North versus south

Why is Huawei beating Lenovo in bid for smartphone supremacy?

Liu Jun w

Huawei’s Yu Chengdong unveils the firm’s latest smartphone product

Google and Apple were once so close that Google’s Eric Schmidt sat on Apple’s board. Their products didn’t overlap and both firms appeared to share a common enemy in Microsoft. That changed in late 2007 when Google revealed its new Android software, thus competing with Apple’s iPhone in the market for smartphone operating systems. Steve Jobs was incensed. “I’m going to destroy Android, because it’s a stolen product. I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m willing to go to thermonuclear war on this,” Jobs was quoted as saying by his biographer Walter Isaacson.

Is something similar happening in China today, with Huawei and Lenovo turning from friends to rivals? That’s the question various media outlets have asked in recent weeks.

In a lengthy article about the two giant tech firms, Economic Weekly notes that a decade ago both were viewed as national champions, each with its own domain: Lenovo seeking local and international dominance selling personal computers and Huawei respectively trying to become number one in telecoms infrastructure equipment. Not only did they not compete, Lenovo resided in the north of the country and Huawei in the south. Both their founders – Lenovo’s Liu Chuanzhi and Huawei’s Ren Zhengfei – were born in the same year (1944) and co-existed as the elder statesmen of the Chinese technology world.

As with Apple and Google, what changed was the advent of the smartphone, which both companies decided to start making. As Economic Weekly points out, initially it looked like Lenovo would have the upper hand, as Huawei’s Ren was lukewarm on the potential for smartphones. Its early models carried the brands of other companies and when Huawei released its own branded versions, even its ultra-loyal employees shunned them as uncool (even Ren carried a Samsung smartphone instead). As recently as five years ago, Huawei was still exploring the sale of the division.

In early 2011, by comparison, Lenovo’s Liu had plucked one of his favoured protégés from the PC business – Liu Jun – to build the smartphone division. Positive results ensued: by April 2013 the LePhone brand was trailing only Samsung in China’s domestic market with a 13.1% market share. At a lavish offsite for top staff and clients in Hainan in late 2012 Liu Jun’s growing smartphone empire chartered yachts and planned world domination. He set a target to sell 30 million smartphones annually in the coming years and in October 2014 he stepped closer to that goal by buying Motorola Mobility from Google.

Lenovo CEO Yang Yuanqing was an enthusiast for the deal’s logic. “Today we achieved a historic milestone for Lenovo and for Motorola – and together we are ready to compete, grow and win in the global smartphone market. By building a strong number three and a credible challenger to the top two in smartphones, we will give the market something it has needed: choice, competition and a new spark of innovation,” said Yang.  “This partnership has always been a perfect fit. Lenovo has a clear strategy, great global scale, and proven operational excellence. Motorola brings a strong presence in the US and other mature markets, great carrier relationships, an iconic brand, a strong intellectual property portfolio and an incredibly talented team. This is a winning combination.”

However, by 2015 Lenovo had been overtaken by Huawei in handset sales, with the Shenzhen-based firm proudly announcing last month that it had shipped more than 100 million handsets during the year, ranking it third globally (not Lenovo). In China its market share of 18.7% far surpassed Lenovo’s 12.7%, although as points out the gap in revenues is even greater, since a third of Huawei’s sales are of more advanced handsets priced above Rmb2,000 ($306), “while most of the phones Lenovo sold are medium and low level ones valued at less than RMB2,000.”

So what happened? How did this reversal of fortune occur? (In November Lenovo reported a quarterly loss of $741 million, with the smartphone division accounting for $324 million of the deficit.)

The decisive moment for Huawei was in 2011 when Ren decided to instal one of his own most talented lieutenants to run the smartphone division: Yu Chengdong. Like his counterpart at Lenovo (Liu Jun ) Yu was born in 1969. From the outset Ren – who’d now changed his mind about selling the business – agreed with Yu that Huawei would not seek to dominate the low-end of the market but focus its research and development expertise on producing handsets technically on a par with those of Apple and Samsung.

Its first high-end designs – the P1 (retailing at Rmb2,999) and the D1 (Rmb3,999) – didn’t sell at all well. But Huawei’s engineers persisted and the firm’s phones were soon earning rave reviews. For example its P8 was described by the Financial Times as being able to almost “out apple Apple” thanks to its sleek packaging, ultra thin screen and dual SIM card  – a boon for travellers who do not want to be hit with high data roaming charges or carry two phones. In a further sign of the firm’s innovative streak the P8 also came with a number of intriguing features that delighted FT reviewer Jonathan Margolis. These included being able to shout out to its owner if it were lost at home (in response to the owner’s command, it will reply “I’m here”). In another first, it could also digitally enhance the owner’s selfies to make her or him look better than other in the photo.

This commitment to release high-spec and innovative products was rewarded with a 33% spike in handset sales last year. And with his brief kept consistent, Yu was able to see through his five-year plan.

The same was not true over at Lenovo where a reorganisation in January 2013 saw the business split into two units, one called Think (for business users) and the other called MIDH (mobile internet digital home). Liu Jun was put in charge of the latter, but insiders at Lenovo told Economic Weekly that CEO Yang Yuanqing’s strategy was a mistake. The younger Liu was unable to focus purely on smartphone sales, and was instead bogged down by the politics and the problems at the divisions he inherited.

It didn’t help that he had to report results to the board monthly – sapping longer term thinking. Nor that the Motorola integration proved more problematic than expected.

Zhang Tingbin, a veteran business journalist and a founder of well-regarded media outlet CBN, thinks that Huawei’s victory in the smartphone war is part of a broader story in which its commercial credentials trump Lenovo’s.He cites better financials: in the first half of last year Huawei’s sales jumped 30% to Rmb179.4 billion and it made an operating profit of Rmb32.3 billion.

Zhang says that unlike Lenovo – which has gone global through buying the “leftovers and scraps” from Western firms (such as IBM’s PC and server businesses) – Huawei’s growth has been organic and driven by independent innovations. It filed 3,442 patents in 2014 alone and in the past 10 years has invested Rmb188 billion in R&D. Zhang calculates Lenovo’s R&D spend for the past 10 years is less than Huawei’s in 2014 alone. He also reckons that 45% of Huawei’s 170,000 staff have some involvement in R&D.

Zhang thinks too that Huawei’s shareholder structure might be an advantage. Although it remains unlisted, about 84,000 of its staff hold stock and around a third of their annual income is derived from the dividends they receive on Huawei’s steadily rising profits. This has enabled the firm to recruit and retain some of China’s best engineers and motivate them to think entrepreneurially.

And while it may not be US politicians’ favourite company – thanks to alleged links to China’s military – something is clearly working at Huawei.

21CN Business Herald says 2015 revenues will reach $62 billion. The company itself has a goal of hitting sales of $100 billion by 2020.

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