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Huawei's US woes give Samsung and Chinese rivals chance to strike

Competitors poised to gain in Europe and Middle East

People arrive for a product presentation at Huawei in Beijing on Jan. 24. The world's second-largest smartphone maker stands to lose ground not only to top rival Samsung but also to smaller Chinese players Xiaomi and Oppo.   © Reuters

HONG KONG/TAIPEI -- Huawei Technologies' mounting legal troubles in the U.S. have given smartphone rivals such as Samsung Electronics a chance to regain lost ground as they battle the Chinese tech giant for share in a slowing global market.

Smartphone makers who have felt the impact of Huawei's aggressive growth in recent years stand to benefit if Washington moves to ban U.S. exports of vital components to the world's second-largest handset maker, say analysts and industry experts.

The industry is bracing for such a move after the U.S. this week launched criminal charges against Huawei, alleging that the Shenzhen-based company had committed bank fraud, broken international sanctions and stolen trade secrets. Huawei has denied all allegations of wrongdoing.

While forecasts for 2019 vary, many analysts expected Huawei would maintain its position just behind Samsung in global market share. But there could now be an opportunity to profit from Huawei's troubles.

"Supply chain disruption for Huawei would definitely play into the hands of Samsung," said Benjamin Stanton, a senior analyst at global research institute Canalys in the U.K. "Samsung has overhauled its smartphone strategy for 2019 in an attempt to claw back market share."

Although the Chinese company is expected to retain its lead over Apple, having overtaken the iPhone maker last year to become the number two player globally, "we must acknowledge that Huawei faces a lot of allegations around the world, and that may create woes for its business overseas," said Eddie Han, an analyst at Market Intelligence & Consulting Institute in Taipei.

Huawei, which launched its smartphone business only in 2010, held a mere 4% of the global market share in 2012. By the third quarter of last year, it had grown to ship 52 million handsets, for a 14.6% share worldwide, according to researcher IDC. Samsung's share during the same period shrank to 20.3% from 39.6% in 2012. Apple has seen its market share tumble more recently to 14.7% in the first three months of 2017 to 13.2% in the third quarter of last year. 

Besides Samsung, Hong Kong-listed Xiaomi and Dongguan-based Oppo -- Huawei's two main competitors in the Chinese market and across Southeast Asia -- are also poised to capitalize on their rival's vulnerability.

"Xiaomi and Oppo are focused on gaining share in Europe in 2019, where Huawei holds many coveted slots [with] operators," Canalys' Stanton said. "If Huawei's business is disrupted, other Chinese companies may be able to take its place."

But Apple, which has been searching for a new growth engine amid sluggish iPhone sales and China's economic slowdown, is less likely to benefit from a possible Huawei retreat, analysts say.

Huawei's struggles "will certainly not" harm Apple, but "it is unlikely that a consumer looking to buy a Huawei phone would instead buy an iPhone if the former was not available," Stanton said. The Mate 20 Pro, Huawei's latest high-end handset, costs 899 pounds ($1,180) in the U.K. market. By contrast, Apple's iPhone XS is priced at least 10% higher, at 999 pounds.

Meanwhile, Huawei and its suppliers are bracing for a further assault by Washington. Nikkei Asian Review revealed on Tuesday that Huawei had called on suppliers to relocate production back in China in a sign of its intense concern over the growing political risk to its business.   

Lawyers told Nikkei that President Donald Trump -- who has pursued an aggressive trade battle with China since last year -- had the power to impose a ban on the export of U.S. technology to the Chinese company, even before the criminal case is decided in court. A similar ban on fellow Chinese telecom equipment maker ZTE's put its survival in doubt last year. 

"Huawei is a powerful player in many markets -- China, Europe and the Middle East in particular," said Peter Richardson, director at global consultancy Counterpoint Research.

"If Huawei's supply chain were to be disrupted by an export ban from U.S.-domiciled companies, it would have a massive impact on Huawei, and it would certainly benefit Huawei's rivals," he said, adding that "Samsung would feel a relief of competitive pressure in Europe and the Middle East for sure."

In smartphones, Huawei has increased self-reliance to develop more than 70% of its own mobile processors, but it still depends on U.S. suppliers for many components. Qorvo, Skyworks and Texas Instruments provide radio frequency chips and power amplifiers, while Micron Technology supplies memory chips, according to Andrew Lu, an analyst at Sinolink Securities.

These components are crucial for the quality of smartphones to make calls and transfer data. Huawei also uses Google's Android operating system in its handsets, although it is unclear whether software would be covered by a U.S. tech ban.

"Huawei is more self-reliant than ZTE, thanks to its aggressive semiconductor venture, but it still needs many high-end parts from the U.S. to build the premium smartphones that it currently offers," said Lu. "Without them, the performance and quality of the Huawei products won't be the same."

A source with direct knowledge of Huawei procurement told the Nikkei Asian Review that "it's still very challenging to find alternatives. And if we don't use U.S. technology, that would mean big downgrades to our products."

For now, concerns over Huawei's supply chain disruption have yet to translate into action. "I think most distributors, including mobile operators, are keeping a close watch on developments, but we've not detected any significant moves away on the smartphone side," Richardson said.

Yet still, there are signs of growing caution about using Huawei's telecom equipment. Vodafone, the world's second-largest mobile operator, announced on Monday that it would halt further installation of Huawei equipment in its core network due to concerns over national security.

Since Huawei's telecom equipment business has bolstered its sales of smartphones through operators, analysts warn such setbacks could deprive Huawei of an advantage in competing with Samsung, Xiaomi and other smartphone makers.

"It is true that Huawei's strong network business [did] smartphone sales a big favor. Vodafone’s recent decision may affect Huawei's smartphone business over the long-term if this security speculation continues," said Jusy Hong, head of smartphone research at market intelligence company IHS Markit in Seoul. Hong is expecting a sharp slowdown in Huawei's smartphone sales growth this year. "Year on year growth ... will fall to single digit levels from 35% in 2018," Hong said, citing a mature Chinese smartphone market and fiercer competition with Samsung.

Huawei did not immediately respond to the Nikkei's request for comments. Samsung declined to comment. 

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