly the same.

The practical question that is of greatest interest is when the first Honor smartphones with GMS will appear. In terms of development and speed of decision making, it can be expected that it will be April-May 2021. The company is unlikely to have time to launch such models earlier. In practice, this can be done for the entire current model range, but I proceed from the following time frames: mid-November – sale of the company, then removal from the sanctions list by mid-February, certification of GMS models within a month, production, and so on. If all processes go very quickly, then production can start in February, that is, in theory, even in March we will be able to see such smartphones.

The first question that arises regarding the future of AppGallery and the independent app store that Huawei is developing is: if the company loses Honor, will the store get worse, lose a significant number of users? At first glance, this is true, but also do not forget that all Chinese vendors use this engine to promote their stores, a political decision, not a commercial one. As a result, nothing bad will happen, the store will remain in Huawei smartphones, the number of users will not decrease significantly, and it will not drop at all. You must also understand that the Harmony cloud operating system will be able to run on any device, including Honor. Therefore, even independent Honor is important for Huawei, it is an opportunity to reach consumers and give them new opportunities, albeit over time.

Doesn’t anyone really understand this?

Huawei’s strategy outlined above is obvious, any person from our industry can talk about it more or less clearly. But if everything is so obvious, then why Huawei is doing this, after all, sanctions can be imposed on Honor and prevent people from retaining the skills of people, the company as such, since then it will strengthen Huawei in one way or another. Reflecting on this, I thought that even for America, sweeping accusations are becoming difficult, since the US is starting to lose the trade war with China at the moment, all their actions do not inflict a crushing blow on the enemy’s economy, but their own resources are being depleted, although this is not critical. The ban on Honor will lead to a number of lawsuits against officials and their ministries by the new company, as well as make possible symmetrical actions of China, and the tangle will twist even more. Therefore, most likely, Honor will be allowed to develop for some time in the hope that the company will not be able to achieve results and this issue will be resolved by itself. But when the result is achieved, sanctions will inevitably come. And history will repeat itself. But for Huawei it is still one or two years, which will be won and saved the most important resources that exist – people and their skills.

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