The latest movement in the escalating US-China trade war has seen restrictions placed on US companies conducting business with Huawei, which has resulted in Google announcing that Huawei will now no longer have access to the latest updates to Android, the operating system that powered nearly 200M Huawei smartphone sales in 2018.
As noted by Futuresource’s previous Smartphone Market Report, Huawei has been increasing competitive pressure on smartphone brands across Europe and Asia in the last five years, with a 2018 result that came close to knocking Apple from its no.2 market volume position. Whilst Huawei has continued to grow as a consumer brand, the company’s network infrastructure business has come under fire time and time again due to security concerns. Furthermore, the ongoing trade war between America’s Trump and China’s Xi Jinping has used the smartphone market as a pawn, with the industries in both countries heavily reliant on American-Chinese trade.
With US-China trade relations deteriorating, the US government has potentially halted Huawei’s growth, by placing it on the ‘entity list’. This effectively blacklists Huawei, preventing US firms from trading with Huawei without a license. This is the same ban that was levied against ZTE, that violated trade sanctions against Iran, resulting in the company shipping 54% fewer handsets in 2018 compared to 2017 and crippled the company until a resolution was found. For Huawei, this initiative will result in US companies such as Google, Qualcomm and Intel ceasing supply relationships for components and software with Huawei, effectively leaving Huawei without access to the latest Android updates and essential chipsets that have thus far underpinned the company’s success. It is at this point worth noting that the US government has now lifted the ban for 3 months, primarily to allow US companies time to adapt to the pending cessation of trade with Huawei.
Huawei are a behemoth within the smartphone market, and early indications suggest that they are well prepared to handle the blacklisting. While it is possible that Huawei will experience a significant decline, there are also a range of other outcomes that could have much further reaching implications for the smartphone market beyond frustrating Huawei’s growth.
Huawei claim to have developed a proprietary smartphone OS, that would allow the brand to untether itself from Google’s Android and the West. With a range of Google services already banned within China, Huawei’s domestic users already lack the full Android experience, so a proprietary OS may well provide Chinese consumers with an improved user experience. Huawei has also approached app makers asking them to create content for their new OS, in exchange for access to the Chinese market. Moreover, with recent events likely causing concern to other international Chinese brands such as Xiaomi and the BBK group, it is entirely possible that Huawei will attempt to position itself as the OS of choice for Chinese vendors, that together claim over 33% of global smartphone shipments. Similarly, while Huawei has announced its stockpiles of relevant components in anticipation of this blacklisting, in the long run it will potentially seek to domesticate component manufacturing to further insulate themselves from American suppliers, a move that may also be followed by others. Taken together, Huawei’s response to this ban could further shift the centre of gravity of the smartphone market away from Silicon Valley and into Shenzhen.
This move by the US has further implications for the broader market. In response to news of the ban, Apple’s stock market value dropped, as investors fear an aggressive response from China that could involve banning Apple handsets from its domestic market. Whilst Apple has struggled to compete against domestic brands in China, the country remains important, having accounted for 15% of global iPhone demand in 2018.
In all of this, it seems that the ultimate winner from any to-and-fro between China and America will be Samsung. The Korean company has had a challenging first half of 2019, with its Galaxy Fold struggling with mechanical issues, and its S10 flagship handset failing to help the company return to its 2017 high. Nonetheless, it has thus far remained entirely uninvolved in proceedings, is a trusted brand, and arguably well placed to claim any market share vacated by Huawei or Apple, with a portfolio including a wide spread of price points that compete with both Huawei’s own extensive product portfolio and Apple’s flagship devices.
Regardless of how Huawei, China and Trump look to calm tensions, confidence in Huawei will have been damaged by this event, while investors are nervously observing how China’s response might impact Apple or other American brands. Chinese vendors may assess the risk of reliance on American firms, which again could have a ripple effect for the likes of Qualcomm and Intel, stunting long-term growth as the Chinese technology industry avoids the increasingly unpredictable US market. Politics may not merely disrupt the Huawei train; it could tilt the market.
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