Huawei seeks redemption in consumer tech market

September 8, 2013 by Steve Downie

Chinese telecoms giant Huawei has an image problem. Last year, the intelligence committee of the US House of Representatives branded Huawei’s infrastructure arm a threat to national security.  This summer, the UK parliament’s Intelligence and Security Committee published its own report, expressing concern that much of the channels carrying sensitive material were designed by a company with “alleged close links to the Chinese government.”

Huawei responded by denying that such links exist, but whatever the truth, Huawei’s leadership has long known that its dependence on national infrastructure projects is risky.  The Shenzhen firm has been making a strategic shift towards the consumer market, believing that even if they lose the trust of governments, consumers might still be convinced.

After all, not everyone who buys a smartphone reads the news. A 2013 survey by Clear, a marketing strategy company, found that US consumers ranked Huawei as the seventh most desirable handheld device brand. On one hand, in a handheld market dominated by Apple and Samsung, seventh place does not mean much – the frontrunners sell far more devices than the also-rans. And yet, Huawei’s seventh place puts it one ahead of Finnish company Nokia. The latter, while struggling to differentiate its offering, has never been accused of spying on the US for Finland.  It seems that a significant proportion of western consumers is more interested in technology than politics. There is hope for Huawei in the US.

Huawei devices are already selling well on the Chinese market. Measured by revenue, Chinese brands have now captured 60% of the domestic smartphone market, and Huawei, together with compatriots ZTE and Yulong, is leading the charge. But while revenue share might be a source of national pride, it isn’t amounting to much national profit. In a recent Forbes article, Yulong was named as the most profitable of the three leading Chinese smartphone brands. Its net profit margin is just 2.3%.

But it is the big international brands are making the real money: Samsung’s net margin was 13% in 2012, while the figure for Apple’s last fiscal year was 22%. The problem isn’t the volume, but the kind of devices companies like Yulong are selling. Its most popular devices are low-end, low-margin products. To compound matters, Yulong’s success at the less lucrative end of the market has come at a considerable marketing cost, further suppressing profits.

Huawei’s consumer division wants out of this race to the bottom. Its research and development spend has increased rapidly in recent years, and that investment is now bearing fruit. The company’s latest flagship device, the Ascend P6, released in Europe and China this summer, is currently the slimmest smartphone on the market, and its European launch price of €449 was competitive for a high-spec device. Speaking before its launch, Huawei Device CEO Yu Chengdong said in June that the company had set a target of shipping 10 million units worldwide.

Chinese analysts are extremely sceptical about Huawei’s ability to meet this target, but their accusations of hubris miss the point. When Chinese luxury clothing brands rent some of London’s most expensive retail spaces to run unprofitable shops, they are making a statement to their domestic consumers about the high quality of their brand. In the same way, Huawei must ship millions of units to overseas markets before it can earn domestic high-earners’ money.

To achieve its ambitious goals, Huawei must now take risks. By focusing on gaining acceptance abroad, and investing heavily in product development, it has made a good start. But making the world’s thinnest phone is not enough – Huawei needs to seriously fatten up its marketing budget. That means spending far more than the reported €30 million it has allocated to sell the Ascend P6 to European consumers.

Huawei’s leadership says it does not have the resources to launch an all-out global marketing campaign. In a recent interview with The Telegraph, Yu Chengdong admitted they weren’t ready to spend anywhere near as much as the market leaders. More worryingly, he claims Huawei’s devices are so good, it shouldn’t need to spend as much as its competitors communicating its offering to the public: “The industry is so dynamic – no matter how successful you are, if you’re currently number one, doesn’t mean tomorrow you’ll be number one.”

While it’s true that the market has been volatile in recent years, companies’ fortunes have been strongly correlated to their marketing spend. According to a report released by advertising research firm Kantar Media and cited in the Wall Street Journal, Samsung’s rise to the top of the Android smartphone market in 2012 was driven by an annual marketing spend of $402 million in the US alone. In that year, Samsung’s marketing division outgunned Apple, the market leader at the time, by $69 million. Within months, Samsung were reaping the rewards, posting Q4 profits of $8.3 billion, an 89% increase on the preceding year.

Yu is unimpressed: “Samsung, they have such huge money – if you invest in marketing and branding then people will always buy no matter how good the products are. The Samsung Galaxy S4 is just a so-so smartphone.”

Huawei’s predicament is not unique. It is just one of many Chinese consumer brands stuck at the bottom end of the market, both at home and abroad. Convincing domestic and international consumers that high-end products are worth the money takes much, much more than one slimline device. An incredible product that nobody knows about is worth infinitely less than a “so-so” product that consumers desire.

Many western consumers are willing to turn a blind eye to allegations of Huawei’s nefarious links to the Chinese state. This represents an opportunity for the Chinese company to gain their approval, which by extension will grant the company access to the booming high-end market at home. However, in a noisy marketplace, Huawei must learn to shout louder about its impressive offering. The alternative is obscurity.

Tags: Huawei, Samsung,

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