Based on the article : A Dark Horse in the Global Smartphone Market By : Yangao Xiao and Guoli Chen
With their eyes sets on innovation, design, customer centrism and 5G wireless, Chinese telecom supplier, Huawei are now one of the largest telecom manufacturers in the world. With a future vision of converging the physical and digital worlds through ubiquitous sensing, they have even set their sights on making industries go digital as well as developing cloud-based smart wearable for the blind. This is in alignment with their vision to “ Bring digital to every person, home and organization for a fully connected, intelligent world” (Huawei Annual Report, 2018). Operating in 170 countries and regions and with 300 billion consumers, Huawei has connected even the most remote of places such as Mount Everest and the Arctic Circle showing their edge and advance technological prowess ness. This report will expound on the internal and external environment for Huawei and how Huawei should respond to the increased global competition. The report will elaborate on the sources of Huawei’s competitive advantage in the smartphone industry as well as its sustainability.
Industry Analysis: Porter’s Five Forces Model
The threat of new entrants: Smartphone manufacturing is no easy feat considering that there are many components and processes that go into a smartphone which requires an extensive network of suppliers for parts and computerized systems due to the high level of component integration and process complexity. Smartphone makers would compete on scale and price if there is limited differentiation in hardware or software design thus showing that high capital is required along with economies of scale. The network effect is also crucial as a healthy ecosystem of apps, developers and users are crucial for a smartphone success and the value of the smartphone is highly dependent on its OS and its available apps, like in the case of iTunes store’s success transcending into Apple’s success. In the smartphone industry, there is a number of embedded functionality and high brand loyalty that makes switching cost high for e.g. Blackberry’s mobile business functions appealed to business people and Huawei’s state-of-the-art design in hardware and software as well as its strength in telecom equipment and cross-business synergies. This shows that the threat of entry is low as a sizable scale is needed to compete in this industry, network effects are present, customer switching costs are high, the capital requirement in technology and proprietary technology requirement is high and is independent in size as it is the leading company in 5G. However. there is a credible threat of retaliation as new entrants can develop a niche segment to win over consumers just like how the present industry players did, hence the threat of new entrants is medium or fairly moderate.
The threat of Substitutes: Potential substitutes for smartphones includes feature phones, PCs, laptops, tablets, smart TV, game players, cameras, multimedia players, bank cards and wearable devices such as smartwatches. Global shipments have shrunk from 157 million units in 2010 to 133.85 billion in 2014. Digital cameras too have suffered the hit of the integration of cameras into smartphones. The high functionality and the mass integration of many features and expand-ability of the smartphones make it hard for a substitute to hinder the smartphone industry and thus the threat is low as there is no other substitute offering an attractive price-performance trade-off.
Bargaining Power of Suppliers: A smartphone has immense hardware and software components but the operating system and the system on chip ( SoC) are the most crucial and the main three operating systems are Android OS by Google with a market share of 87.6%, followed by iOs (11.7%) and Windows Phones OS (0.4%) . However, there are newcomers such as Huawei themselves with their own Kirin series which is self -designed and developed for their Huawei and Honor smartphones and comprises of 7.73% of the android SoC market share. Thus, the power of supplier is moderate as the supplier’s industry is more concentrated than the industry it sells to, incumbent firms face significant switching costs when changing suppliers, products offered by suppliers are differentiated and there is no readily available substitute for the product and services that the suppliers offer. Suppliers are, however, heavily dependent on the industry for their revenues as the operating system is needed and used predominantly in the smartphone industry and technology-based industries that make use of ICT.
Bargaining Power of Buyers: The bargaining power of buyers is low for the smartphone industry as there are many buyers from end consumers who buy individually from telecom carriers and third-party retailers and dealers in the distribution channel who buy in bigger quantities. The smartphone industry’s products are very differentiated and offer a wide range of features, including wireless data and speech communication, camera capabilities, social networking, self-expression and identity and this demand attracted non-traditional phone makers like Huawei, Samsung, LG and Apple. Buyers are not able to credibly threaten to backwardly integrate into the industry due to the much expertise and capital required. A smartphone is a shopping good/affordable luxury good and even Huawei latest P9 series had a price tag ranging from € 599 to € 749, so there are moderate switching costs.
Rivalry among competitors: The top 5 major vendors in the industry is Nokia (33.9%), RIM ( 16.5%), Apple (15.4%), Samsung ( 7%) and HTC ( 6.8%). Besides these major players and their considerable market shares, there has been a rise in Chinese smartphone makers including Xiaomi, Lenovo, OPPO and ZTE. There are considerable competitors in the industry and the competitors are roughly of equal sizes besides the main two superstars Apple and Samsung who own their own SoC and started off as manufacturing companies. Industry growth is high with booming emerging economies like China, India, southeast Asia, middle east and Africa that is spearheading local makers like HTC, Xiaomi, Lenovo, Oppo, Huawei, Vivo, ZTE and Meizu. Thus, the rivalry among competitors to be medium with many competitors in the industry and with much growth in the industry.
Competitive Industry Structure: The smartphone industry is an example of monopolistic competition. There are many firms with some pricing power competing in this industry, offering differentiated products and services through their smartphones, apps and operating systems and with medium barriers of entry as new entrants can develop a niche segment to win over consumers just like how the present industry players did. New entrants can redefine smartphone features and even managed to squeeze out traditional phone makers like Nokia, Ericsson and Sony. The products are between competitors tend to be similar but are by no means identical as they have high end and low-end segments and varying features and apps that go with the range of phones.
Co-opetition: Xiaomi Inc. gained its market share due to its superior Chinese Version MIUI OS based on Android and Taiwan’s HTC joined Android Open Handset Alliance led by Google and launched HTC dream, and then HTC released HTC HD7 and HTC 7, Mozart, using Windows Phone 7 OS in November 2010 thus resulting in 43.5 million units sold and a 9.1% global share in 2011. This shows strategic cooperation between industry rivals as both Google and Windows also compete in the smartphone industry with their own launches of smartphones.
Internal Analysis : Core Competencies
Resources – Tangible: Huawei’s own Kirin 955 chip and Leica’s dual-lens camera for their premium P9 series is a perfect combination for a powerhouse phone and with a top-notch camera. Their Kerin series is a self-designed and developed chip which uses a fabless model. They have even developed Kirin 950 SoC to improve CPU and the overall battery life where one can use the phone continuously for two days without charging. These are valuable resources and is rare as they are the ones who designed it and it cannot be imitated for they leveraged on their deep understanding of 3G and 4G wireless technology to produce this SoC. Huawei is organised and captured the value of this resource as they managed to boost its market share from 5.2% to 8.2% in 2015 and secure a No. 3 position in the market after Samsung and Apple.
Resources – Intangible: It launch of the P9 series won reputation in London and sent a strong signal of their ambitions in the global market scene by ranking no. 1 in the global telecommunications equipment market replacing Sony Ericsson in 2013. Serving 170 countries and regions and more than one-third of the world population, Huawei’s culture of continuous customer-centric innovation and win-win cooperation have served it well. Their massive cloud presence serves more than 4000 enterprises over 150 countries and they have set-up more than 180 Evolved Packet Core (EPC) to service almost half the world’s 4G users. They have provided the Indoor Connect Solutions for more than 40, 000 hotspots operated by 120 carriers in 75 countries. That is the kind of brand equity it has, with such high value offered and is deemed as an asset to consumers and is unique and unmatched by major rivals like Apple and Samsung. Additionally, they have licensed 769 patents to Apple covering wireless telecommunications including GSM, UMTS, and LTE while Apple licensed 98 patents to Huawei, thus showing this intangible resource that they could leverage on so that they could do co-opetition with rivals. Huawei could also sue Samsung in China and the US for infringement of their patents related to telecommunications and smartphone interface. These are highly valuable resources and are hard to come by and attain. It is is not easily imitated and they have isolating mechanisms that allow them to be able to sue if their intellectual property has been infringed and their reputation building isn’t easy to replicate in a short period of time. Huawei seems to able encompass its intangible resources and capture value as these assets and relationships to promote their smartphones globally, even enabling them to move into the medium and high-end market increasing their brand value.
Dynamic Capabilities: Huawei’s reduction in its reliance on telecom carriers has enabled it to understand the fast-changing preferences of their consumers thus leading them to come up with the dual-channel strategy. This strategy allows them to move into the premium market segment and aided in developing their other channels to embrace sales opportunities inspired by Xiaomi’s internet sales success. Through this strategy Huawei makes used of both online and offline channels including their own and other affiliated or third-party retailers that cater to both premium segment ( P series ) which they will predominantly use offline channels supplemented by online channels and the medium market segment ( Honor ) which targets young people, which they will predominantly use online channels supplemented by offline channels . This is a form of primary activity for Huawei as they are directly adding value and involved in distribution, marketing and sales of their smartphones. Through this, we can see them adapting their resources over time with consideration of the external environment that they are in, tapping into the dynamic internet sales opportunities present in the industry. By doing so, they have modified their model where these dual channels will boost sales through by 80% while cutting down sales by telecom carrier to less than 20 %, a strategic fit with Huawei’s environment. This clearly highlights the evolution of their strategic system as they cut down on telecom carriers as the driving force of sales and utilize online platforms as they are a better fit based on consumers’ preferences. Additionally, Huawei has invested substantial resources in research and development particularly in the upgrading of their technology. With plans to commercialize 5G technology usage by 2020, Huawei will redefine the telecommunication landscape to which rivals such as Apple and Samsung must respond accordingly. Huawei’s extensive network connectivity as enabled just their Mate 8 to connect to wireless networks of more than 1000 carriers in 200 countries, giving Huawei the edge as they are unmatched by huge rivals like Apple and Samsung and this has a profound environmental change in which these smartphone vendors operates.
Activities: Huawei employed over 79, 000 personnel which is 45% of all its employees for research and development. This cost them about US 9.2 billion far exceeding the likes of Apple, IBM, Cisco, and Ericsson. Their dedication to supporting activities can be seen in their ardent investment in financial and managerial resources for their SoC development and smartphone design. Huawei hired Hagen Fendler, former director of product concept design of Siemens and former chief designer of BMW to lead an international product development team consisting of 200 engineers across design centers in China, western, Europe Japan, and the USA. Additionally, they hired Joon Suh Kim, former creative director at Samsung who was instrumental in many of Huawei’s flagship products.
Focused Cost Leadership: Huawei in 2003 distributed and cut their base station equipment by 10 times and weight by 15 times. They have also drastically reduced carrier operation and maintenance costs by 30% optimizing the value chain for low costs, which resulted in them becoming Vodafone’s strategic supplier and British Telecommunications’ “ 21 Century Network ( 21CN)” preferred supplier in 2005. This has to lead them to reduce significant costs than that of other Chinese smartphone makers like Lenovo and ZTE which relies heavily on carriers to distribute their phones.
Cost Drivers that kept Costs Low: Their dual channel strategy where they strategise to make use of online channels to have sales of 80% while keeping sales via carriers to be less than 20% shows their strong vision in reducing cost by cutting back on carrier’s services which they were heavily dependent on when they initially entered the industry where over 80% of their low-end phones were made for telecom carriers. One of the main raw components of a smartphone is the operating system, and Huawei strategy was to develop their own Kirin series which is self-designed for both their premium P series and medium market Honor phones. By leveraging on its deep understanding of 3G and 4G technology, Huawei managed to improve battery life and CPU performance. In the first quarter of 2016, their global shipment of smartphones was 27.5 billion and with the construction of more than 280 400G core router networks and serving almost half of the world’s population , Huawei has the economies of scale to drive cost down and their deep understanding and technological prowess has reduced the learning and experience curve to research into 5G technologies, even planning to commercialize their usage by 2020. Overall, this allows for protection against price wars because of the lowest-cost strategy in place.
Focused Differentiation: Huawei’s focus on high-tech and fashion highlight their dedication to technological capabilities and user interface design as lead to partner with leading camera and audio companies like Lecia and Harmon/ Kardon to provide optimum experience and quality to consumers. This can be clearly seen by them hiring top design executives like Joon Suh Kim who was the former chief of design for Samsung to launch premium market smartphones like the P series with its stylish and all-metal case with a price range of € 599 to € 749 which consumers are more than willing to purchase with just 27.5 billion shipments at the beginning of 2016. The launch of the Ascend Mate 7 with a price tag of € 500 which was designed for the business class had premium features such aviation-grade aluminium case, a 6-inch FHD display, an eight-core Kirin 925 SoC and a 4100 mAh Lithium polymer battery which was a hit among consumer indicating that they were willing to pay a premium as 7 million units were shipped internationally.
Sustainability In the Midst of Increased Global Competition
We can clearly see that Huawei is re-positioning its market strategy of mass -market low-end smartphones to propelling itself into the premium – end smartphone segment (niche) while still maintaining a medium segment (Honor) for young people. Although Huawei has adopted a strategic position, it must not only rely on perceived excellence but on product excellence while bearing in mind costs especially due to the rising cost of manufacturing in China. We can see a strong initiative towards improving batteries, chipset, design and smartphone features, so the next step would be for Huawei to work on the weaknesses in designing their operating systems is by seeking opportunities by partnering with other adept OEMs (Original equipment manufacturers) to rectify existing problems and improve the system just like how they have partnered with top-tiered camera and audio companies like Lecia and Harmon/ Kardon. Partnering with manufacturing companies in specialised components can lower manufacturing costs as they are able to access new technologies without consuming resources and are able to share the burden of costs. This will enable them to gain a competitive advantage over their competitors in perceived and product excellence.
In order for Huawei to stay for the long haul, they need to stay relevant. The smartphone shipment growth rate in emerging markets such as Asia-Pacific, Middle East and Africa has been steadily rising as there is a shift in demand from developed markets to emerging markets especially in the demand for low-end smartphones. Huawei rising from an emerging economy itself can make use of this opportunity to enter these emerging economies and build relationship and consumer base. Their market repositioning to enter the high-end market will enable to tap on the high-profit potential in the developed markets while at the same time they can maintain a mass-market strategy in these emerging economies where they can seek new growth and profit opportunities by offering services, content and devices. By leveraging on the success of their synergies with businesses and it being the world’s biggest producer of telecoms equipment, it can lay the groundwork of constructing their router networks and hotspots in these emerging countries , they would be able to distribute their smartphones easier through the local telecoms carriers sales networks and leverage on the capabilities of these carriers. Huawei’s intensive investment in Research and Development in 5G technology will serve it well as developed markets like Korea which has recently launched the world’s 5G network (The Economic Times, 2019). It, however, faced setbacks when the US accused Huawei of cybersecurity issues and went as far as influencing its allies such as Canada, Japan, New Zealand and Australia to ban their 5G gear (Khan, 2019). However, Huawei found other opportunities in emerging markets like India with a government thirsting for rapid digitisation and a young sizable population hungry for the latest technology (The Economic Times, 2019). This will keep Huawei ahead of the increased global competition especially when confronted with emerging smartphone giants such as Lenovo, ZTE, Xiaomi and could work in their endeavours to overtake Apple and Samsung in the years ahead.
Huawei Investment & Holding Co., Ltd. (2019). Huawei Investment & Holding Co., Ltd. 2018 Annual Report. [online] Huawei Investment & Holding Co., Ltd. Available at: https://www-file.huawei.com/-/media/corporate/pdf/annual-report/annual_report2018_en.pdf?la=en [Accessed 17 Apr. 2019].
Khan, D. (2019). Huawei alleges US lobbying against it in India Read more at: //economictimes.indiatimes.com/articleshow/68206604.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. [online] The Economic Times. Available at: https://economictimes.indiatimes.com/tech/ites/huawei-alleges-us-lobbying-against-it-in-india/articleshow/68206604.cms [Accessed 13 Apr. 2019].
The Economic Times. (2019). Can bring 5G to India in 20 days if given the green light, says Huawei CEO Read more at: //economictimes.indiatimes.com/articleshow/68480704.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. [online] Available at: http://Can bring 5G to India in 20 days if given the green light, says Huawei CEO Read more at: //economictimes.indiatimes.com/articleshow/68480704.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst [Accessed 12 Apr. 2019].
The Economic Times. (2019). South Korea to launch world’s first national 5G networks Read more at: //economictimes.indiatimes.com/articleshow/68700813.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst. [online] Available at: https://economictimes.indiatimes.com/news/international/world-news/south-korea-to-launch-worlds-first-national-5g-networks/articleshow/68700813.cms [Accessed 17 Apr. 2019].