Huawei’s smartphone ambition cannot be achieved without Honor

Recent reports out of China suggest that mobile giant Huawei may spin-out its sub-brand Honor as an independent company.

The phones Huawei sells under its own name are generally mid to high-end models, aimed at both the Chinese and overseas markets. Honor, on the other hand, is a vehicle for selling more cost-effective handsets, often targeted at young consumers. It was launched in 2013 to compete against budget brands like Xiaomi, and focuses on lower-end demand internationally and at home

It is thought that there is already a substantial amount of internal competition between the Huawei device and Honor commercial teams; but formally separating the two brands would raise various commercial and IP issues, which executives would need to consider carefully.

• Honor operates independently in branding and lining-up smartphones, but it does not have its own dedicated R&D unit. It relies completely on Huawei technology and IP. Right now this allows the Honor business unit to produce phones at aggressive prices to compete in the low-cost market. If an independent Honor still gets to rely on Huawei technology, it’s a huge advantage over competitors like Xiaomi and Oppo that have to pay for their own R&D. But presumably some kind of licensing arrangement would have to be worked out with Huawei, and that could affect the company’s cost structure (so would setting up an Honor R&D unit).
   
• Huawei as a whole sells more phones than any company other than Samsung. That volume is a big advantage when it comes time to negotiate patent licences. Without Honor in the fold, Huawei could lose the privileged royalty rates or cross-licensing leverage it has derived from large shipping numbers. Honor’s share of Huawei smartphone shipments increased from 24% to 36% from Q2 2017 to Q2 2018, and the sub-brand accounted for about half of mainland China sales. It’s arguable that its divestment could cause an increase in Huawei’s royalty burden on a per-phone basis.
   
• Huawei currently walks a fine line on questions of licensing policy because it is both one of the highest-volume handset vendors and one of the biggest contributors to telecommunications standards. That’s a big reason why the company has been tight-lipped so far on its vision for 5G SEP royalty rates. But with most of its low-end sales carved off, the overall Huawei business could be left as much more oriented to the licensor side of the equation.
   
• If Huawei wants to retain the perception that it is part of a global ‘big three’ alongside Apple and Samsung, then spinning off Honor could set it back. Huawei heavily relies on Honor for its success in budget and mid-range segment, while companies like Samsung use their own brand for the different tiers of devices. As stated in the figures above, Honor now accounts for a healthy share of Huawei device shipments and a spin-off would definitely push Huawei down the overall totem pole.
   
• In terms of brand, there could be positive and negative aspects. Huawei could be giving up a brand that resonates with the younger, online demographic in China – that has been a key component of the value of companies like Xiaomi, which Honor recently surpassed in China sales. On the other hand, concentrating on higher-end devices could be a boon to the Huawei flagship brand. Some have already opined that the rumours about a Honor spin-off are themselves evidence that Honor’s brand differentiation strategy may have worked too well.
   
• Honor has been quickly growing into new markets like Russia, India, and Western Europe. It’s encouraging news for the sub-brand. But as an independent firm, it is certain to face patent risks overseas. While it would likely enjoy a licence to Huawei’s gigantic patent portfolio, that does not necessarily mean it could rely upon those rights to deter assertions by competitor companies. The contours of the IP relationship between the two entities will have a big impact on how much risk Honor faces abroad.
   
• Shedding the association with the Huawei brand may be beneficial to Honor, especially in markets where the parent company is synonymous with security concerns. Huawei has faced setbacks in striking a carrier partnership with AT&T in the US, and has been blocked from selling 5G network equipment in both the US and Australia. Other major economies, such as Canada and India, have been encouraged to take similar measures. It’s become a political play, but an independent Honor brand may be spared from this since it would no longer be associated with Huawei’s telecom business.

In response to the speculation, the president of Honor stated that Honor will remain an independent brand that's part of Huawei. But many industry observers think a break-up is only a matter of time. With overall smartphone shipments slowing down, the competition among vendors can only get more intense. Factors like patents, designs, brands, trade secrets, marketing and reputation will play a huge role in who stays at the top of the tree.