The Reason Apple's Losses To Huawei Are Not Explained By Chinese Nationalism

Huawei's phones have become competitive technologically, which, combined with lower price points, gives them an edge over Apple in the world's largest smartphone market.

Whether that can be sustained as Huawei attempts to become a global brand may not yet be clear, but it would be imprudent to underestimate it intentions - and capabilities. JL


Sam Byford reports in The Verge, photo by Vlad Savov:

People often feel strongly about the provenance of the products they buy, not just in China. “Made in the USA” is a powerful symbol for many Americans. (But) without competitive products, it’s impossible for Huawei to achieve such success in its domestic market. The major factor is Huawei’s technological innovation- “huge battery, slick design, and a superb processor" - which brings it to the same level as the top smartphone giants. The company sells phones across all price points. Its lower-end Honor brand makes up 45% of Huawei’s shipments

Huawei’s reputation in the US took a serious battering in 2018, a year bookended by major carriers shelving high-profile phone launches and the arrest of the company’s chief financial officer on fraud charges. Last week, however, a report and survey from the Financial Times suggested that the external controversies could actually be helping Huawei in its domestic market.

The FT report claims that Huawei’s struggles are “leading to a surge in the brand’s popularity among Chinese consumers and a sharp rise in the sales of its smartphones,” citing a 33 percent rise in consumers expressing an intent to buy a Huawei phone next. The authors also asked sales staff in smartphone stores for comment; one said that “the arrest of [CFO] Meng Wanzhou has made Huawei a patriotic icon.”

No doubt there are customers in China whose purchasing decisions could be swayed by the disputes. People often do feel strongly about the provenance of the products they buy, and not just in China — the “Made in the USA” mark is a powerful, emotional symbol for many Americans even in times when the country isn’t locked in a fierce trade war with an adversary. “[It’s] probably not the key criterion most of the people use in their purchase decision,” says Kiranjeet Kaur, a senior research manager at IDC. “But the nationalist sentiment is definitely not helping Apple in China and could likely sway the decision in Huawei’s favor when someone is on the fence.”

Whatever nationalist boost Huawei might receive, however, is unlikely to do much to change its fortunes in China. The reason is simple: Huawei has been on an upward trajectory in its home market for some time and had an absolutely astonishing 2018 — largely at the expense of Apple and Xiaomi, among other competitors. There can be no serious analysis of the company without the recognition that, outside of the US, it is now a hugely successful consumer brand as well as a highly advanced technological force.

“This [nationalist] sentiment might help Huawei’s overall brand image in China, however without competitive products, it’s impossible for Huawei to achieve such a success in 2018 in its domestic market,” says Mo Jia, an analyst with Canalys in Shanghai. “I think the major factor is Huawei’s aggressive technological innovation, which brings it to the same level as the top two smartphone giants, Samsung and Apple, in the global market.” Counterpoint Research director James Yan agrees, saying, “I don’t think it is a significant factor in purchasing decisions,” instead citing strong photo capabilities, battery life, and performance from Huawei’s own Kirin processors as bigger reasons for Chinese consumers to choose the brand.

Describing the Huawei Mate 20 Pro as “the best phone America can’t get,” The Verge’s Vlad Savov cited its “huge battery, slick design, and a superb processor, constrained by bad software and international relations.” The software isn’t an issue for most Chinese users, and the international relations certainly aren’t a negative for them either. In that light, it’s not surprising that Huawei is continuing to establish itself as a top-tier phone manufacturer in the world’s largest market.

Canalys puts Huawei’s share of the Chinese smartphone market at 27 percent, up 7 percentage points year on year, while the company’s shipments are said to have grown by 16 percent. This is particularly impressive given the overall stagnant state of the phone market in China, with IDC yesterday reporting a 10.5 percent contraction in shipments. Oppo and Xiaomi managed to slightly increase their share, for example, but saw overall shipments decline year on year. The market is maturing and consolidating, with Huawei the biggest benefactor yet.

“[Huawei’s] attempt of strengthening the brand image through technological innovations [has] seen strong progress,” says Jia. “It has significantly helped Huawei’s high-end performance with the P and Mate series, most importantly. The halo effect also helped Huawei’s overall brand image, thus, to become an attractive and trustworthy brand in China. Besides, Huawei is the only brand that could compete with Apple in terms of brand image in the high-end space in China after Samsung’s failure.” Samsung’s share of the Chinese market shrunk to a single percent in the final quarter of 2017, according to Counterpoint.

That’s not to say that Huawei is necessarily up there with Apple in terms of high-end brand perception, even within China. The company sells phones across all price points, helped out by its lower-end Honor brand — which Yan says makes up 45 percent of Huawei’s shipments — so it can’t quite be described as exclusive. IDC’s Kaur tells The Verge that “its flagship series are considered high-end enough, but [it’s] too early to say they have the ‘aspirational’ status that the iPhones have seen in the good days.“

Photo by Vlad Savov / The Verge

But Apple had a disastrous 2018 in China, with IDC estimating that its 11.7 percent slump in sales was greater than the slowdown in the market overall. Its market share was flat at around 9 percent, the only one of China’s top five phone brands not to grab more share in 2018. “The ultra-high prices limit the audience of XS and XS Max as it’s hard to place an above-8,000-yuan smartphone as a mass market device,” says Jia. “The XR was originally placed at 6,499 yuan (~$950), which is around the price of a high-end Android device [like] Samsung’s Note 9 or Huawei’s Mate 20 Pro. Although the China market has become one of the largest high-end smartphone markets, the positioning (entry iPhone with high price point) of the XR failed to ensure the volume play.”

There are other reasons behind Apple’s poor performance relative to Huawei. Kaur cites the higher prices, of course, saying that Huawei’s flagships have been “filling the gap” left as other brands go higher-end, but other factors include “lower telco subsidies (which has been the case for a while), higher-tech innovation from China players that resonates with Chinese consumers, better brand perception of other brands, and a strong portfolio of flagships. The options in the market are a lot more now, which the people are willing to consider rather than pay a huge premium.”

Market share isn’t everything, of course, and Huawei’s phone business isn’t anywhere near as high-margin as Apple’s. But Apple largely blamed the iPhone and China for its unusually poor quarter last month, and it can’t ignore the fact that it’s losing customers to Huawei in the region, particularly as it continues to push the narrative that it’s a services company. It also seems very possible that Huawei could overtake Apple to the position of second-biggest global smartphone vendor — just behind Samsung — over the whole year even without any presence in the US market. (That actually happened in the second and third quarters of 2018.) Apple CEO Tim Cook has blamed currency fluctuations for the high cost of iPhones in China, and the company will reset prices for affected regions. “We’ll see how that works out for us,” Cook told NPR yesterday.

It could be tough for Huawei to replicate its market share gains in China in 2019, however, because much of its recent performance has been at the expense of smaller players. “Huawei’s gain was mostly from the smaller vendors like Gionee and Meizu in China, as the share from smaller vendors out of top five has decreased from 27% in 2017 to 12% in 2018,” says Jia. “In 2019, it would be harder for Huawei to take share as the competition will remain largely among the top five vendors, and Oppo, Vivo, Xiaomi, and Apple have their stable user bases. It will be extremely hard for any vendor to gain share from others.”

“The big Chinese players, including Huawei, have grown at the cost of some of the smaller domestic players in a market where smartphone penetration has already reached quite high levels,” agrees Kaur. “There could be some further consolidation in the China market which could help players such as Huawei further consolidate their share in the market.” Counterpoint’s Yan, meanwhile, predicts that Huawei’s Chinese market share will grow because of a lack of “outstanding highlights” from competitors over the next year.

Huawei has emerged as an inarguably strong competitor

Ultimately, however, Huawei has global ambitions, and the intercontinental controversy surrounding it isn’t likely to help it in the long term — even if there does turn out to be a small patriotism-fueled sales bump in the short term. “Huawei’s success in some of the western markets has improved its credibility back home and its growth in China has helped provide scale to grow outside of China too,” says Kaur. “All this has also helped Huawei drive R&D and improve its brand image, and it could become challenging to drive this if there is international slowdown and financial challenges arising out of that.”

The decision to buy a particular phone can be intensely personal, and there are countless factors that affect it. What is clear is that in China, and many other countries in the world outside of the US, there are a lot of strong reasons for customers to pick Huawei devices. Of course, the popularity of consumer products isn’t going to shift any government’s position on, for example, the national security issues raised by allowing a Chinese company with a dubious history to build 5G infrastructure. But it’s worth reflecting on how and why Huawei is able to beat companies like Apple in China. However much patriotism might come into play, it’s less of a factor than the reality that Huawei has emerged as an inarguably strong competitor at every tier of the market.