Zhu Xinli, the founder of Huiyuan Juice, once argued that there’s no place for sentiment in disposing of companies, which should be “raised as a son but sold like a pig”.
But for the embattled telecoms giant Huawei, the decision to sell one of its favourite offspring – the smartphone brand Honor – is a means of survival. Or as the news portal Huxiu put it more succinctly: “if you can’t afford to raise it, you might as well sell it”, describing the Shenzhen firm’s disposal of its affordable smartphone brand – which was founded in 2013 to target younger consumers.
After weeks of rumours, news surfaced this week that Huawei had sold Honor in its entirety to Shenzhen Zhixin New Information Technology. According to a joint announcement published on the Shenzhen Special Zone Daily, the buying consortium is led by a state firm controlled by the Shenzhen local government, and comprised of 30 of Honor’s dealers. Huawei will be selling the Honor brand as well as its R&D facilities. The announcement does not disclose financial details, although local media outlets have speculated that the final price tag could be anywhere between Rmb100 billion ($15 billion) to Rmb260 billion.
Honor was sold, Huawei said, because its smartphone business is under “tremendous pressure” from component shortages due to US chip sanctions. “We hope this new Honor company will embark on a new road of honour with its shareholders, partners and employees,” the company added in a statement.
Guo Mingchi from Tianfeng Securities points out that by selling the business the brand will find it easier to purchase semiconductor chips. Quite how the separation with Huawei will develop over time is unclear – although it will clearly be a matter of interest to Huawei’s opponents in the US. For instance, the Wall Street Journal reckons that newly independent Honor could be an early customer for Huawei’s new homegrown operating system, called Harmony OS, which is expected to launch early next year.
Other commentators claim that the brand was destined for a disposal for a while. “Spinning off Honor was only a matter of time. Around 2018, the brand announced a plan to become independent from Huawei and it was even planning a listing in Hong Kong,” reports Huxiu, adding that, at that stage, the plan was to boost awareness of the Honor brand, as well as create some distance from its parent’s growing difficulties with Washington.
Still, Honor is a major part of Huawei’s consumer-facing business, contributing about a quarter of its smartphone shipments this year. Counterpoint Research calculated that Huawei’s share of China’s smartphone market was 40% as of the third quarter of last year, making it the largest mobile phone brand in the country. But without Honor’s sales, Huawei would have slipped to being the world’s fourth largest smartphone vendor in the just elapsed third quarter, behind Samsung, Apple and Xiaomi.
Honor has also contributed significantly to Huawei’s profits, helped by the economies of scale. “Honor is a fuerdai [ second-generation rich-kid], receiving a lot of support from Huawei, so it saves on a lot of expenses and costs. It only needs to focus on product design and distribution,” Jia Mo, an analyst at Canalys told National Business Daily.
As Honor became bigger, conflicts for resources with Huawei’s other brands became more apparent. For instance, the behemoth’s powerful Kirin chipsets appeared first in Huawei’s flagship handsets before trickling down to the Honor range (and more often than not, Honor smartphones were given less powerful versions). Honor devices were sometimes used to test experimental functions, which then went into other Huawei handsets in fuller form when the new technology was proven to be stable. Honor bosses also chafed at being unable to move the brand upmarket because Huawei did not want to undermine its flagship models.
“At a time when Huawei is facing life and death, the spin-off of Honor is certainly an imperfect decision. However, it is probably one Huawei needs to make in order to survive,” concluded Huxiu.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.