Why Huawei’s founder is sticking with premium smartphones even as sales decline amid US sanctions

Masha Borak
·5-min read

Last week Ren Zhengfei, the founder and CEO of 5G technology leader Huawei Technologies Co, said the company would still be willing to “transfer” its 5G technology but will never give up its smartphone business.

“We can transfer 5G technology, but we will never sell our terminal [devices] business,” Ren said during a media round table last Tuesday.

Ren made the statement despite sales of its smartphones – which he described as “terminal devices” because they connect to the network – being on a downward spiral since the US government introduced trade sanctions barring the company from obtaining US technology.

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Just last summer, the company briefly became the world’s top smartphone seller, surpassing South Korean giant Samsung Electronics. In the last quarter of 2020, however, the smartphone maker sunk to sixth place, according to shipment figures from Canalys. Huawei is now predicted to fall to seventh place in 2021, according to research company TrendForce.

Yet Huawei already has given up some of its smartphone business. In November, it sold its Honor brand to Shenzhen Zhixin New Information Technology, a consortium of more than 30 agents and dealers. Since then, rumours have been swirling about Huawei abandoning its high-end smartphones, including the Mate and P series.

Regardless, Huawei has said it remains committed to its premium smartphones. Indeed, analysts say they are an integral part of Huawei’s overall business.

“Terminal devices are an important part of Huawei’s strategy in a lot of ways,” said Tarun Pathak, associate director for mobile devices and ecosystem at Counterpoint.

Terminal devices, especially smartphones, help build a strong user base which in turn generates revenue from services, he explained, adding that the best example of this comes from iPhone maker Apple.

Ren describes terminal devices as anything that can be “connected to people or objects”, so the definition also includes radar systems used in driverless cars and Internet of Things (IoT) devices for smart homes.

Huawei founder Ren Zhengfei describes terminals as anything that can be connected to people or objects. Photo: EPA-EFE
Huawei founder Ren Zhengfei describes terminals as anything that can be connected to people or objects. Photo: EPA-EFE

Terminal is “telco industry lingo” and reflects Huawei’s roots as it has been connecting terminal devices to networks for years, said Bryan Ma, vice-president of devices research at IDC.

An important piece of this puzzle is the company’s Harmony operating system which first received attention in August 2019, about three months after the US put Huawei on the Entity List that barred it from shipping Google apps and services on new products, and from buying US components.

In September 2020, Huawei announced that it was preparing to switch from Google’s Android operating system to Harmony OS for all of its smartphones starting this year.

Harmony OS was not just designed for phones – it can be used with many other categories of connected devices such as tablets, computers and smart TVs – all made by Huawei. For example, it is being used by more than 20 hardware companies, including traditional home appliances companies such as Midea, Joyoung and Robam Appliances, which have used it to run products such as ovens and smoke exhaust ventilators.

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Huawei also wants to provide the communications equipment and software required for smart vehicles and has created an Intelligent Automotive Solutions platform, dubbed Huawei HI, powered by HarmonyOS.

“To keep its connected ecosystem strategy alive and kicking, Huawei needs to keep its terminal business alive – at least in China, the world’s largest market,” said Pathak, adding that success at home could be translated to other countries with the help of Harmony OS.

The biggest hurdle still facing Huawei, however, is the US sanctions which have made sourcing components like semiconductors difficult. Richard Yu Chengdong, then chief executive of Huawei’s consumer business group, admitted the same in August last year when he said the sanctions would make it difficult for Huawei to produce and ship smartphones incorporating its high-end Kirin chips after 2020.

The impact is not limited to smartphones. Huawei’s chip problem is a threat to most of the products in its terminal business, spanning consumer electronics, 5G and automobile communication systems, because they all rely on a raft of different chip products that Huawei cannot currently produce in-house.

Huawei said it would be willing to transfer its 5G technology but will never give up its premium smartphone business. Photo: EPA-EFE
Huawei said it would be willing to transfer its 5G technology but will never give up its premium smartphone business. Photo: EPA-EFE

“I think the chip drain is being felt through the entire spectrum of its terminal businesses,” said Roger Sheng, vice-president and semiconductor analyst with advisory firm Gartner.

Huawei still faces “problems on 5G module [chips],” according to a sales manager at Quectel Wireless, a Chinese telecoms company that uses 5G chips designed by Huawei’s chip design unit HiSilicon.

Huawei will also have to keep an eye on US government policies to maintain its product competitiveness and supply chain stability, said Pathak. The ecosystem strategy can be difficult to sustain with declining hardware sales, he noted.

“If the US government takes a more diplomatic stance towards Chinese companies, including Huawei, then Huawei will have a chance to survive, especially on the terminal devices side, and will have enough volume to keep moving by securing access to components,” Pathak said.

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Huawei’s consumer electronics group, which includes smartphones, contributed to 54 per cent of its 2019 revenue and was the fastest growing business segment, according to the company’s most recent annual report. However, products defined as “terminal devices” are not broken out by revenue and could include devices from any of its three business groups.

Other experts have noted that selling another well-performing business unit will not solve issues from the US trade ban and only cause Huawei to lose a major revenue source.

However, Ren said last week: “We think our new business development can offset the decrease in revenue in our smartphone business this year.”

Huawei has pushed into new growth areas such as smart vehicles, while doubling down on existing businesses such as cloud services. While Ren said he has confidence in Huawei’s ability to survive, he added that he thinks it would be “extremely difficult” to remove Huawei from the US Entity List.

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