Huawei Grabs More Of The China Phone Market As Overseas Demand Wanes Amid Trade Tensions

© 2019 Bloomberg Finance LP

U.S. President Donald Trump may have effectively curbed Huawei’s ambition to dominate the global telecom market by blacklisting the Chinese company, but it still knows where it can find new growth, at least for now.

Faced with the uncertainty over whether the U.S. government will eventually lift its ban and grant access to crucial U.S. technologies like Google’s Android, Huawei has been busy bringing more of its smartphone development in house. Last week, the company unveiled its own proprietory operating system, Harmony OS, which could displace Android within China as Huawei adjusts its production and features to better suit local demand. Analysts say the company’s strong brand image in its home market will help it capture even more market share, though some warn the gains may not be sustainable in the long run.

“Huawei wants to circumvent risks in overseas markets, so they have been proactively adjusting production to make more phones for China,” says Jia Mo, an analyst at market research firm Canalys. “For now, the China market is quite receptive to its products.”

More On Forbes: Hands-On With Honor Vision, Running Huawei's Harmony OS

Called Harmony OS or Hong Meng in Chinese, Huawei’s new operating system has already been greeted with an outpouring of local support. State media praised it as a crucial step toward self-reliance, while many netizens took to social media with promises to buy the company’s future models.

Richard Yu, head of Huawei’s consumer business group, has repeatedly stated that the company still prefers to use Android, but can switch handsets to Hong Meng within “one or two days” if the need arises. What’s more, it can count on continued local support because China has long banned foreign services from Gmail to Google Maps, which means phones running on an alternative platform would face less competition as they build out their own ecosystem of apps.

“This, for sure, will first take off in China,” Jia says. “If they end up putting it on a smartphone, they may try a low-cost model first.”

Getty

Meanwhile, anticipating more demand for its devices, Huawei has been assigning assembly lines previously designated for foreign markets to China, and is ready to open more retail stores and relocate distribution personnel back home, analysts say. While its shipments abroad have been hit by declines ranging from 8% to 61% in the second quarter amid worries that Huawei would lose access to Android and other software, domestic shipments actually grew 31% to 37.3 million units. Canalys data shows that Huawei managed to grab a 38% share of the China market at the expense of competitors like OPPO and Xiaomi, whose shipments declined in the same period by 18% and 20%, respectively.

Aside from glitzy marketing campaigns and reputation for producing high-quality products, Huawei is also riding high on a wave of patriotic sentiment. Many in China view the company as being unfairly targeted by the U.S., after it was placed on the Commerce Department’s so-called entity list for posing a threat to U.S. national security. Eager to capitalize on the recent sentiment, retailers like GOME have adjusted their marketing slogans to associate buying Huawei’s products with patriotism, leading to what some see as irrational buying.

“I don’t think this growth is entirely rational because nationalistic sentiments have played a role,” says Liang Yaguang, consumer insight director at consultancy Kantar Worldpanel. “ Over the long term, I don’t think this is good because Huawei can’t get an accurate picture of real consumer preferences from the amplified results, and it will affect their future designing and production plans.”

More On ForbesTrump's Public Warning To Huawei Comes At The Worst Possible Time

Huawei declined to comment for this story. Billionaire founder Ren Zhengfei had previously sought to distance the company from patriotic buying, saying in a May interview that Huawei is a commercial business, and people should only buy its products if they like them.

Still, the gains in China will probably be enough to offset declines abroad until year end, meaning Huawei would be able to maintain last year’s shipment level and sell about 200 million units, says CK Lu, Gartner’s research director. But he and others are warning of a continued retreat abroad, especially as escalating trade tensions cast a shadow over suppliers’ efforts to resume sales to Huawei.

“If the tensions between the U.S. and China continue to escalate, especially if Huawei is not removed from the blacklist, then the business will suffer quite a lot in regions like Western and Central Europe,” says Francisco Jeronimo, associate vice president of devices at IDC EMEA. “In the meantime, what Huawei did was basically starting to develop strategies to recover in terms of brand awareness. They are investing to make sure the brand recovers to where it was before.”

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© 2019 Bloomberg Finance LP

U.S. President Donald Trump may have effectively curbed Huawei’s ambition to dominate the global telecom market by blacklisting the Chinese company, but it still knows where it can find new growth, at least for now.

Faced with the uncertainty over whether the U.S. government will eventually lift its ban and grant access to crucial U.S. technologies like Google’s Android, Huawei has been busy bringing more of its smartphone development in house. Last week, the company unveiled its own proprietory operating system, Harmony OS, which could displace Android within China as Huawei adjusts its production and features to better suit local demand. Analysts say the company’s strong brand image in its home market will help it capture even more market share, though some warn the gains may not be sustainable in the long run.

“Huawei wants to circumvent risks in overseas markets, so they have been proactively adjusting production to make more phones for China,” says Jia Mo, an analyst at market research firm Canalys. “For now, the China market is quite receptive to its products.”

More On Forbes: Hands-On With Honor Vision, Running Huawei's Harmony OS

Called Harmony OS or Hong Meng in Chinese, Huawei’s new operating system has already been greeted with an outpouring of local support. State media praised it as a crucial step toward self-reliance, while many netizens took to social media with promises to buy the company’s future models.

Richard Yu, head of Huawei’s consumer business group, has repeatedly stated that the company still prefers to use Android, but can switch handsets to Hong Meng within “one or two days” if the need arises. What’s more, it can count on continued local support because China has long banned foreign services from Gmail to Google Maps, which means phones running on an alternative platform would face less competition as they build out their own ecosystem of apps.

“This, for sure, will first take off in China,” Jia says. “If they end up putting it on a smartphone, they may try a low-cost model first.”

Getty

Meanwhile, anticipating more demand for its devices, Huawei has been assigning assembly lines previously designated for foreign markets to China, and is ready to open more retail stores and relocate distribution personnel back home, analysts say. While its shipments abroad have been hit by declines ranging from 8% to 61% in the second quarter amid worries that Huawei would lose access to Android and other software, domestic shipments actually grew 31% to 37.3 million units. Canalys data shows that Huawei managed to grab a 38% share of the China market at the expense of competitors like OPPO and Xiaomi, whose shipments declined in the same period by 18% and 20%, respectively.

Aside from glitzy marketing campaigns and reputation for producing high-quality products, Huawei is also riding high on a wave of patriotic sentiment. Many in China view the company as being unfairly targeted by the U.S., after it was placed on the Commerce Department’s so-called entity list for posing a threat to U.S. national security. Eager to capitalize on the recent sentiment, retailers like GOME have adjusted their marketing slogans to associate buying Huawei’s products with patriotism, leading to what some see as irrational buying.

“I don’t think this growth is entirely rational because nationalistic sentiments have played a role,” says Liang Yaguang, consumer insight director at consultancy Kantar Worldpanel. “ Over the long term, I don’t think this is good because Huawei can’t get an accurate picture of real consumer preferences from the amplified results, and it will affect their future designing and production plans.”

More On ForbesTrump's Public Warning To Huawei Comes At The Worst Possible Time

Huawei declined to comment for this story. Billionaire founder Ren Zhengfei had previously sought to distance the company from patriotic buying, saying in a May interview that Huawei is a commercial business, and people should only buy its products if they like them.

Still, the gains in China will probably be enough to offset declines abroad until year end, meaning Huawei would be able to maintain last year’s shipment level and sell about 200 million units, says CK Lu, Gartner’s research director. But he and others are warning of a continued retreat abroad, especially as escalating trade tensions cast a shadow over suppliers’ efforts to resume sales to Huawei.

“If the tensions between the U.S. and China continue to escalate, especially if Huawei is not removed from the blacklist, then the business will suffer quite a lot in regions like Western and Central Europe,” says Francisco Jeronimo, associate vice president of devices at IDC EMEA. “In the meantime, what Huawei did was basically starting to develop strategies to recover in terms of brand awareness. They are investing to make sure the brand recovers to where it was before.”

I am a Beijing-based writer covering China's technology sector. I contribute to Forbes, and previously I freelanced for SCMP and Nikkei. Prior to Beijing, I spent six mo...