Huawei Technologies Co., a Chinese company with little name recognition in the U.S., is poised to challenge Samsung Electronics Co. (005930) and eventually even Apple Inc. (AAPL) in the $219.1 billion market for smartphones. Its strategy: inexpensive handsets.
Already China’s largest telephone-network equipment maker, closely held Huawei probably leapfrogged Nokia Oyj (NOK1V) and Research In Motion Ltd. (RIMM) in the second quarter to become the world’s third-biggest seller of smartphones, said Horace Dediu, founder of equity-research firm Asymco.
Huawei, based in Shenzhen, China, entered the mobile-phone market in the past decade by selling bare-bones handsets to price-sensitive buyers in emerging economies. Now, as it focuses on models with better screens and faster chips, Huawei will probably widen its lead over smaller manufacturers and siphon users away from Samsung, Dediu said.
“They’re the guys that don’t get a lot of respect, because they’re not big in the U.S.,” said Dediu, who’s based in Helsinki. “Samsung ought to be looking over its shoulder.”
While Huawei trails Apple and Samsung by a wide margin, it’s working to narrow the gap by selling handsets through U.S. carriers AT&T (T) Inc. and T-Mobile USA Inc. AT&T began selling Huawei’s Impulse smartphone in September for $30. Deutsche Telekom AG’s U.S. unit said on July 11 that Huawei would make two models in its MyTouch line of handsets.
Huawei’s devices carry many of the features found on more expensive smartphones and provide access to the compendium of apps available at Google Inc.’s online store.
Carriers benefit from pairing with Huawei because low phone prices help them win bargain-hunting shoppers, and because Huawei has historically been willing to support their own marketing efforts rather than pushing its own brand.
“We essentially made the market for affordable smartphones,” Bill Plummer, a U.S. spokesman for Huawei, said in an interview. “We’re in a good position, because we’ve established ourselves as a trusted partner to carriers.”
Huawei’s annual smartphone sales are expected to triple to 60 million units this year, compared with 134.1 million for Apple and 207.2 million for Samsung, according to Dediu.
Huawei owes much of its success to Google’s Android software for smartphones, said Mike Morgan, an analyst at ABI Research. While rivals such as Samsung, HTC Corp. (2498) and Google’s Motorola Mobility Holdings focused on adding their own software and features to command higher prices, “Huawei just slapped Android on some hardware and it shipped it,” Morgan said.
That’s made Huawei a leader in sales of sub-$200 smartphones, a corner of the market that Morgan expects to grow at a faster pace in the coming years, taking share from higher end devices in the range of $200 to $400.
Wireless carriers typically pay manufacturers full price for the phones and sell them more cheaply to customers in exchange for multiyear-contract commitments.
High-end devices, such as the iPhone and Samsung’s Galaxy line, which cost the carrier more than $400, are expected to hold steady, at about a quarter of the market. The market for mid-tier handsets will drop, Morgan said.
Succeeding in smart phones isn’t optional for Huawei if it wants to remain a fast-growing company. Founded in 1987 to sell telecommunications gear to China’s phone companies, it grew that business to $18 billion in fiscal 2010.
Huawei has been competing against Alcatel-Lucent (ALU), Ericsson AB (ERICB) and Cisco Systems Inc. (CSCO) in the market for telecommunications gear and Internet switches and routers during the past decade.
Cisco sued Huawei in 2003 for copying software and infringing patents. That lawsuit was settled in 2004 after Huawei agreed to stop selling some products and alter some designs.
Concerns about the company’s intellectual-property practices and ties to the Chinese government have hurt its ability to sell sophisticated network equipment to U.S. carriers, said Jeff Heynen, an analyst at Infonetics Research. While buying smartphones carries a lower security threat, questions over Huawei’s reputation create an added obstacle to its campaign to gain U.S. market share.
Huawei’s carrier-equipment business is under pressure as Chinese carriers rein in spending, said Simon Leopold, an analyst at Raymond James & Associates Inc.
“Huawei has experienced a lot of slowing in its core networking business,” Leopold said. “They’ve made the easy gains there, and handsets are the next logical front.”
While Huawei is poised to take share from weaker rivals, catching No. 2 U.S. player Samsung will be more difficult. Although both have adopted Android as the smartphone software, Samsung has a cost advantage because it makes many of the screens, chips and other components used in its phones. Samsung also has bolstered its brand, partly with advanced features, such as face recognition and motion-sensing tools.
Samsung said on June 25 that its latest flagship phone, the Galaxy S III, will help mobile earnings surpass the first- quarter record with sales of more than 10 million units by the end of July since it went on sale in May.
Even with its size and market-leading share of 30 percent of global smartphone sales, Samsung remains vulnerable because it doesn’t control a software platform of its own, like Apple, Google or Microsoft Corp., said Dediu. That limits its ability to differentiate product or lock-in customers, especially versus a lower-cost competitor.
“The story of the last year has been the rise of Samsung,” Dediu said. “But I’ve never felt they had a strategically strong position.”
Because of lower labor and marketing costs and booming smartphone sales in China, Huawei can make money when rivals such as Nokia and RIM suffer losses as they invest to maintain brands and woo application developers.
“They’re coming at the smartphone business with a low-cost model,” said ABI’s Morgan. While higher-cost rivals develop products to command a premium to cover their investments, Huawei can do just fine selling good-enough products at lower prices.
“Their devices don’t have to have jetpacks to do 90 percent of what most people need,” Morgan said.
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