LOVE Apple

This is not a piece on the fondness of Apple [AAPL] and its products. Rather this is a reflection of what Ren Zhengfei, founder of Huawei, and ultimately the boss, said in November 2017 during a meeting with employees; “Apple has changed the world, we really need to thank them for that,”. Mr. Ren pointed to three examples; firstly the first consumer computer, second imaging technology and third the iPod/iPhone. Huawei has benefitted from all these developments. Somewhat controversially, Mr. Ren also claimed Apple created room for it to dominate the market. Whatever the case may be; we should love Apple as without that company, the markets in which we are now vigorously competing, and which consumers are avidly enjoying, would not exist. Mr. Ren is right to be thankful.

In China the comparison between Mr. Ren and Mr. Steve Jobs is often made, even though on the face of it they seem quite different characters, at least on a personal level. At the heart of the debate lies the distinction between a hardware company, and a services company, the latter a model which Apple has revolutionized, propelling it to the biggest company in the world, by market capitalization. In the compiled animated images of 5 years of quarterly sales of smartphones in China, by Canalysis, we can see where Mr. Ren is coming from. Huawei outsold Apple nearly each quarter pictured, in terms of units shipped, however Huawei only extracted more value a few times. In the parting shot of Q4 2017 we see Apple making around twice the value out of half the units, comparatively. Roughly speaking, then, Huawei gets only a quarter of the value, per handset, as does Apple. Domination certainly comes at a price in this demanding hypercompetitive market, the biggest of its kind in terms of volume.

The Smartphone markets are usually rapidly shifting and volatile in their own right. The king of today, may end up to be the pauper tomorrow, succession is swift and definitive. Korean Samsung [SSNLF] and Chinese local brand Lenovo [LNVGY] have been relegated to obscurity in China, for instance. After years of meteoric rises the Chinese market also began to resemble more developed and saturated markets in 2017. Units shipped declined year on year, for the first time ever. Another Chinese Smartphone firm, Xiaomi, is beating Samsung in the fast growing Indian marketplace. Xiaomi, in 2014 a Unicorn (start up venture valued at $1 Billion or more) with the highest valuation in the world before collapsing, has now rebounded from disastrously missing sales targets back then. It is even forging ahead with a purported Initial Public Offering, creating a dual stock offering on two exchanges in China, that, some argue, may value the firm at $100 Billion. That is a lofty multiple for a firm that made perhaps $1 Billion in profits last year, and hints at the belief that Xiaomi will blossom into an ecosystem far more encompassing than Apple, which trades at a multiple price to earnings ratio (P/E) of 19.

"2018 will be the year of Huawei", Jim Harris argued recently in a piece citing that Apple has become too greedy, focusing too little on innovation and too much on milking the iPhone product line. The same piece shows Google's [GOOG] Android, the mobile operating system, dominating the smartphone market with an 85% share, and Apple's iOS taking the remainder. In competitive terms this is a Duopoly; consumers have, or, have chosen for, little competitive choice in offerings. Being an Android vendor, as all smartphone makers beside Apple now are, makes Huawei of course more of a hardware company than Apple, by default. Even though Huawei spends more in R&D investment than Apple, it's services tunnel lacks the sophistication of what Apple has so carefully created. Huawei has already been in a very public spat over who owns consumer data mined using the wechat app, owned by Tencent [THCHY:US], on its phones in China. In a broader sense being an Android vendor makes it hard to create sticky ecosystems, such as Apple's iCloud, Google's Drive etc.

Mr. Ren and Mr. Harris may have been too optimistic, too soon. At end of 2017 a huge coup by Huawei, offering a high end phone exclusively to AT&T [T] in the USA, was being finalized. However, this deal fell through, at the last moment, as the Wall Street Journal reported at the time. Not long after, Reuters wrote that US lawmakers urged AT&T to cut all ties with Huawei, presumably on the basis of national security concerns. Huawei has been selling phones there through other channels, department stores and the free market, for instance. Huawei had also been producing handsets there for other brands before, such as the Nexus 6P for Google. Nevertheless, without exposure through a major carrier, the US market, the biggest of its kind in terms of value, will remain elusive, and perhaps impossible to tackle for Huawei. Of course one phone maker was able to give AT&T exclusive rights to a high end phone; Apple back in 2007.

Mr. Ren was right to thank Apple. As a competitor we should be thankful as some of the current business lines wouldn't have existed without it. Mr. Ren should also be mindful; using a multiple similar to Apple's would place Huawei's, notional, market capitalization around $100 Billion. Using a ten year average (P/E) of Samsung, perhaps more fitting, at 8,5 would mean the, again notional (Huawei is privately held), enterprise value is less than half that figure. Apple is worth close to a trillion dollars as of this writing, and does it's business with around 80.000 employees. Mr. Ren may take stock, especially of the people aspect at Apple. If we look at Glassdoor, an employment site, Huawei underperforms and trails Apple in every aspect. This needn't be so if Mr. Ren's firm would take better care of it's most important assets, the employees. Also happier employees may provide better quality products and services translating perhaps into more favorable recognition of, maybe even love for, the brand.

If you have any questions, comments, experiences or views on this topic, I'd love to hear from you. Please feel free to like, share or comment below.

Niklaas van de Bunt, MBA, MSc., is a Senior Executive Business Consultant in Huawei’s Western European Carrier Business Unit practice. He has worked for Huawei in diverse geographical areas and has won several internal awards, including the prestigious Huawei Team Gold Medal for his work in the U.K. Professional specialties include Strategy, Business Cases and Commercial Model Development including Joint Go To Market initiatives with partners.

The views expressed in this commentary are solely those of the author.

Tags: #Huawei #Apple #Ren Zhengfei #Xiaomi #Samsung #Lenovo #Glassdoor #Tencent