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China tech

Huawei phone spinoff Honor stages big comeback in China

Company rides on bold handset drive, but possible US sanctions loom as a threat

Honor CEO George Zhao presents the Magic3 Series of high-end smartphones at a product launch event in August.  (Photo courtesy of Honor Device)

GUANGZHOU -- Honor Device, the Chinese smartphone brand that was spun off from Huawei Technologies to evade sanctions on using U.S. chips and operating systems, has rebounded strongly in the domestic market after a rough start.

Driving the recovery is an aggressive push to develop new models, such as the latest Magic3 series. A sales outlet located in Guangzhou was packed with customers on Friday, with the biggest draw being the most expensive device in the series, which sells for 7,999 yuan ($1,229).

"We immediately ran out of inventory," said a sales associate. "It will be a long wait if you make a reservation now."

The offerings are the first new devices for the flagship Magic line in roughly three years. The phones use Qualcomm's semiconductors as well as the Android operating system, and feature three to four rear cameras capable of 10X to 100X digital zoom, depending on the model.

With prices starting at 4,599 yuan, the Magic is targeting high-end demand.

"Our goal is to make products that will compete with or surpass Apple," George Zhao, CEO of the brand operator Honor Device, said during the launch event for the Magic3 series held earlier this month.

Huawei first established Honor in 2013 as a brand geared toward online sales, eventually expanding its sales in brick-and-mortar stores as it grew into a sub-brand complementing the mainstay Huawei label.

Honor drew fans in Europe and elsewhere overseas, reaching 70 million yearly deliveries in 2019 and accounting for roughly 30% of Huawei's overall smartphone sales. As a standalone brand, it ranked seventh worldwide.

But in September 2020, the U.S. Department of Commerce tightened trade restrictions on Huawei, reversing fortunes for the telecommunications equipment group. The Chinese company faced daunting hurdles in procuring semiconductors, and its smartphone business took a steep dive.

Huawei decided to divest Honor to shield the brand from the fallout of the U.S. sanctions. Last November, a consortium formed jointly by an asset manager controlled by the city of Shenzhen, as well as by dozens of smartphone dealers, took over Honor in a deal that was essentially a bailout by the local government.

The brand inherited roughly 8,000 employees from Huawei, including several involved in sales and research and development. At the same time, the new company said it has no capital relationship with Huawei.

Without its powerful backer in Huawei, Honor spent months watching its share plummet in the Chinese market in terms of smartphone shipments. Honor's 13% slice in the third quarter of 2020 tumbled to 5% in the first quarter of this year, according to Hong Kong industry research firm CounterPoint. But its market share has turned around since then, just over 8% in June.

Huawei smartphones cannot include Google apps due to U.S. trade restrictions, but that ban does not apply to Honor. The new company moved quickly to develop "non-Huawei" devices.

The first post-spinoff product, the V40, came out in January and features a redesigned backside to accentuate the split from Huawei. The midrange "50" series has been a hot seller since it was released in June.

Honor could capture a share of about 12% in China in either November or December, said Ivan Lam, senior analyst at CounterPoint. Furthermore, the smartphone dealers that have became major Honor shareholders when it went independent may play a role in expanding the company's physical sales channels, Lam added.

Honor's activities abroad have become a subject of attention. The company will hold a 2% global share in smartphone production this year, Taiwanese market intelligence firm TrendForce predicted in November, while Huawei is expected to hold a 4% share.

Customers throng an Honor smartphone outlet in Guangzhou, China on Friday. (Photo by Takeshi Kawakami)

In 2019, Honor and Huawei controlled a combined 17% market share in smartphone output, falling far behind Samsung Electronics and Apple.

But TrendForce's forecast was issued when Honor was first spun off from Huawei. The company plans to aggressively market its phones outside of China with the Magic3 front and center.

Honor could very well be Huawei's successor, sweeping through the global smartphone market like the "eye of a typhoon," said one commentator.

There are some dark clouds on the horizon, however. Lawmakers in the U.S. have grown alarmed over Honor's comeback, with 14 Republican House members signing a letter to the Commerce Department Aug. 6 demanding that export controls be imposed on the smartphone maker.

"The sale of Honor was not a market-based outcome, but rather orchestrated" by the Chinese Communist Party to "outmaneuver U.S. sanctions," reads the letter.

There is speculation that Honor will embark on a stock market debut to fend off the backlash from the U.S. The company sent a notice to major smartphone sellers earlier this month that there is a chance it will soon list, according to reporting by some Chinese media outlets. The company is also surveying distributors on whether they intend to purchase shares, according to the reports.

Honor "will have private companies own its shares by listing in the stock market, with the aim of increasing transparency and reducing pressure from the U.S.," said an industry insider.

The company itself has not ruled out the prospects of a listing.

"A listing is one option for the future," CEO Zhao told Chinese media.

There is no guarantee that the move will blunt misgivings from the U.S. If Washington decides to slap Honor with the same kind of trade sanctions imposed on Huawei, it will be hard pressed to acquire semiconductors and other items, which risks striking a major blow to business.

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