China and the World, Talking Point

Washington’s new consensus

Huawei’s ambitions face fresh setback as US politics unravels AT&T deal


Smiles in Vegas for Huawei followed by tears as AT&T backed out of a big smartphone deal at the eleventh hour

On January 9, 2007, more than 140,000 techies swarmed to Vegas for the annual CES show. They were lining up for what was billed as the world’s largest and glitziest consumer electronics exhibition. But Steve Jobs stole the thunder 400 miles away in San Francisco by giving the world something that would forever change history: the iPhone. At the time, of course, the now iconic smartphone was only available on AT&T, the second biggest mobile carrier in the US.

Fast forward to January 9 this year and another CES show, where Chinese smartphone maker Huawei was hopeful that it too would unveil a game-changer – in this case a deal with AT&T to sell its flagship gadget, the Mate 10 Pro, to the Americans.

It was also supposed to be a day that would “change history”, as Chinese media oulets put it, given that Huawei has tried to crack the US market for years. But jaws instead dropped as the news broke that AT&T was dropping the partnership with Huawei.

The decision was largely a result of mounting political pressure from American politicians, who had written to the telecoms regulator, saying they had “long been concerned about Chinese espionage in general, and Huawei’s role in particular” given its founder Ren Zhengfei was a former PLA officer.

Even though it’s not the first time Huawei has been rebuffed in the US – its earlier takeover bids had been blocked (see WiC96) – AT&T’s backing out of this deal at the last minute still stung.

What’s different this time?

Huawei had been so confident that its deal with AT&T would go ahead that media invitations had been sent for a presentation on January 9.

Luckily Huawei still had something talk about. The firm has spared no expense to raise its profile in the US and had drummed up interest for its new flagship phone thanks to a blanket advertising campaign it ran right across the US. Its slogan described the Mate 10 Pro as “The best phone you have never heard of” (which turned out to be improbably prophetic for many AT&T customers).

Among the $100 million set aside for marketing spending, a chunk was allocated to sign Hollywood star Gal Gadot, best known for her role as Wonder Woman. The new brand ambassador’s role? To teach the rest of the world how to pronounce its tricky name (tricky, at least, if you’re not Chinese).

“Remember, it’s pronounced Wow Way,” the Israeli-born actress said in a glamorous video clip that was shown during Huawei’ CES presentation. Gadot’s rendering was hardly perfect, although it was certainly an upgrade: many Americans had previously called the Chinese firm “Hawaii”.

But with the AT&T deal scotched Richard Yu could hardly disguise his disappointment when the chief executive of Huawei’s consumer products division made his CES presentation. Those who were present described him as showing “genuine pain” and looking “visibly helpless” over AT&T’s decision.

Still, some analysts have argued that Huawei doesn’t need the US market since its $75 billion of annual revenues already renders the company the world’s largest maker of telecoms equipment. Nevertheless, with China’s own smartphone market near or at a point of saturation, it’s not only Huawei but virtually every Chinese handset maker that’s looking to export its products to foreign shores.

So, does Huawei need the US market?

At the moment, its presence in the world’s second largest smartphone market – after China – is virtually nonexistent. As of the third quarter of last year, Huawei’s market share in the US was hovering around 0.4% (it sells unlocked devices online through its own website and other e-commerce sites like Amazon), according to research firm Strategy Analytics. Its biggest rival ZTE, meanwhile, ranks fourth with 15% of the American market.

But the US has always appeared to be the holy grail of Chinese handset makers. Tech giant Apple makes $131 on each iPhone it sells in America – that’s 14 times the average profit Chinese manufacturers make from a smartphone, according to data from research firm Counterpoint.

“It is impossible for Huawei to be known as an international brand unless it has a presence in the developed markets. And amongst all the developed countries, the US market is the most sophisticated and the spending power of its consumers is significantly higher compared with the rest of the world. Even though Samsung and Apple have seen their market share slip in China in the last few years, the lack of competition means that they are still the dominant players in the US, which is very attractive to Huawei,” Sun Yanbiao, president of N1 Mobile, a research institute, told International Finance News.

What about the domestic smartphone market?

Huawei has found added motivation to go global as China’s smartphone market has stagnated. Between January and November of last year, shipments of smartphones in the country plummeted 9.7% from a year ago to 448 million units. A total of 964 new models hit the market during the period, down 27% from the same period last year.

For smaller handset makers, the overseas market is the only means of survival. “With the gradual decline of the domestic smartphone market, it has become clear that the future of mobile phone manufacturers is to expand overseas,” Wang Yanhui from the China Mobile Alliance told National Business Daily.

Pressures at home explain why Chinese firms are aggressively looking abroad. Vivo, for instance, is now targeting Russia as its first foray into Europe. Its sister brand Oppo has been hugely successful in Southeast Asia and is now planning to sell its higher-end handset in Japan. Coolpad is also currently working with T-Mobile to supply as many as two million units of low-end handsets in the US.

How do Chinese smartphone makers compete outside China?

Zhao Ming, president of Honor, the budget brand that is owned by Huawei, told Tencent Technology, a major news portal, that most producers grab market share by churning out low-cost and low-quality handsets.

Tecno, for instance, has carved out a niche in Africa. The company is the number one mobile phone company by sales in Africa having sold more than 50 million phones there in the first half of 2017. Its phones includes features like a powerful audio bass that is better suited for African pop music and multiple SIM card sockets to support more than one card (a common practice amongst African mobile users).

“We will head out of Africa to other emerging markets. In the future, our focus will be on India and the Middle East,” said Zhu Zhaojiang, Tecno’s founder and chief executive.

Another business model is to make more sophisticated handsets – albeit also with a cheaper price tag – to win market share from global giants like Apple and Samsung.

Cult brand OnePlus, for instance, has shunned the domestic market to focus on exporting its high-end handsets (its flagship smartphone OnePlus 5T costs between $499 and $559). That strategy has won over both fans and foreign tech critics. The smartphone maker recently reported that its sales doubled in 2017, reaching $1.4 billion.

Xiaomi, which has a somewhat similar strategy, is already India’s best selling smartphone brand. It has announced plans to sell mobile phones in Spain with the broader goal to eventually sell throughout Europe .

To that end, the Beijing-based smartphone maker is reportedly planning an initial public offering later this year to fuel its global expansion. It is believed that the company could be valued at as much as $100 billion.

Back to the Huawei AT&T deal…

Industry observers reckon that more is at stake for Huawei than meets the eye. The telecoms equipment maker had hoped that its mobile phones might prove a route into selling its network equipment in the country, because the US is gearing up for the rollout of a 5G network. (Since 2012, the Chinese telecoms equipment giant has been banned from selling telecoms equipment in the US.)

“Huawei is so desperate to break into the US market and that also has to do with the arrival of the 5G era. In the European market, Huawei is already the network provider for the world’s leading operators like Deutsche Telekom, France Telecom, Telefonica and Telecom Italia. So if it doesn’t break into the US market soon, its telecoms equipment business can encounter a bottleneck,” Liu Qicheng, a telecoms expert, surmises.

Nevertheless, Liu reckons Huawei might ultimately learn from the AT&T setback and emerge stronger.

“After all, blocking the AT&T deal suggests to a certain extent that the US does not need Huawei. When it comes to smartphones, it is hard for Huawei to surpass Apple and Samsung in terms of technology. In terms of 5G telecoms equipment, Huawei also needs to compete against Nokia and Ericsson. So except for the price advantage, Huawei needs to deliver bigger breakthroughs on technology. So when Huawei develops a technology so unique and so cutting edge that US consumers must adopt, then the US government will have to open its door,” he concludes.

Still, there was more bad news for Huawei this week. That’s because news surfaced that Senators and House members are again pressuring AT&T – this time to end its collaboration with Huawei on the setting of standards for its next-generation 5G network…

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