Huawei – The Price of Unreality

I think the price is so high due to the silicon.

• Huawei is goading Apple by releasing a completely new product just after Apple released more of the same but the $2,800 price is a sign that in reality, Huawei is really struggling to make products that have cutting-edge performance.
• Hours after Apple launched its iPhone 16 lineup, Huawei launched the Huawei XT a completely new folding smartphone that has three screens as opposed to the more commonly available, two.
• When unfolded, the three screens create a 10.2” tablet that is just 3.6mm thin where Huawei has also managed to squeeze in a total of 5,500mAh of battery made up of three cells each of which, is less than 2mm thick.
• Even when closed, the device is less than 10mm thick which is similar to an iPhone with a sturdy protective case attached to it meaning that carrying this device is a perfectly rational proposition.
• However, it looks fragile and plastic laminated folding screens scratch extremely easily and so any real-world use of this device is going to need a case which will make it much thicker than it appears.
• This is a device that is clearly aimed at hammering Apple’s appeal in China and in terms of adding something new and different to the line-up, Huawei wins hands down, no contest.
• However, this device starts at RMB20,000 ($2,800) meaning that Chinese consumers could buy three iPhone 16s or an iPhone and an iPad and still have money left over for the same price.
• Despite this eye-watering price, pre-orders apparently have been excellent with 2.7m as of Monday 9^th September passing 5m as of Wednesday the 11^th of September with the device scheduled to go on sale on September 20^th.
• These are big numbers and imply that Chinese consumers are willing to spend $14bn on a mobile device they have not seen, touched or experimented with.
• They also imply that if the price was lower, the numbers would be much larger which may have been a better strategy to get even more volume, but I am not convinced Huawei had much choice but to price the device at this level.
• Samsung’s current flagship is priced at $1,899 and I don’t think that adding an extra screen to a folding device would warrant an uplift of this degree.
• Consequently, it leads me to wonder why the price is so high and my suspicions immediately come to the silicon.
• Huawei was pretty quiet on this issue leading me to think that it will be using the Kirin 9010 5G processor or some derivative of it in this product.
• This chip is produced using the 7nm multi-patterning technique which both Intel and TSMC tried and discarded in favour of Extreme Ultraviolet (EUV) because they could not get yields to economic levels.
• This makes the few chips that are viable at the end of the manufacturing process extremely costly and I suspect that is a factor in the price of the device.
• Furthermore, tests have shown that the performance of this generation of silicon is mediocre at best, and this is going to be an area where Apple can take the fight to Huawei in China.
• China has no access to EUV technology and so it is stuck with the uneconomic multi-patterning technique, and I think that what we are seeing here is SMIC passing this cost to Huawei which has in turn passed it to the Chinese consumer.
• Consequently, I doubt that this device is likely to ship in any meaningful volume outside of China as this is more about geopolitical PR games than it is a serious attempt to make money in the smartphone market.
• This combined with the fact that Huawei is being seen as a symbol of national resistance to sanctions and the irrelevancy of Apple Intelligence in China is going to keep Apple on the backfoot in one of its biggest markets.
• Around 18% of Apple’s revenues come from China and the outlook is that this going to continue to decline with time as China continues to decouple from the rest of the world.
• This is just one reason why growth will be hard to come by meaning that the shares look pricey at 33.0 x 2024 PER.
• I am happy to stay away.