A DARK HORSE IN THE GLOBAL SMARTPHONE

MARKET: HUAWEI’S SMARTPHONE STRATEGY

CASE ANALYSIS

[Course title]
1. Which of the trends in the smartphone industry do you consider to be most important for
Huawei?

Aiming to focus on their customers “market challenges and needs by providing excellent
communications network solutions and services in order to consistently create maximum value
for customers”, Huawei - a chinese technology company based in Shenzhen, China - has been
successfully delivering value to customers, jumping from being a sales agent to a
telecommunications giant. Serving over one third of the world’s population, Huawei is now
ranked No 1 and No 3 in the global telecom equipment and smartphone markets, respectively.
From 2006 to 2015 the company’s revenues increased from, approximately, 8 to 60 million
USD, respectively, achieving operating profits of 7,052 million USD in 2015 (Exhibit 8a).
Originating from Personal digital assistants, that lacked the features voice and
telecommunication of cell phones, smartphones disrupted the telecommunications industry,
blurring the boundaries between traditional cellular phones (which focused on voice and text
communication) and personal computers. This disruption seems to come from above, as new
products in the smartphone market tend to arrive as luxury goods, but over time, they get
cheaper and the old less capable model must be replaced. This top down approach of
smartphone entrance into the market was, in effect, running parallel with a bottom up disruption
on cellular services. The cellular service market is fiercely competitive, and to effectively enter
this competition, new service providers must offer higher speeds or cheaper prices, with most
choosing the latter due to technical capabilities.
Composed by different software and hardware components, smartphones introduced
new functionalities, such as wireless connection technologies and internet-based message tools
that led to a shift from traditional features such as text messages and phone calls to an increase
in the usage of these new developments implemented by technology giants such as Apple,
Samsung and Huawei. As a consequence, distribution channels in online markets were
introduced to the previously dominant telecom carrier only constituted by offline sales channels
of distributors and retailers. Furthermore, the technological innovations introduced led to major
changes in customer's purchase decision, from a focus in calling rate plans and brand
recognition to attributes such as wireless data, camera, network development or speech
communication, raising customer switching costs and developing brand loyalty, two entry
barriers characteristic of the industry. These features created by the telecommunications
companies culminated in a successful top-down market disruption, therefore, decreasing the
importance and market share of PCs and laptops (Exhibit 4), once smartphones allow
customers to access most of their functionalities in a more practical and, thus, less time-
consuming fashion.
More recently, and even though the smartphone industry registered an exponential
growth over the past decade, the growth in demand has been much stronger in emerging than
in developed countries (Exhibit 6a), triggering the demand for low-end smartphones and,
consequently, a decrease in the average sale price. This fact, led to a slowdown in the sales of
smartphones, led to an increase in competition, from which constant innovation seems to be
crucial to survive and maintain a competitive advantage.
Understanding customers and market changes are critical trends for Huawei. In order
to do this, Huawei will need to successfully target customers according to their needs and
preferences, develop software capabilities and complements, and improve hardware to
continuously ensure their products competitive advantage in a highly competitive market.

2. Explain which impact you think those trends will have on the smartphone industry

As mentioned in the previous section, innovation is the most important factor for
telecommunications companies, especially regarding the high end market, due to customers
high standards and expectations. Apple’s presentation of its new smartphones is the best
example to illustrate this. They have been the preeminent power in highlighting their phones
new capabilities and how strongly their team has developed the new product, comparing and
contrasting numerous specifications against other high end competitors. However, this constant
innovation has to be balanced with the high demand in the low-end smartphones where the
market pressure is on lower prices. This increase in low-end demand has had an impact on the
smartphone industry by pushing the average price of smartphones down, due to the higher price
competition, and this has led to increases in the competition between the different players in
the smartphone market. This increase in low-end demand created an urge for smartphone
companies to lower their prices in emerging markets, to gain market share. The aforementioned
trend could have another impact for the smartphone industry, motivating these businesses to
continue to invest heavily in Research and Development. This investment is one of the tools
that allows dominant players, and new potential entrants, to gain a competitive advantage.
Huawei, Xaomi and other Asian companies have another advantage in countries like China.
Chinese citizens give great importance to national companies, they trust those companies as a
guarantee of quality for them and therefore may give them priority over similar other products
offered by international competitors.
The smartphone is becoming a substitute for many other electronic devices, and in the
future years it will continue to go this way due to the constant innovation of
telecommunications companies and their effort to integrate more functionalities in these
devices. As an example, smartphones are already a good substitute for cameras, GPS and other
devices. However, smartphones are not yet perfect substitutes for computers or televisions.
Students still need a computer at school to write their notes and workplaces still cannot replace
them to perform tasks in the office building, yet the potential for this is becoming more
promising.
In the high-end smartphone market, prices are decreasing due to saturation of the
market. Competition between these actors is increasing and this is driving prices down, as
differentiation becomes more difficult to identify. Therefore smartphone companies will have
to continue innovating if they want to stay at the top and survive. If a company is able to have
a competitive advantage, through innovation, (for example a really thin keyboard that you can
put in your phone) that the other competitors can’t have, they could sell their phones for a
higher price or capture a greater market share against their nearest competitors.
Finally, smartphone makers will have to invest in software and application partnerships,
as this will drive the demand of the secondary market. The number of applications available in
every applications store (iOS or Android) is huge and is growing exponential. For example,
Windows Phone tried to enter the market with their own “application store” but it turned out
to be a failure, due to the small amount of applications available on their store. Applications
on smartphones became essential for the users, an important trend in which smartphone makers
have to try to get a competitive advantage by having special and exclusive apps. For example,
companies could create a partnership with a famous developers to get the exclusivity on its
new applications. This kind of advantage could lead to profit opportunities for the company
that achieves successful partnerships (first mover advantage).
To conclude this section, the trends in the market highlight the need for every
smartphone company to invest heavily in R&D and to improve the capacities of their devices
through innovation, as the growth in competition between products and market saturation force
smartphone companies to devise new ways to generate profit and differentiate their product.

3. What would you suggest Huawei should do in response?

 To be able to compete in the smartphone industry in the future, Huawei has to adapt to
the upcoming trends in the industry. To accomplish that, the focus should be on the high-end
market for smartphones, the Asian market, software and hardware capabilities and mobile data
networks.
The focus on the high-end market is for several reasons. First, the trend shows that
smartphones will likely be a substitute for laptops and tablets in the long term (p. 4). This means
that the smartphones will be used for more tasks and therefore need to have higher technical
requirements. Second, the high-end market will be more important because the market in the
developed economies is already saturated, growth is stagnating and new sales are either for
replacement devices or due to a new innovation. For Huawei, they will want to target the
technical innovation buyers, meaning their strategy must focus on R&D to expand their market
share in this segment. To compete in this market, Huawei must separate from its competitors.
This will most likely not be achieved by competing in brand reputation because other
companies like Samsung and Apple have a competitive advantage in this field. Therefore,
Huawei must attract customers by challenging the established companies in the price
competition or in technological superiority.
Price competition includes positioning the products at the lower end price point of the
high-end market. This market can be divided between Apple and Samsung products at the top
end of the market and different other android based products (from Samsung, Xiaomi or
Lenovo) in a lower price range. Since Huawei lacks in competing directly in terms of brand
reputation, they must convince customers to change the brand by having an comparable quality
of technical standard like the other companies and offer the phones for a lower price. This is
mainly due to the high switching costs consumers experience when they switch between a
smartphone brand and especially when they switch between the two main OS. In this point,
they must use their ability to cut costs, which results from their raising market shares, their
experiences in the cellular market and the cross-business synergies from other profit streams
within the company. Doing so will also increase the entry barriers in this specific market
because new entrants will not be able to produce at this low price and provide the same quality
standard at the same time.
Besides the investment in the high-end market for the developed economies, the
development in the Asian market offers different opportunities. As this market is the biggest,
in sheer numbers, in the world and has the highest growth expectation, being a player is
inevitable and presents the strongest opportunity for Huawei to seize market share. Therefore,
Huawei should continue to offer, and potentially increase their investment in their Honor brand
which they started during their differentiation strategy, to cater to the lower end of the
smartphone market (p.6). Huawei’s advantage in this competition lies their origin as an Asian
company and management of people from the region. While the smartphone industry has been
suffering in the developed economies, with shipments shrinking in North America by 0.7% and
1.3% in Western Europe (Exhibit 6b), the Asian region, more specifically China and the
developing APAC region, are expected to grow at 13.8% and 5.3% respectively (Exhibit
6b). With intimate knowledge of the culture of these regions, the hardware used for the cellular
service industry in Asia and trends in the Asian market, Huawei has a decided advantage in
capturing this increased demand. To do this, they must focus on software and hardware
capabilities, to compete - or outcompete - their competition and gain this growing demand.
Regarding the software/hardware capabilities, it is important to be able to adapt the
smartphones to the newest technological innovations. The focus of this strategy is on the
secondary market, once an user has already purchased a smartphone. The competition in the
primary market – selling a smartphone itself – is characterized by price competition,
technological jumps and brand reputation. Furthermore, the profit opportunities in the primary
sales market are limited because the smartphone market in many regions is slowing down, with
the exceptions of the aforementioned target markets, and is characterized by replacement
purchases of smartphones, rather than gaining new customers. This market is then not
expanding market size but rather fighting for existing market share; for Hauwei, an opportunity
then exists in generating revenue from current smartphone users (referred to as the secondary
market from here out).
The secondary market, including the app stores and services offered on the
smartphones, offers huge profit opportunities (p.5). As capabilities of smartphones have began
to increase, they are beginning to be viewed as substitutes, rather than complements, to laptops
and tablets (which both are experiencing shrinking demand figures currently and into the
future) (p.4). By following this trend, the capabilities to work with the features and applications
offered by laptops and tablets will be key to convince customers to make the switch. For
Huawei, this means being an early adopter and working on developing this technology before
their competitors. Furthermore, the higher demand on applications will lead to profit
opportunities by the marketplace that features the most and the best applications. Apple is
known for having the most robust applications store, followed by Google Play; however, as
smartphones become more capable substitutes for the aforementioned products, Huawei has
the potential to utilize their application marketplace as the preeminent leader in software
offerings for this shift. Thus, it is important to expand and improve their offerings and quality
of the applications. This includes partnerships with developers as well as equipping the
smartphones with the technology which is need for the new innovative applications. The
importance of that point becomes more obvious when you look at the future possible
competitors and new entrant potential. The smartphone market seems to have huge entry
barriers because of the big market leaders and their influence over the brand reputation.
However, entry opportunities in the smartphone market still exist for companies which have
software or hardware advantages that can be implemented in smartphones. For example,
Huawei was able to enter the smartphone market from the GSM market and this is possible for
other businesses to do. Google has developed the operating system Android, has the technical
capabilities to compete and the financial resources, yet has not been successful thus far, but
that does not prevent them from entering.
The software advantage is not likely to be related to the OS of smartphones as the
markets operates as a duopoly, controlled by Android and Apple. In contrast, the market for
Apps and Services offers greater potential for new innovation, which would give competitors
of the two major powers, Apple and Samsung, an advantage (like Apple in 2007) (p.5). To
avoid one of their competitors capturing this, Hauwei must invest in software capabilities and
their Application-Store, as this will be crucial in keeping and expanding their market position
and defending against new entrants by raising the entry barriers.
Referring to the trend of rising scope to use the smartphone once again, the mobile-data
usage will become more important. In this context, Huawei should use his strength of having
a developed network of wireless infrastructure, massive data storage and collaborations with
global telecom carriers to provide the best and fastest mobile data accessibility. Therefore, the
focus on R&D, over the last years should be continued (if not expanded), to be able to offer
new technologies like the 5G-Technology. Utilizing their competitive advantage, a much
greater understanding of the data and mobile network industry than competitors, Huawei has
a lot to gain from investing in this sector. 5G technology is one potential opportunity, with
many more that could be discovered or utilized exclusively on Huawei smartphone products.
This directly refers to the rising use of applications and services on the smartphones because
the availability and speed of mobile data will have to increase due to the higher usage and the
desire for higher speeds. Therefore, this area presents Huawei with the greatest ability to utilize
their other markets and internal capabilities to pursue their goal of expanding their smartphone
market share.
 In addition to our above analysis, there are other trends Huawei could pick up and
improve their performance. One of this is the multi-product implementation. This technology
allows the customer to connect different devices (like the smartphone, tablet, smart TV, music
system etc.) from one brand and therefore raises the value which the products create for the
customer. In this context, Apple is the leading competitor, which gives them a competitive
advantage because it increases the customer's reliance to Apple products and increases the
switching costs for customers to a different brand. Huawei could compete in this issue to reduce
Apple’s competitive advantage and make customers more loyal to their brand.
This leads to another point which is not detailed formulated in our analysis. Brand loyalty is a
big issue in the smartphone industry and one of the most popular reasons to choose a specific
product when buying a smartphone. However, the smartphone market is already seen as a
mature market with big leading competitors. Therefore, brand loyalty is nothing where a
company like Huawei is likely to be able to compete against the giant competitors like Samsung
and especially Apple. Because the possibilities of a successful competition in these areas are
limited, we chose to focus on other more relevant issues in our analysis.

Conclusion:
The market for smartphones and their secondary and tertiary product streams are facing the
greatest period of competition in their short history. Most people own a smartphone, as shown
through the slowing of purchases and consolidation of the market into two main product
streams: Android and iOS users. Due to this consolidation the main competition for business
has shifted from the operating system market to the hardware and application markets. Huawei
must consider that users who have made their choice to purchase iOS products are mainly
driven by factors such as brand familiarity and reputation. That opens the possibility to compete
within the Android market against the other major smartphone companies such as Samsung,
Xiaomi and Lenovo. Competing in this market does not come without its challenges, as we
have shown. However, we have shown potential ways in which Huawei can different
themselves. The hardware/software market in smartphones has the potential to be disrupted
and by continuing to develop both their lines of products, Huawei should remain a strong
competitor in this area; moreover, using their ability to sell at lower prices than their
competitors should assist them in competing in the China and Emerging APAC markets.
Secondly, they can compete in the secondary market, one where revenue exists once an user
has purchased the smartphone. As phones become substitutes for laptops and tablets, this
market will become ever more important, and realizing this early Huawei should begin to
expand their offerings in this sector. Finally, and most important to their goal, Huawei must
use their competitive advantage in understanding the GSM and cellular data market to capture
market share and raise entry barriers. As differentiation in products shrinks, the speed and
quantity of data available will be paramount, and Huawei has the greatest capabilities in this
area.