Faced with US sanctions that have restricted its access to chip supplies, Chinese telecommunications giant Huawei has decided to self-amputate in order to survive.
A joint statement published in Shenzhen Special Zone Daily yesterday confirmed industry murmurs that Huawei is selling Honor, its youth-focused smartphone budget brand. The statement said that Shenzhen Zhixin New Information Technology Co., Ltd has signed an acquisition agreement with Huawei sealing the deal. Huawei also later released a statement on its official website confirming this transaction.
This is the first time that Huawei has made major adjustments to its business operations following US sanctions blocking its chip access. While both parties did not reveal any figures, based on reports by Reuters and other media last week, Honor’s sale price is 100 billion RMB (S$20.5 billion).
This amount is believed to be the highest recorded for an acquisition in China’s smartphone industry. Voices on Chinese social media platforms chimed in to say that this sale will not only save Huawei, but Honor too.
... Honor’s sales volume in the Chinese market is very impressive. It ships over 70 million handsets a year and once occupied 10% of China's smartphone market share.
Honor was established as an internet-based smartphone brand by Huawei in 2013. Its products are mid-range and budget-friendly, and its main competitors are other mid-range brands like Xiaomi. However, for a brand that has been playing a supporting role to Huawei’s Mate and P series phones, Honor’s sales volume in the Chinese market is very impressive. It ships over 70 million handsets a year and once occupied 10% of China's smartphone market share.
Removing Honor will help slow the drawdown of Huawei’s chip stockpile
Huawei was forced to make the decision to sell Honor after the US made moves to cut global chip supplies to Huawei. A Huawei executive in charge of the company’s 5G business was quoted by Caixin as saying, “At the start, we established Honor because high-end chips could have spillover effects. Modify them a little and we can make them low-end, which is akin to eating the same fish two ways. But if the fish is gone, what else is there to eat?”
Huawei did not mince its words when explaining the sale either. According to the statement on the company’s website, amid “tremendous pressure” on Huawei’s consumer business, and a “persistent unavailability of technical elements”, Huawei decided to sell its Honor business to “help Honor’s channel sellers and suppliers make it through this difficult time”. The statement also stated, “This move has been made by Honor's industry chain to ensure its own survival.”
... no matter how Huawei distances itself from Honor, it is still the US government that holds Honor’s fate in its hands.
Industry experts have differing opinions as to whether this sale will change the fates of Honor and Huawei. Optimists think that Honor will now be able to purchase 5G chips from enterprises like Qualcomm and MediaTek after separating from Huawei. They also think that Honor can take a leap of faith and enter the high-end market, as it does not have to play the supporting role to Huawei anymore. Earlier, there were rumours that Honor’s new owner has plans to get listed within the next three years. This is a prospect that is not out of reach.
To ensure that Honor will not be implicated by Huawei any longer, Huawei made a “clean break” with Honor, stating explicitly in the statement, “Once the sale is complete, Huawei will not hold any shares or be involved in any business management or decision-making activities in the new Honor company.”
But pessimists feel that Huawei’s stealthy retreat may not guarantee that Honor’s supply chain is secure, especially in terms of chips, because no matter how Huawei distances itself from Honor, it is still the US government that holds Honor’s fate in its hands.
... some industry players estimate that the chips stored up before the US sanctions kicked in will only last until early next year
For Huawei, it is also uncertain whether it will be able to save itself by selling off Honor. With the chip supply shortage, right now Huawei can only rely on its current stock to keep up production. Its smartphone business is dependent on how long those stocks last, and whether Huawei can find replacement chips within that time.
Selling off Honor does give Huawei’s smartphone business a lifeline. It can save its existing chip stock to maintain the Huawei brand for as long as possible, and extend its timeline for finding replacement chips. Selling Honor while it still has market value would also give Huawei a sizeable amount of cash, which would be valuable “winter fodder”, to ensure the company’s other operations can proceed smoothly.
A national matter
However, looking at the hundreds of millions of chips that Huawei goes through each year, some industry players estimate that the chips stored up before the US sanctions kicked in will only last until early next year, and selling Honor would only make the stock last longer — the key is still to resolve the bottleneck in chip supply. There were previous reports of Huawei’s “Nanniwan” project — named after Nanniwan in Shaanxi where a campaign was launched during the resistance against Japan to achieve self-sufficiency in production — to shun US technologies in manufacturing finished goods. However, self-sufficiency in R&D and production of chips will not happen overnight.
The news of Huawei’s sale of Honor again sparked calls for China to be self-sufficient in technology. WeChat writer and analyst “Mingshu zatan” even called the Trump administration’s containment of Huawei a “21st century humiliation” for China, adding that China should innovate the entire supply chain, and the authorities should use China’s huge market to get back at companies that cut off supplies to Huawei in the name of US sanctions.
We have to note that the beleaguered Huawei has received strong state support in this round of efforts to save itself.
According to the buyer’s statement, Shenzhen Zhixin New Information Technology (SZNIT), the buyer, was set up in September this year by Shenzhen Smart City Technology Development Group along with about 30 agents and suppliers of the Honor brand, including dealers such as Telling Telecommunication, as well as its retailers such as Suning and Shenzhen Sundan Chain Store. A Jiemian News report said SZNIT’s largest shareholder is in fact Shenzhen’s State-owned Assets Supervision and Administration Commission.
With the state essentially taking over Honor, and considering public sentiment in China, a national effort to rescue Huawei is in the works, and this move for survival is not just about Huawei’s honour — or Honor.
Related: Will China and the US fight another wrong war, with the wrong enemy, at the wrong place and time? | Cut-throat competition for world-class chips: The end of Huawei? | Huawei’s latest chip: A possible “seven-up eight-down” breakthrough?