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Can Honor stand on its own after its separation from Huawei?

Written by Qianyu Han Published on     5 mins read

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After gaining independence from Huawei, Honor is now released from tech restraints, free to flex its muscles, and ready to make a name for itself in the highly-contested Chinese smartphone sector.

Honor, the former budget smartphone subsidiary of Chinese telecoms and smartphone giant Huawei, in June launched its first flagship 5G model, the Honor 50 series, since its spinoff from the parent earlier this year. “(The launch of the H50 Series) is Honor’s last battle,” a Huawei employee told Chinese tech news outlet 36Kr on the eve of its launch.

The “last battle” sense of urgency was felt not only among Honor’s 8,000 or so employees but also among many of its distributors, such as Digital China Group Co Ltd, who became Honor’s stakeholders following the untangling between Huawei and Honor.

In January 2021, Huawei announced its divestment in Honor in a move to spare the latter from the US chip ban and tech sanctions that would have impacted all of Huawei’s businesses. At the same time, Huawei would also get to focus on its eponymous high-end phones.

“This means a higher degree of autonomy and freedom. It just feels like there’s so much we can do now,” an anonymous Honor employee commented on the spinoff in an interview with 36Kr. “With Huawei dealing with the US chip ban, there is this huge vacancy in the market. Honor will no doubt be the one to fill that.”

After the spinoff, US chip giant Qualcomm tightened its partnership with Honor. A source familiar with the matter told 36Kr that Qualcomm has assembled a team of experts from different Chinese cities and various internal projects to work on the Honor partnership. The team is bigger than the other teams supporting Oppo and Vivo, and around 80% of the size of the team that works with Xiaomi, which was the largest Chinese smartphone brand globally in February.

Qualcomm, per industry sources, promised 8 million chips to Honor, and if the new 50 Series proves to be a hit, more resources will be poured in, and if not, the “special treatment” could end immediately.

From supplier’s expectation, the lifeline of its distributors to its own “conquest or death,” there is so much at stake in the maiden launch of Honor’s 5G flagship.

Competition awaits

While securing chips from Qualcomm and avoiding the collateral damage resulting from the sanctions on Huawei is an applaudable feat for Honor, competition also awaits.

Xiaomi, one of its arch-rivals in the budget smartphone sector, held a spring product launch event to introduce a series of new devices. OnePlus, another ferocious competitor, announced its merger with Oppo in a move to consolidate its efforts and cement its market position.

Back in 2019, Huawei’s shipments grew by 35%, crushing its rivals. The market share of Oppo and Vivo fell to less than 20%, respectively. Then came the Trump Administration’s chip ban that continues to disrupt Huawei’s smartphone ambitions, resulting in the company handing over much of its market share to local competitors. Honor split ways with Huawei with one clear goal: To take back the market that Huawei has lost over the past few years because it is now free to do so.

Oppo and Vivo currently account for a whopping combined 46% of the local smartphone market, and Vivo’s shipments grew 79% year on year, according to Canalys, a Singapore-based tech market analyst firm.

Xiaomi sold 1 million units on JD.com, one of China’s leading e-commerce platforms, in the first week of June, an industry insider told 36Kr. In contrast, in the first quarter, the sales volume of Honor on JD.com was less than 10,000 in a single day. After its Changwan 20 was released in May, its sales volume reached 14,000 units, which was about one-third that of Xiaomi.

An informed source told 36Kr that, after Honor gained its independence, there was a three-year Valuation Adjustment Mechanism Agreement that stipulated Honor’s target sales to be RMB 100 billion (USD 15.4 billion) this year, about half of Huawei’s consumer business in 2019. As 21Tech previously reported, Honor plans to ship 70 to 80 million units in 2021. Yet, towards the end of June, Honor still hasn’t produced a star product and will be under tremendous pressure in the second half of the year.

Read this: Huawei spinoff Honor and Qualcomm are ready to collaborate: Report

Go big or go home

Some Honor distributors and employees are watching the new Honor 50 series’ market performance like a hawk.

“If it turns out to be a hit, we’ll be fine for a while. If not, it will trigger a cascade of problems. The supply of chips might have dried up, and the team would probably have to let some people go,” an Honor employee told 36Kr.

The fact is, China’s highly contested market didn’t leave much of an opportunistic window for Honor to prove itself. For Honor, both time and money are limited.

Make no mistake, Honor going independent didn’t leave it empty-handed. The company was reportedly sold for RMB 263.3 billion yuan (over USD 40 billion). Read: Honor started off with more than USD 40 billion. Additionally, some of its largest distributors and dealers, such as Shenzhen-based Aisidi, chipped in as well. A person close to the matter told 36Kr that Honor distributors have each made somewhere between RMB 10 million (USD 1.5 million) and RMB 100 million (USD 15.4 million) investments in Honor, hoping it will succeed. However, Honor spends over RMB 100 million (USD 15.4 million) on human capital alone each month. The company is burning money at an alarming rate.

“The money that shareholders poured in is almost gone. If the new product doesn’t make it to the market soon, the company will face serious ramifications. If we don’t start making money now, there won’t be any money left to burn,” an employee speaking on condition of anonymity told 36Kr.

Continuing to stretch itself thin, the company also wants to compete against Huawei in the premium device market, although Honor historically has only released mid-range smartphones under Huawei. Zhao Ming, Honor’s CEO, claimed that his company’s products “will be able to surpass Huawei’s Mate and P series (in sales) in the future.” Both series are high-end offerings from Huawei.

Rumor has it that Honor has been preparing a high-end Magic 3 to be released in the next few months. The new device will equip Qualcomm’s latest Snapdragon 888+ chipset and cost around RMB 6,000 (USD 927).

At the 50 Series’ launch event held on June 16, one slide from Honor’s presentation deck said, “The darkest moment is over.” After what it has gone through, both together under Huawei and independently as Honor, it is true that its darkest moments have now been left behind. Businesses are slowly humming onto the right track, and products are being launched as scheduled, with more in the pipeline. However, Honor still needs to duel with its more established competitors to gain a firmer grip on the market. With a lot at stake, essentially its entire livelihood, the industry is holding its breath to see if Honor will sink or swim.

This piece originally appeared on 36Kr and was written by Yuan Silai.

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