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Huawei: “Hobnobbing” with the premium “smartphone boys?”

Will you buy a Huawei phone for $1000? Right off the back, that’s going to be a really tough sell; for many, that is. Not only because the amount staggers one’s imagination (for a cellphone) in an absolute sense, but perhaps because, before now, Huawei has been known for peddling budget, no-frills, “Chinese” phones. Suddenly, the company is planning to leapfrog into the premium-brand league, hitherto dominated by Apple and Samsung. It isn’t going to be easy for Huawei, for sure, given the deep pockets of the two incumbents. Moreover, Huawei barely appears (Number 94) in last year’s Interbrand’s 100 Best Global Brands -and it is the only Chinese company that appears on the chart. (Apple and Samsung were ranked first and seventh, respectively.)

I do have a few comments. Two of these are related, and pertain to “labeling” and being able to convince consumers to switch. Also, the high-end phones cost much - a thousand dollars or more, while Huawei’s recent gains (last quarter reports that came out last week) have been in emerging economies, where many folks still struggle to make ends meet. Thus, while Huawei’s $300 or so phones might be selling well in those markets, stretching that to the Apple or Samsung-level offerings might not go well for Huawei. Sophisticated consumers will ask many questions.

So, what do I mean by labeling? It’s human nature: changing what people have filed on you in their mind cabinet is difficult. “He’s always being producing A, so he should stick with A and not dabble into B.” In the present context, it’s more like “he has always made cheap phones, I think he should stick with that, because I don’t believe that he can make high-end phones, relative to companies that have always done this and excelled at it.” Of course, people’s perceptions have little to do with whether or not Apple’s/Samsung’s phones are better than Huawei’s. Contrary to Huawei’s publicized plan to leapfrog into the premium category, I think what the company is actually doing - inching toward the premium brand via the $300 stop-over, is a much wiser decision (than attempting to move into the premium category in a blast). Otherwise, the results may not be pleasant for the company.

A labeling case in point is iPhone 5C. In the article “Down-scaled iPhone Dilemma” that appeared in this column in Daily Trust on 16 September 2013, I wrote about how Apple had underrated the power of labeling. Apple, famously known for selling expensive handsets, decided to compete in the low-end market by producing the much cheaper 5C phone alongside 5S, the expensive, high-end version. So, iPhone 5C was purposely introduced into the market with the hope of attracting financially-lean, albeit infinitely numerous, consumers in countries like China, India, and Brazil. My predictions came to pass, and 5C was total disaster - people did not want a cheap phone from Apple - they would rather go to other companies for that.

Huawei’s proposed move is in the other direction, of course, but the result will be similar, nevertheless. Folks will go to Apple or Samsung for the very high-end products. The $300 phones are bother-line in this regard, and Huawei might be cut some slack in this range. Any attempts by Huawei to move toward the $1000 products marketed by Apple and Samsung, may fail.

Of course, I am aware that heavy product marketing can tilt the scale, but only by so much! In this regard, Huawei’s aggressive marketing campaign is acknowledged; for example, the company’s Facebook campaign in 2013 asked people to pronounce “Huawei.” Thousands submitted their recorded voices to win free Huawei smartphones. I also learned that Huawei enlisted the help of Nancy Ajram, a popular singer in the Arab world in April of this year. An online contest asked fans to submit videos of them singing one of Ajram’s songs, to win $25,000 of solid gold. Huawei has also been sponsoring professional soccer teams in Europe (Spain, Italy) and gaining market share in parts of the region.

Technically speaking, Apple is in a class by itself, with its own homegrown operating system (OS). The rest of the pack manufacture phones that use Android to drive them, and, in a sense, are not sufficiently differentiated. In this class, however, Samsung seems to have an edge over others, including Huawei, because the company has been developing its own OS - Tizen, which might one day actually compete with Android, if successful. This could spell flexibility for Samsung down the road, helping to keep competitors at bay, if the differentiation is effectively leveraged. Moreover, I am not aware that Huawei has software development in its DNA.

The problem that Huawei is having with the U.S. government is not helpful to the company either. Americans are sophisticated consumers, with the disposable income to afford high-end phones. Unfortunately, Huawei phones currently have little presence in the U.S., as the company’s telecommunicationnetworking-gear business has effectively been banned because of security concerns raised by U.S. lawmakers who believe Chinese equipment could be used by the Chinese government for spying.

What to expect? Huawei will continue to be successful in China and other emerging markets in the low-end region of its smartphone business, where the margin is low, and in the medium range, but perhaps not in the very high-end part of the spectrum. It is not clear that the company can convince consumers to switch.

The take-away from this article is that Huawei is aggressively planning to go after Apple and Samsung in the premium end of the smartphone business. The company may only have some success in the low-end and medium range of the market, especially in the emerging markets.