Huawei's Smartphone Strategy PDF

Huawei’s Smartphone Strategy Adapted from a case study published by INSEAD in 2017 and available via The Case Centre On April 6, 2016, Huawei Technologies, the Chinese telecom equipment giant, released three variants of its latest P9 series smartphone in London. With Huawei’s own Kirin 955 chip and...

Huawei’s Smartphone Strategy Adapted from a case study published by INSEAD in 2017 and available via The Case Centre On April 6, 2016, Huawei Technologies, the Chinese telecom equipment giant, released three variants of its latest P9 series smartphone in London. With Huawei’s own Kirin 955 chip and Leica’s dual-lens camera, the P9 series was a perfect combination of a powerful smartphone and a top-quality camera. The release in London not only won Huawei high recognition, but it also helped it secure its No. 3 position in the market after Samsung and Apple 1. A latecomer to smartphones, Huawei has emerged as a global leader and is positioned to shape the competitive landscape in significant ways. A Brief History of the Smartphone Industry Smartphones have blurred the boundaries between cell phones and personal computers. With an advanced operating system (OS), a smartphone works as a cell phone to place and receive voice calls and text messages; it also works like a personal computer, combining features from various mobile devices such as PDA (personal digital assistant), multimedia player, GPS (global positioning system), digital camera, various sensor (e.g., sports/heart rate), and a variety of software components and services known as apps. Smartphones originated from PDAs that lacked the features of cell phones. Simon, released by IBM in 1993, is considered the first smartphone in the world – it had a touchscreen and Zaurus OS, with only one app called “Dispatch It”2. The Nokia 9000 Communicator, released in 1996, offered a number of functions including email, calendar, address book, calculator, notebook, web-surfing, as well as fax. The Ericsson R380e, released in 2000, was the first to be officially dubbed a “smartphone”3. As an ‘early riser’ in the smartphone market, Nokia, with its Symbian OS and hardware capacity, was the leading global brand outside North America. Another important, early player was the Canada-based RIM (Research in Motion), which with its BlackBerry smartphones took a rising share of the market in North America and globally. Seeing the huge potential, many other companies entered the industry, releasing smartphones with increasingly powerful functions. The advent of iPhone in 2007 and Android OS in 2008 re- contoured the industry landscape as Nokia lost its grip to the newcomers. Apple’s first- generation iPhone, with a self-developed iOS, was announced in January 2007. With a stylish design, touchscreen, and fool-proof operating system, it was instantly popular with consumers. 1 IDC Worldwide Quarterly Mobile Phone Tracker, April 27, 2016. http://www.idc.com/getdoc.jsp?containerId=prUS41216716 2 “Before iPhone and Android Came Simon, the First Smartphone”, by Ira Sager. Bloomberg Businessweek, June 29, 2012. 3 “Ericsson Introduces the New R380e”, by Dave Conabree, Mobile Magazine, 2001. http://www.mobilemag.com/2001/09/25/ericsson-introduces-the-new-r380e 1 Smartphones with the Android OS were launched in 20084. In October, the HTC Dream (called T- Mobile G1 in the US) was the first successful application of the Android OS in a smartphone. Samsung and Motorola followed suit in October 2009, LG in May 2010, Sony Ericsson in August 2010, and Huawei in October 2010, each with its own Android OS- powered smartphone. This series of events proved to be the beginning of the exponential growth of the global smartphone industry in the years that followed. The Smartphone Technology Feature phones are relatively simple devices both in terms of the components and the assembling techniques. By contrast, smartphone manufacturing involves assembling a large number of high-precision components integrated in a small-size phone, such as wireless connector, antenna, camera, battery, display, but the operating system (OS) and the system on chip (SoC) are the key ones. The OS manages a smartphone’s hardware and software resources, around which numerous applications and eco-systems revolve. An SoC is a type of integrated circuit (IC) that integrates multiple electronic components (e.g. CPU, GPU, wireless connection, touchscreen control) for a particular purpose. The value of a smartphone is strongly tied to the capabilities of the OS, as well as the variety, price, and number of apps available on the OS. A sound ecosystem of apps, developers, and users is therefore key to smartphone success, creating entry opportunities for companies that have a software advantage. For example, Apple’s entry into the smartphone industry in January 2007 was greatly helped by its successful iTunes Store apps and resources. Evolving Trends The smartphone market has seen exponential growth over the past decade. More recently, the growth rate has slowed from 75.62% in 2010 to 10.08% in 2015. The slowdown was due to many factors including market saturation in developed economies. By contrast, the growth rate in the emerging economies in Asia-Pacific, Middle East, and Africa has been firmer. The shift in demand from the developed markets to emerging markets has triggered a growth in demand for low-end smartphones, driving down the average sale price. The slowdown in growth and declining average price foreshadow increasingly fierce competition – “The squeeze is on”, noted the Wall Street Journal in April 20165. Production capacity may be consolidated, and a shakeout expected, given the lack of economies of scale for smaller makers and the high profit potential in the high-end market. Smartphone makers may be increasingly seeking new growth and profit opportunities by offering new content, services, or devices. 4 In October 2003, Andy Rubin and three other technical experts founded Android Inc. in Palo Alto, California to develop an operating system for mobile devices. Android was later acquired by Google in August 2005. See “A Brief History of Google’s Android Operating System”, by Steve Brachmann, 2014. http://www.ipwatchdog.com/2014/11/26/a-brief-history-of-googles-android-operating-system/id=52285 5 “In Smartphone Market, The Squeeze is On”, by Jonathan Cheng and Min-Jeong Lee, The Wall Street Journal, April 28, 2016. 2 Apple and Samsung Apple and Samsung, the current superstars, both started off manufacturing hardware, and both have their own self-designed smartphone SoCs. The iPhone, synonymous with stylish design, premium quality and cutting-edge technology, continues to fascinate Apple fans. Targeting the premium segment of the market, iPhones have brought vast sales revenues and profits to Apple. Apple’s iOS not only contains more than 1.4 million apps and games, but is perfectly paired with iTunes—the hub of its digital empire. Since launching its iPhone 4 in September 2010, Apple has released a new model each year. In addition to its tight grip on the premium segment, it is testing the middle segment of the market. In September 2013, Apple released the iPhone 5C, with a polycarbonate outer case, priced US$100 lower than its high-end iPhone 5S released at the same time. Samsung was an early player in mobile phones and emerged in the smartphone industry only after the launch of the Galaxy S—a high-end smartphone based on the Android OS. Taking advantage of its expertise in LCD/LED/OLED display, Samsung applied its exclusive Super AMOLED display technology to the Galaxy series smartphones to launch the Galaxy S2 with a 4.3 inch display and 4G capabilities in May 2011, and the Galaxy Note with a 5.3 inch display in October – signalling the advent of the “Phablet” era. It was these large high- definition displays that enabled Samsung to compete with Apple (the iPhone 4S display was only 3.5 inches at the time). Since 2011, Samsung has retained its No. 1 position in terms of shipments6. Huawei Headquartered in Shenzhen, China’s technology giant Huawei provides telecom carriers, enterprises, and consumers with products and services including ICT (information and communication technology) solutions, fixed and mobile networks, routers, smartphones, and other mobile devices. Huawei serves more than 170 countries and regions, and over one third of the world’s population7. The device business best represented by smartphones, became a cornerstone of Huawei’s strategy in 2011. To provide “high-quality devices and services to build a premium brand and lead the global consumer market”8, Chengdong (Richard) Yu was appointed Chairman of Huawei Device and CEO of Huawei Consumer Business Group. Huawei was initially viewed as offering low-end phones (below US$150); the high-end market was seen as being exclusive to Apple and Samsung. Under the new leadership, Huawei Device 6 “Worldwide Shipments of Leading Smartphone Vendors”, by Statista: http://www.statista.com/statistics/271539/worldwide-shipments-of-leading-smartphone-vendors-since-2007 7 Huawei Annual Report 2015. http://www.huawei.com/en/about-huawei/annual-report 8 Huawei Annual Report 2015. http://www.huawei.com/en/about-huawei/annual-report (Page 4) 3 cut more than 80% of Huawei’s old phone models and kept less than ten. While this risked retaliation from carriers (Vodafone and FTE stopped partnering with Huawei for a while), it enabled Huawei to understand consumers’ fast-changing preferences and eventually move up to the premium segment of the market. On June 18, 2013, in London, Huawei released Ascend P6, its first premium smartphone. With a stylish design and all-metal case, it was the slimmest smartphone in the world at that time (6.18mm). On September 4, 2014, Huawei launched Ascend Mate 7 in Berlin, designed for business people, featuring an aviation- grade aluminium case, a 6-inch FHD display, a super eight- core Kirin 925 SoC chipset, and a 4100 mAh lithium polymer battery. The success of the P series and Mate series helped Huawei move up to the medium- and high-end market, and increased its brand value. Huawei’s rise and rapid growth benefited greatly from its continued focus on R&D 9. In 2015, Huawei employed over 79,000 R&D personnel, accounting for 45% of its total employees. R&D spending reached CNY¥59.607 billion (about US$9.2 billion), accounting for 15.1% of its total sales revenue, and outstripping its major competitors including Apple (3.45%), IBM (6.42%), Cisco (12.63%), and Ericsson (14.1%). Believing that “R&D and design are key to a successful smartphone business”10, Huawei devoted substantial financial and managerial resources to SoC development and smartphone design. Huawei had founded HiSilicon Technologies Co., Ltd. (HiSilicon) in October 2004, a fabless IC design company with design centres located in Beijing and Shanghai in China, Silicon Valley, and Sweden. HiSilicon had been a driving force of Huawei smartphone’s growth. Its Kirin SoCs were core to Huawei’s release of its latest smartphone models. For instance, in April 2015, HiSilicon released Kirin 935, which was used to power Huawei P8 (Deluxe Model) and Honor 7. Later, HiSilicon released Kirin 950 and 955, which were used for Huawei Mate 8 launched in November 2015, and Huawei P9 launched in April 2016, respectively. On a broader level, Huawei’s dedication to the development of SoC enabled it to move up the market, joining an elite club of smartphone leaders with their own SoCs, including Apple and Samsung. Huawei conceived its smartphones as a “collision between high-tech and fashion”, emphasizing both technological capability and user interface design. To this end, Huawei collaborated with leading camera and audio companies such as Leica and Harman/Kardon to improve smartphone quality and user experience. Huawei’s P9 smartphone, for example, has a dual-lens camera jointly designed and developed by Huawei and Leica. These strategic moves reflect two core principles followed by Huawei in smartphones: industrial design directing the design of hardware, and user experience directing the design of software. 9 Huawei Annual Report 2012. http://www.huawei.com/ucmf/groups/public/documents/annual_report/hw_u_256032.pdf 10 “Huawei YU Chengdong: Xiaomi Will Phase out in Three to Five Years”, tech.qq.com, March 4, 2015. 4 Huawei’s background and technological capabilities as a telecom equipment provider give its smartphone business a technological advantage. For example, battery life has been a pain- point for smartphone users, and Huawei developed Kirin 950 SoC to address this problem by leveraging its deep understanding of 3G and 4G wireless Modem technologies. First used in Huawei Mate 8 smartphones, the new chipset not only made a significant improvement to CPU performance, but greatly enhanced battery life, allowing two days of continual use once fully charged. Huawei also successfully integrated its pseudo base station detection technology into the Kirin 950. With this technology, information or signals sent from pseudo stations can be automatically filtered out by the chip to ensure smartphone security. Huawei’s telecom network assets and relationships with carriers gave another advantage to its smartphone business. For more than 20 years it had been collaborating with leading global telecom carriers. These assets and relationships help to promote Huawei smartphones globally. Not only do they make it easier for Huawei to distribute smartphones through local telecom carriers’ sales networks, but also give Huawei smartphones unique access to wireless data transfer and speech communication, as well as other capabilities offered by carriers. For example, Huawei Mate 8 smartphones can connect to the wireless networks of more than 1,000 carriers in 200 countries, covering five 2G frequency bands, ten 3G frequency bands, and 18 4G frequency bands. These resources and capabilities are unique to Huawei, and are unmatched by major competitors including Apple and Samsung. The future of Huawei smartphones Benefiting from market repositioning, continued focus on R&D, and synergies between businesses, Huawei has emerged as one of the leaders of the global smartphone industry. Yet many challenges await: weaknesses in designing operating systems and apps, limited ability to control the industry chain, and rising manufacturing costs in China, to name a few. Nonetheless, on February 21, 2016, Yu announced that Huawei’s strategic goal for its smartphone business was to overtake Apple in three years and Samsung in five years. Given the dynamic industry environment and Huawei’s smartphone strategy, was this feasible or too big a dream? Questions for Class Discussion: 1) Analyse the smartphone industry: How attractive is the industry? How will its attractiveness change in the future? 2) Choose one of the conceptual tools presented in the core readings (e.g. technology S- curve, Abernathy-Utterback model) to analyse the evolution of smartphone technology. What stage of evolution is the smartphone technology at? What role did the advent of iPhone in 2007 play? 3) Based on the analysis of technology evolution, is Huawei’s strategic goal of competing in the smartphone industry profitable in the long-term? 5