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Market Disconnect

Facing US sanctions, Huawei and other Chinese smartphone makers are struggling to retain their share of the premium smartphone market

By Yu Xiaodong , Meng Qian Updated Dec.1

On September 6, Huawei released its latest flagship smartphone series, the Mate 50. Running on HarmonyOS 3, a self-developed operating system, and supported by China’s Beidou Navigation Satellite System (BDS), it is the company’s first new smartphone series in almost two years since tightened US sanctions blocked access to high-end chips and software, including the Android operating system.  

Scheduled just one day ahead of Apple’s release of the iPhone 14, the Mate 50, priced at 4,999-6,699 yuan (US$704-944) in China, it is Huawei’s latest effort to regain market share in the premium smartphone market.  

Prior to the US sanctions, Huawei was China’s top brand in the global smartphone market and a strong challenger to Apple as a premium brand. Despite the Trump administration imposing initial tech sanctions on the company in 2019, Huawei topped the second quarter of 2020 with a market share of 20 percent. It was the first quarter in nine years that a company other than Samsung or Apple had taken the lead, according to global technology market analysis firm Canalys.  

Huawei also edged out Apple in China’s premium smartphone market. According to a report by International Data Corporation (IDC), a global market intelligence firm, Huawei ranked first with 44.1 percent over Apple’s 44 percent in the first half of 2020. 

But as the US tightened sanctions, Huawei’s smartphone business quickly collapsed in both the global and China markets. Its domestic market share plunged from over 30 percent in Q2 2020 to just 6.9 percent by Q2 2022, spurring other Chinese brands to make a move for the premium market. 

A Xiaomi store displaying its 12S series developed with Leica, Mixc Shopping Mall, Shanghai, September 25, 2022

Paltry Premiums 
Because Huawei’s success boosted global confidence in Chinese brands, other Chinese firms such as Xiaomi, Vivo and Oppo were poised to take over Huawei’s hard-earned market share, especially in the premium market. Instead, it was Apple that most benefited from Huawei’s decline.  

The IDC data showed that Apple’s market share among smartphones priced US$600 and above surged to 76.9 percent in Q4 2021, a 75 percent increase from Q2 2020. 
Among smartphones priced US$400 and above, Apple had a market share of 46 percent in Q2 2022 in China, according to Counterpoint Research, a global research firm specializing in mobile products. The best domestic performer, Vivo, only had 13 percent. Behind Vivo was Huawei (11 percent), Honor (11 percent), Xiaomi (8 percent) and Oppo (8 percent).  

Not only has Apple expanded its lead in the premium market but it also ventured into the mid-range market previously dominated by Chinese brands. In March, Apple released its iPhone SE 2022. Priced at about 2,750 yuan (US$390), it is the cheapest Apple phone ever released and directly competes with Chinese models.  

In Q4 2021, Apple surpassed Vivo to regain the top spot in China after losing it in 2015, with its highest-ever market share at 23 percent, according to Counterpoint Research’s Monthly Market Pulse Service. 

Shrinking Share 
Behind the struggling performance of Chinese mobile phone makers is an overall shrinking smartphone market, as persistent Covid-19 restrictions and an economic slowdown hamper consumer confidence in China.  

According to data released by the China Academy of Information and Communications Technology (CAICT), a scientific research institute directly under the Ministry of Industry and Information Technology (MIIT) of China, in the first seven months of 2022, total shipments of mobile phones in China amounted to 156 million, a 23 percent drop over the same period last year. While accounting for 85.5 percent of the market share, Chinese brands recorded a steeper decline of 26.4 percent.  

On August 19, leading Chinese mobile phone maker Xiaomi reported a net profit of 2.08 billion yuan (US$293m) for Q2, one-third of its profit in the same period last year. In a speech delivered in early August, Xiaomi CEO Lei Jun said that the company had shipped 39.1 million mobile phones in Q2, 13.8 million or 26 percent less than the previous year. Other domestic brands face a similar situation. Mobile shipments of both Vivo and Oppo in the first half of 2022 were down more than 30 percent compared to last year.  

Although overall sales declined, demand for premium phones was more robust. Counterpoint Research’s data shows that market share for premium smartphones increased from 31 percent in Q2 2021 to 33 percent in Q2 2022.  

Besides resilience of demand, the premium market offers higher profit margins. According to Counterpoint Research, Apple’s smartphones accounted for only 13 percent of total global shipments, but captured 75 percent of all profits in Q2 2021, thanks to its dominance in the high-end market. It is no surprise that entering the premium market has become the top priority for domestic brands.  

“The premium market is key to the survival of smartphone companies, as it has been least affected by the pandemic,” said Sun Yanbiao, head of Mobile World (Shoujibao.com), a Shenzhen-based industrial information provider. 

Focus on Cameras
Several major Chinese brands have launched new initiatives to increase their global recognition and presence in high-end markets. In the absence of ground-breaking advances in tech, they focused on improving the quality of components, like teaming up with reputable camera makers to improve image and video quality.  

Huawei was the first to adopt this strategy. In September 2016, Huawei announced its partnership with German camera maker Leica to develop smartphone cameras. The strategy quickly paid off as Huawei released the first triple-lens smartphone camera on the Huawei P20 in March 2018, which helped establish the company as a prestige brand.  

Other Chinese brands adopted similar strategies. In December 2020, Vivo announced its partnership with German optics manufacturer ZEISS to develop innovations in mobile imaging technology.  

In February 2022, Oppo announced a three-year partnership with Swedish camera maker Hasselblad to co-develop technologies for its flagship Find series.  

As US sanctions hindered Huawei’s smartphone business, Leica moved on – to Xiaomi, announcing in May its new strategic partnership in mobile imaging.  

The result is Xiaomi’s flagship 12S series released in July. Priced between US$671- 831, the series is Xiaomi’s new effort to increase its presence in the high-end smartphone market.  

China’s major smartphone makers have also entered the arena of foldable smartphones, a premium market niche that continued to expand despite overall slowdowns. According to the IDC, domestic shipments of folding screen products hit 1.1 million units in the first half of 2022, an increase of roughly 70 percent year on year.  

But analysts warned that strategies targeting specific technologies and submarkets will provide only a limited boost for domestic brands in the premium market.  

Sun Yanbiao, head of Shoujibao.com, told NewsChina the major problem with domestic brands is that despite increased R&D, they follow rather than lead in smartphone technologies, often playing catch-up with Apple’s advances in image quality, multiple lenses and system configuration. “The reality is that the premium market tends to be a winner-takes-all market,” said Sun, “Among smartphones with similar features, consumers tend to choose the top ones.” 

Chipping Away 
Kuang Shan, COO of AlpsenTek, a Beijing-based machine vision sensor startup, told NewsChina that all smartphone companies seeking to become a premium brand must tackle what he called the two “crown jewels” of smartphone technologies – the operating system and system-on-chipset (SoC), the circuit that integrates all of a phone’s components. “They are the litmus tests for a company’s ability to innovate,” Kuang said.  

Li Nan, former vice-president of smartphone maker Meizu and founder of Angry Miao, a startup focusing on computer accessories, said that it is not a coincidence that Apple, Samsung and Huawei, arguably the world’s top three players in the premium smartphone market, all have their own SoC solutions.  

In the past, almost all domestic brands relied on Qualcomm and MediaTek for chipsets including SoC, for their entire stable of handsets.  

With heavy investment in R&D, especially in SoC, Huawei is the only domestic brand to have a major presence in the SoC sector. Huawei’s HiSilicon Kirin series chips ranked among the best in the market before US sanctions brought the company’s chip output to a halt.  

As the US expanded its crackdown on China’s semiconductor industry, nearly all of China’s major smartphone makers began developing their own chips. In December 2021, Oppo launched the neural processing unit (NPU) chip MariSilicon X, its first-ever custom processor. In March, Xiaomi unveiled the Surge C1 processor, a mobile phone image signal processor (ISP) chip, with its own algorithm. In February, Xiaomi CEO Lei Jun posted to Weibo that the company will invest another 100 billion (US$14b) in R&D over the next five years.  

But few domestic brands have made major strides in developing their own SoC solutions. Xiaomi has not released a new SoC since its Surge S1 in early 2017. Both Vivo and Oppo reportedly plan to build their own SoCs, though the details are murky. 

According to Zhong Xinlong, an industrial analyst from CCID Group, a consulting firm affiliated with the MIIT, given the huge amount of investment and high risk involved in the development of chipsets, many companies take a very cautious approach and any major progress takes years. 

New Ecosystems 
Besides increasing R&D investment in hardware, Chinese brands are creating their own smartphone ecosystems. “The competition among smartphone makers is essentially the competition of their ecosystems,” said Sun Guoqiang, COO of MarketIDX, a Beijing-based market intelligence firm.  

Chinese brands lag behind Apple and other global competitors in proprietary operating systems, mostly relying on Google’s Android. Unlike Apple, which boasts higher customer loyalty and can maximize market capitalization with its closed iOS operating system, Chinese brands have been struggling to differentiate their products beyond price. The US sanctions on Huawei, which banned it from using Google’s services, including Android, further exposed the vulnerability of Chinese brands to increasing geopolitical tensions between the US and China.  

In response, Huawei launched its own operation system, HarmonyOS, in 2019. But to date, no other major smartphone makers ship with HarmonyOS. Most analysts are pessimistic about the operation system’s future in the global smartphone market. 
To address the problem, Huawei’s switched focus to the Internet of Things (IoT), the interconnected galaxy of devices that includes smartphones, tablets, PCs, VR devices, wearables, smart screens, smart audio, smart speakers and stereo receivers. Making HarmonyOS customizable and open source, Huawei launched its 1+8+N Seamless AI Life Strategy in March 2019, which allows users to connect to different devices on the same platform. According to Yu Chengdong, Huawei’s CEO, HarmonyOS was used on more than 300 million devices as of late July.  

Other Chinese brands adopted similar strategies. In September 2018, Vivo launched its Jovi IoT, enabling users to control home devices through Vivo’s voice assistant. In January 2019, Xiaomi announced its Smartphone & AIoT (Artificial Intelligence + IoT) strategy, which the company recently upgraded to Smartphone x AIoT. In December 2019, Oppo unveiled plans to build an IoT ecosystem that covers smart devices for four scenarios: personal, family, travel and office.  

Just like Apple’s electric car project and rumored team-up with Hyundai on a selfdriving car, Huawei and Xiaomi have ventured into the emerging industry. In December 2021, Huawei launched its HarmonyOS vehicle AITO M5 with carmaker Seres. In August, Bloomberg News reported that Xiaomi is eyeing a partnership with Beijing Automotive Group Co (BAIC) to make electric vehicles.  

“As growth in the smartphone market appears to stagnate, tech giants are looking for new sources of growth, and they widely consider electric cars the next big thing,” said Guo Tianxiang, a senior analyst with market intelligence provider IDC China.  

According to Guo, Chinese firms need to make longer-term investments in R&D, product quality, brand building and other services to secure their presence in the premium market. “It takes a long time for quantitative changes to become qualitative,” Guo said.