Huawei – Nowhere to run pt. III.

Huawei enters the death spiral.   

• Huawei has warned that its international shipments are already in free-fall which fits with RFM’s recent observations, but I suspect that there could be worse to come as Huawei has entered the death spiral.
• According to Bloomberg (see here), Huawei is now expecting to see a 40-60m drop in unit shipments this year as a result of the US administration’s blacklisting of Huawei.
• This fits with RFM’s observations where numerous operators are already seeing big cuts in orders from their network operating companies for Huawei devices.
• With the smartphone market expected to decline slightly in 2019 and with Huawei on about 17% market share (Counterpoint Research), Huawei might have been expected to ship about 250m units in 2019.
• Of Huawei’s units, roughly half have been shipping in China and half in international markets which are predominantly Europe and Asia.
• This means that in 2019, roughly 130 or so would be shipping outside of China (China smartphone market is weaker than average currently).
• In Q1 Huawei shipped 59.1m units (Counterpoint Research), of which roughly 30m shipped in China.
• If Huawei shipments will decline by 50m units in 2019, then it will ship around 150m units in total for the year.
• This would be approximately 100m for China and 50m for the rest of the world meaning that Huawei needs to ship a further 20m devices for the balance of 2019 to make this target.
• Given the commentary from operators, Counterpoint’s data and inventories, this looks like a credible target but represents a disaster for Huawei financially.
• Effectively Huawei is not expecting to ship any new devices outside of China for the foreseeable future.
• Furthermore, Huawei’s own version of Android is unlikely to save the day because consumers are not going to buy devices without the Google Ecosystem installed as I have argued here and here.
• Huawei, the average selling price in 2018 was around $252 and ASPs in international markets will be higher than in China.
• Hence, I would estimate that 150m devices shipping with an ASP of $220 would result in revenues of RMB229bn for the consumer division in 2019.
• This is a 34% decline YoY in 2019 and is very likely to decline another 25% in 2020 due to no longer shipping Q1 2020.
• Huawei has said that it is not cutting R&D for the moment meaning that in all probability, the consumer division will plunge heavily into the red this year.
• This is critical because it puts Huawei in a similar position to ZTE when it was blocked by the White House and also to Nokia when it was bleeding market share.
• This is the dreaded death spiral where share losses mean poor financial performance, bad press resulting in consumers and distributors beginning to lose confidence.
• This results in further falls in share, confidence falls further and so on.
• The bottom of the spiral in Huawei’s case will be the end of all shipments outside of China and the loss of 50% or more of its entire smartphone business.
• The question then becomes what happens to the infrastructure business which in 2018 was a $42bn revenue business and is now at risk due to its inability to source Altera and Xilinx FPGAs as well as the IP for the telecom standards that is US owned.
• The main beneficiaries here are Ericsson and Nokia on the infrastructure side and Samsung for the handset business.
• Samsung and Nokia shares have not yet reacted to this opportunity making them the best way to make the most of this unfortunate turn of events.