Huawei: Repositioning Strategy for 2017

Huawei did a great job in 2016. During this year's Consumer Electronics Show (CES) in Las Vegas last January, Huawei announced this year's mobile phone sales were expected to reach 139 million units. This figure puts Huawei smartphone manufacturers in the top position in China.

Huawei has thus become one of the rare company willing to announce its 2017 expected mobile phone business report prediction. On January 15, Huawei announced its goal to reach 33 billion US dollars revenue. The media calculated this figure and predicted that Huawei's mobile phone sales should reach at least 180 million smartphones in 2017.

In the past two years, the global mobile phone market, including China, has experienced a difficult and long period of despair. According to market research firm IDC’s latest report, 2016 global smartphone shipments are expected to reach 1.45 billion, a 0.6% increase in two years.

In the past year, the whole mobile phone industry faced weak growth. In China, the battlefield is getting fiercer and fiercer. On the one hand there's the market downturn, on the other hand there are new domestic mobile phone manufacturers competing in a market that is already not looking well.

How serious is the situation? Look at the latest report from the China Institute of Information and Communication. In 2016, China listed a total of 1446 phone models, and there are 89% of domestic mobile phone brands in the overall domestic mobile phone market.

More and more Chinese mobile phone influx results in a highly competitive market. Meanwhile, innovation has become smart phone manufacturers’ nightmare. This leads to the following situation.

In order to win more consumers, manufacturers have to launch low-cost mobile phones and search for subtle innovation in limited profit margins. The intensification of competition drove up the material cost of the phone itself, greatly reducing the profit margins of mobile phone manufacturers, who now start struggling.

Even Huawei is facing a similar problem. In 2016, although Huawei's consumer business revenue was 178 billion yuan, five consecutive years of growth, Ren Zhengfei - Huawei Founder, still believed that the business had a problem of insufficient profitability. According to 36Kr reporter, Ren ZhengFei said Huawei consumer business is hoping to be able to improve profitability in 2017.

When the sales reached number one in China, profit became the first problem. In this regard, Yu Chengdong CEO of Consumer Goods at Huawei, hopes to reduce expenditure in order to strengthen the profitability of the business in 2017. 36Kr thinks that these are the 3 key points to look at in 2017:

1 - How would Huawei Honor competes with Huawei itself, OPPO and Vivo?

As of the third quarter of 2016, Huawei announced 33.59 million smartphone shipments, of which mid-range models and high-end models accounted for 44%. In other words, the low-end models of Huawei consumption still occupies the majority of customer consumption.

According to the official data released by Huawei, Huawei made 139 million smartphones in 2016, an increase of about 20%.

However, after Oppo and Vivo's laungh in China last year, the two brands managed to sell up to 170 million units with a growth rate of nearly 120%. Oppo and Vivo are expected to maintain at least 80% growth in 2017, and Huawei can’t underestimate and ignore the two BBK brands anymore. It is worth noting that, Oppo and Vivo’s average price is much higher than the Huawei Honor, and their profit margins are correspondingly much higher. Although Huawei Honor has a firm place in Chinese mobile phone market, Oppo and Vivo are still not to be ignored.

In addition, some Huawei Honor high-end models are competing with existing Huawei smartphone. According to 36Kr, this year Huawei Honor is also slowly exploring other channels, and the proportion of online and offline gradually narrowed. It’s not easy for Huawei and existing Huawei mobile phones to compete with each other, while having the two sides generate 33 billion US dollars revenue.

2 - How to increase the overall mobile phone profit?

In the past year, the profitability of Huawei's mobile phones has not increased and the overall profit margin has declined.

The main reason for the decline in profit margins is due to large R & D investment. Huawei's R & D investment in total reached 38 billion US dollars. In 2016 global R & D investment reached 9.9 billion -9.2 billion US dollars, of which 1/3 is used for research and development.

To enhance profitability and improve profit margins, Yu Chengdong focused on cutting expenditure. According to a 36Kr reporter, Huawei pays channel rebate more expensive than other mobile phone manufacturers about 4% to 8%. In 2017, Huawei will cut the cost of channels, retail, marketing and distribution channels.

In addition, Huawei said they will reduce the promotion efforts in mature second-tier cities, and will continue to put efforts in marketing in cities that are below a T3 level.

A more important aspect is to control the pace of development of overseas markets. Huawei has less than 15% of the market share of countries in many overseas markets; therefore, Huawei is in a state of loss. In addition to part of the European market, small part of the Middle East and Latin America and other overseas markets are still at loss, so there is a need to grow in these markets and create more visibility.

However, if Huawei is to sell 180 million smartphones in 2017 to reach a $ 33 billion revenue, it will have to continue to seek incremental growth in three or four tier cities and overseas markets. Seeking incremental approach is nothing more than continue to develop channel and marketing to strengthen investment, and this is precisely what Huawei needs in 2017.

How to improve operational efficiency and improve profits? Chief Executive Officer of Huawei Consumer Business Group, Yu Chengdong was not particularly specific about the methods and solutions in several subsequent interviews. We can only continue to observe Huawei and hope it can find a new business model.

3 - Change in revenue structure to see how Huawei can break in the US market

If Huawei can change the revenue structure, increase the proportion of high-end machines, and reach 33 billion US dollars, then the US market is significantly important for Huawei in 2017.

The US average annual high-end smartphone sales reach 60 million units or so, it is the world's first high-end mobile phone market. So if Huawei wants to adhere to the development of high-end mobile phones, it must win the market in the United States.

At the CES this year, Huawei announced Mate 9 is officially for sale in the US market. In 2016, Huawei tried to sell Huawei Honor products through online channels and resulted in poor sales in the US. The Mate 9 mobiles are mostly sold on Best Buy, Amazon, Newegg and other social and online channels.

By focusing only on online channels, Huawei can barely sell hundreds of thousand mobile phones.

According to 36 Krypton, Huawei is still in the negotiations with local operators in the U.S. market. Operators have more access to mobile phone providers, including some tariff packages, custom, etc.,

In addition, Huawei's owned 2B business in the United States is not going very good. Huawei's lack of experience in the United States and other areas may also be an important challenge.

Original article on 36Kr

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