Case Analysis - Huawei

A DARK HORSE IN THE GLOBAL SMARTPHONE MARKET: HUAWEI’S SMARTPHONE STRATEGY CASE ANALYSIS

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1. Which of the trends in the smartphone industry do you consider to be most important for Huawei? Aiming to focus on their customers “market challenges and needs by providing excellent communications network solutions and services in order to consistently create maximum value for customers”, Huawei - a chinese technology company based in Shenzhen, China - has been successfully delivering value to customers, jumping from being a sales agent to a telecommunications giant. Serving over one third of the world’s population, Huawei is now ranked No 1 and No 3 in the global telecom equipment and smartphone markets, respectively. From 2006 to 2015 the company’s revenues increased from, approximately, 8 to 60 million USD, respectively, achieving operating profits of 7,052 million USD in 2015 (Exhibit 8a). Originating from Personal digital assistants, that lacked the features voice and telecommunication of cell phones, smartphones disrupted the telecommunications industry, blurring the boundaries between traditional cellular phones (which focused on voice and text communication) and personal computers. This disruption seems to come from above, as new products in the smartphone market tend to arrive as luxury goods, but over time, they get cheaper and the old less capable model must be replaced. This top down approach of smartphone entrance into the market was, in effect, running parallel with a bottom up disruption on cellular services. The cellular service market is fiercely competitive, and to effectively enter this competition, new service providers must offer higher speeds or cheaper prices, with most choosing the latter due to technical capabilities. Composed by different software and hardware components, smartphones introduced new functionalities, such as wireless connection technologies and internet-based message tools that led to a shift from traditional features such as text messages and phone calls to an increase in the usage of these new developments implemented by technology giants such as Apple, Samsung and Huawei. As a consequence, distribution channels in online markets were introduced to the previously dominant telecom carrier only constituted by offline sales channels of distributors and retailers. Furthermore, the technological innovations introduced led to major changes in customer's purchase decision, from a focus in calling rate plans and brand recognition to attributes such as wireless data, camera, network development or speech communication, raising customer switching costs and developing brand loyalty, two entry

barriers characteristic of the industry. These features created by the telecommunications companies culminated in a successful top-down market disruption, therefore, decreasing the importance and market share of PCs and laptops (Exhibit 4), once smartphones allow customers to access most of their functionalities in a more practical and, thus, less timeconsuming fashion. More recently, and even though the smartphone industry registered an exponential growth over the past decade, the growth in demand has been much stronger in emerging than in developed countries (Exhibit 6a), triggering the demand for low-end smartphones and, consequently, a decrease in the average sale price. This fact, led to a slowdown in the sales of smartphones, led to an increase in competition, from which constant innovation seems to be crucial to survive and maintain a competitive advantage. Understanding customers and market changes are critical trends for Huawei. In order to do this, Huawei will need to successfully target customers according to their needs and preferences, develop software capabilities and complements, and improve hardware to continuously ensure their products competitive advantage in a highly competitive market.

2. Explain which impact you think those trends will have on the smartphone industry

As mentioned in the previous section, innovation is the most important factor for telecommunications companies, especially regarding the high end market, due to customers high standards and expectations. Apple’s presentation of its new smartphones is the best example to illustrate this. They have been the preeminent power in highlighting their phones new capabilities and how strongly their team has developed the new product, comparing and contrasting numerous specifications against other high end competitors. However, this constant innovation has to be balanced with the high demand in the low-end smartphones where the market pressure is on lower prices. This increase in low-end demand has had an impact on the smartphone industry by pushing the average price of smartphones down, due to the higher price competition, and this has led to increases in the competition between the different players in the smartphone market. This increase in low-end demand created an urge for smartphone companies to lower their prices in emerging markets, to gain market share. The aforementioned trend could have another impact for the smartphone industry, motivating these businesses to continue to invest heavily in Research and Development. This investment is one of the tools that allows dominant players, and new potential entrants, to gain a competitive advantage. Huawei, Xaomi and other Asian companies have another advantage in countries like China.

Chinese citizens give great importance to national companies, they trust those companies as a guarantee of quality for them and therefore may give them priority over similar other products offered by international competitors. The smartphone is becoming a substitute for many other electronic devices, and in the future years it will continue to go this way due to the constant innovation of telecommunications companies and their effort to integrate more functionalities in these devices. As an example, smartphones are already a good substitute for cameras, GPS and other devices. However, smartphones are not yet perfect substitutes for computers or televisions. Students still need a computer at school to write their notes and workplaces still cannot replace them to perform tasks in the office building, yet the potential for this is becoming more promising. In the high-end smartphone market, prices are decreasing due to saturation of the market. Competition between these actors is increasing and this is driving prices down, as differentiation becomes more difficult to identify. Therefore smartphone companies will have to continue innovating if they want to stay at the top and survive. If a company is able to have a competitive advantage, through innovation, (for example a really thin keyboard that you can put in your phone) that the other competitors can’t have, they could sell their phones for a higher price or capture a greater market share against their nearest competitors. Finally, smartphone makers will have to invest in software and application partnerships, as this will drive the demand of the secondary market. The number of applications available in every applications store (iOS or Android) is huge and is growing exponential. For example, Windows Phone tried to enter the market with their own “application store” but it turned out to be a failure, due to the small amount of applications available on their store. Applications on smartphones became essential for the users, an important trend in which smartphone makers have to try to get a competitive advantage by having special and exclusive apps. For example, companies could create a partnership with a famous developers to get the exclusivity on its new applications. This kind of advantage could lead to profit opportunities for the company that achieves successful partnerships (first mover advantage). To conclude this section, the trends in the market highlight the need for every smartphone company to invest heavily in R&D and to improve the capacities of their devices through innovation, as the growth in competition between products and market saturation force smartphone companies to devise new ways to generate profit and differentiate their product.

3. What would you suggest Huawei should do in response?

To be able to compete in the smartphone industry in the future, Huawei has to adapt to the upcoming trends in the industry. To accomplish that, the focus should be on the high-end market for smartphones, the Asian market, software and hardware capabilities and mobile data networks. The focus on the high-end market is for several reasons. First, the trend shows that smartphones will likely be a substitute for laptops and tablets in the long term (p. 4). This means that the smartphones will be used for more tasks and therefore need to have higher technical requirements. Second, the high-end market will be more important because the market in the developed economies is already saturated, growth is stagnating and new sales are either for replacement devices or due to a new innovation. For Huawei, they will want to target the technical innovation buyers, meaning their strategy must focus on R&D to expand their market share in this segment. To compete in this market, Huawei must separate from its competitors. This will most likely not be achieved by competing in brand reputation because other companies like Samsung and Apple have a competitive advantage in this field. Therefore, Huawei must attract customers by challenging the established companies in the price competition or in technological superiority. Price competition includes positioning the products at the lower end price point of the high-end market. This market can be divided between Apple and Samsung products at the top end of the market and different other android based products (from Samsung, Xiaomi or Lenovo) in a lower price range. Since Huawei lacks in competing directly in terms of brand reputation, they must convince customers to change the brand by having an comparable quality of technical standard like the other companies and offer the phones for a lower price. This is mainly due to the high switching costs consumers experience when they switch between a smartphone brand and especially when they switch between the two main OS. In this point, they must use their ability to cut costs, which results from their raising market shares, their experiences in the cellular market and the cross-business synergies from other profit streams within the company. Doing so will also increase the entry barriers in this specific market because new entrants will not be able to produce at this low price and provide the same quality standard at the same time. Besides the investment in the high-end market for the developed economies, the development in the Asian market offers different opportunities. As this market is the biggest, in sheer numbers, in the world and has the highest growth expectation, being a player is inevitable and presents the strongest opportunity for Huawei to seize market share. Therefore, Huawei should continue to offer, and potentially increase their investment in their Honor brand

which they started during their differentiation strategy, to cater to the lower end of the smartphone market (p.6). Huawei’s advantage in this competition lies their origin as an Asian company and management of people from the region. While the smartphone industry has been suffering in the developed economies, with shipments shrinking in North America by 0.7% and 1.3% in Western Europe (Exhibit 6b), the Asian region, more specifically China and the developing APAC region, are expected to grow at 13.8% and 5.3% respectively (Exhibit 6b). With intimate knowledge of the culture of these regions, the hardware used for the cellular service industry in Asia and trends in the Asian market, Huawei has a decided advantage in capturing this increased demand. To do this, they must focus on software and hardware capabilities, to compete - or outcompete - their competition and gain this growing demand. Regarding the software/hardware capabilities, it is important to be able to adapt the smartphones to the newest technological innovations. The focus of this strategy is on the secondary market, once an user has already purchased a smartphone. The competition in the primary market – selling a smartphone itself – is characterized by price competition, technological jumps and brand reputation. Furthermore, the profit opportunities in the primary sales market are limited because the smartphone market in many regions is slowing down, with the exceptions of the aforementioned target markets, and is characterized by replacement purchases of smartphones, rather than gaining new customers. This market is then not expanding market size but rather fighting for existing market share; for Hauwei, an opportunity then exists in generating revenue from current smartphone users (referred to as the secondary market from here out). The secondary market, including the app stores and services offered on the smartphones, offers huge profit opportunities (p.5). As capabilities of smartphones have began to increase, they are beginning to be viewed as substitutes, rather than complements, to laptops and tablets (which both are experiencing shrinking demand figures currently and into the future) (p.4). By following this trend, the capabilities to work with the features and applications offered by laptops and tablets will be key to convince customers to make the switch. For Huawei, this means being an early adopter and working on developing this technology before their competitors. Furthermore, the higher demand on applications will lead to profit opportunities by the marketplace that features the most and the best applications. Apple is known for having the most robust applications store, followed by Google Play; however, as smartphones become more capable substitutes for the aforementioned products, Huawei has the potential to utilize their application marketplace as the preeminent leader in software offerings for this shift. Thus, it is important to expand and improve their offerings and quality

of the applications. This includes partnerships with developers as well as equipping the smartphones with the technology which is need for the new innovative applications. The importance of that point becomes more obvious when you look at the future possible competitors and new entrant potential. The smartphone market seems to have huge entry barriers because of the big market leaders and their influence over the brand reputation. However, entry opportunities in the smartphone market still exist for companies which have software or hardware advantages that can be implemented in smartphones. For example, Huawei was able to enter the smartphone market from the GSM market and this is possible for other businesses to do. Google has developed the operating system Android, has the technical capabilities to compete and the financial resources, yet has not been successful thus far, but that does not prevent them from entering. The software advantage is not likely to be related to the OS of smartphones as the markets operates as a duopoly, controlled by Android and Apple. In contrast, the market for Apps and Services offers greater potential for new innovation, which would give competitors of the two major powers, Apple and Samsung, an advantage (like Apple in 2007) (p.5). To avoid one of their competitors capturing this, Hauwei must invest in software capabilities and their Application-Store, as this will be crucial in keeping and expanding their market position and defending against new entrants by raising the entry barriers. Referring to the trend of rising scope to use the smartphone once again, the mobile-data usage will become more important. In this context, Huawei should use his strength of having a developed network of wireless infrastructure, massive data storage and collaborations with global telecom carriers to provide the best and fastest mobile data accessibility. Therefore, the focus on R&D, over the last years should be continued (if not expanded), to be able to offer new technologies like the 5G-Technology. Utilizing their competitive advantage, a much greater understanding of the data and mobile network industry than competitors, Huawei has a lot to gain from investing in this sector. 5G technology is one potential opportunity, with many more that could be discovered or utilized exclusively on Huawei smartphone products. This directly refers to the rising use of applications and services on the smartphones because the availability and speed of mobile data will have to increase due to the higher usage and the desire for higher speeds. Therefore, this area presents Huawei with the greatest ability to utilize their other markets and internal capabilities to pursue their goal of expanding their smartphone market share.

In addition to our above analysis, there are other trends Huawei could pick up and improve their performance. One of this is the multi-product implementation. This technology allows the customer to connect different devices (like the smartphone, tablet, smart TV, music system etc.) from one brand and therefore raises the value which the products create for the customer. In this context, Apple is the leading competitor, which gives them a competitive advantage because it increases the customer's reliance to Apple products and increases the switching costs for customers to a different brand. Huawei could compete in this issue to reduce Apple’s competitive advantage and make customers more loyal to their brand. This leads to another point which is not detailed formulated in our analysis. Brand loyalty is a big issue in the smartphone industry and one of the most popular reasons to choose a specific product when buying a smartphone. However, the smartphone market is already seen as a mature market with big leading competitors. Therefore, brand loyalty is nothing where a company like Huawei is likely to be able to compete against the giant competitors like Samsung and especially Apple. Because the possibilities of a successful competition in these areas are limited, we chose to focus on other more relevant issues in our analysis.

Conclusion: The market for smartphones and their secondary and tertiary product streams are facing the greatest period of competition in their short history. Most people own a smartphone, as shown through the slowing of purchases and consolidation of the market into two main product streams: Android and iOS users. Due to this consolidation the main competition for business has shifted from the operating system market to the hardware and application markets. Huawei must consider that users who have made their choice to purchase iOS products are mainly driven by factors such as brand familiarity and reputation. That opens the possibility to compete within the Android market against the other major smartphone companies such as Samsung, Xiaomi and Lenovo. Competing in this market does not come without its challenges, as we have shown. However, we have shown potential ways in which Huawei can different themselves. The hardware/software market in smartphones has the potential to be disrupted and by continuing to develop both their lines of products, Huawei should remain a strong competitor in this area; moreover, using their ability to sell at lower prices than their competitors should assist them in competing in the China and Emerging APAC markets. Secondly, they can compete in the secondary market, one where revenue exists once an user has purchased the smartphone. As phones become substitutes for laptops and tablets, this

market will become ever more important, and realizing this early Huawei should begin to expand their offerings in this sector. Finally, and most important to their goal, Huawei must use their competitive advantage in understanding the GSM and cellular data market to capture market share and raise entry barriers. As differentiation in products shrinks, the speed and quantity of data available will be paramount, and Huawei has the greatest capabilities in this area.