Huawei vs Samsung – Rivers of blood Pt III

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Huawei flat-line passes advantage to Samsung. 

• The first indications for the smartphone market in Q2 16A are pointing a loss of momentum for Huawei, Vivo and Oppo which will put a crimp in their plans to continue their rapid growth in 2016.
• Huawei is of particular note as it has very aggressive plans to become No. 1 in smartphones indicating that it needs to employ a different strategy to continue gaining market share.
• Production volume estimates from TrendForce indicate that Huawei’s share has remained broadly flat at around 9% while both Oppo and Vivo have also barely advanced from the 5% they had in Q1 16A.
• Although, Samsung’s share of production is down a little, I suspect when it comes to sales to end users it has advanced slightly thanks to the popularity of the Galaxy s7.
• The net result is that Huawei is no longer closing the gap on Samsung meaning that its global ambitions are grinding to a halt.
• Huawei is now a comfortable No. 2 in Android but because Android devices are commoditised, that means that I see it making margins of 2-4% in the best instance.
• In order to earn better margin, it must become the No. 1 in terms of volume and outsell its closest rival by a factor of more than 2 to 1.
• It is this volume advantage that allows Samsung to earn 10-12% margins on Android devices which I think is sustainable for as long as it can maintain that volume advantage.
• This is why to be successful, Huawei has got to do far more than just catch Samsung; it must outsell it by more than 2 to 1.
• This will be very difficult to achieve which is why I think that Huawei is also working on differentiating its products through software and services.
• If it can create a good user experience and services that users are prepared to pay something to have access to, then it should be able to make better than commodity margins.
• However, this is easier said than done and I think that Huawei has a lot of work to do before it will be in this position.
• This is why, I continue to believe that its best chance of success remains in China where a tie up with Baidu or Tencent could help it plug the service gap it currently has (see here).
• However, this won’t help in developed markets and here Huawei must do everything that it can to develop the appeal and attractiveness of its Honor brand.
• This will be difficult given the dominance of the Google ecosystem in these markets but I see cracks in Google’s position that might just give Huawei a chance.
• Huawei’s commitment to this strategy will be sorely tested as it is going to be a long and hard road and handsets could easily lose a lot of money before everything comes right.
• For the moment, the advantage has passed back to Samsung, who is also capitalising on popularity of the Galaxy s7 to extend its lead in terms of profitability.
• This is why Samsung rests alongside Microsoft and Baidu as my top picks for 2016.