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Huawei crackdown

Huawei to sell Honor phone brand to save it from US pressure

Move is aimed at maintaining access to vital supply chain

Huawei's smartphone business has been under pressure since the U.S. restricted its access to key global suppliers.   © Getty Images

TAIPEI -- Huawei Technologies said on Tuesday it will sell its Honor smartphone business to a consortium of more than 30 companies, acknowledging that the budget brand needed help to maintain access to vital components and supplies amid a U.S. crackdown.

Huawei, China's largest smartphone maker, said it will sell all its Honor assets to a newly formed entity dubbed Shenzhen Zhixin New Information Technology Co., Ltd. Huawei will "not hold any shares or be involved in any business management or decision-making activities" once the sale is complete.

The consortium of buyers includes agents and dealers of the Honor brand, as well as many Shenzhen government-backed entities and e-commerce platform Sunning.com Group. China Telling Telecom, a distributor for Huawei, Samsung and Apple smartphones, is also among the buyers. No value was given for the sale.

The disposal makes Honor the first visible casualty within Huawei, the world's second-biggest smartphone maker, since the latest Washington restrictions on the Chinese company took effect on Sept. 15, severing its access to key global suppliers.

Huawei admitted the difficulties the business was facing. "Huawei's consumer business has been under tremendous pressure as of late. This has been due to a persistent unavailability of technical elements needed for our mobile phone business," the company said.

By spinning off Honor into an independent entity, Huawei hopes the sub-brand can retain access to vital components to sustain the business. Honor shipped nearly 70 million smartphones in 2019, with China its main market.

A joint statement by the consortium was published in Shenzhen local newspapers on Tuesday: "This acquisition is a multi-win move for the industry. All shareholders of the new Honor company will fully support the development of the Honor brand, enabling it to leverage the industry's advantages in resources, brands, production, channels, services, and more effectively to compete in the marketplace."

"While we will enjoy returns on our financial investments, we will compete fairly for the same business opportunities as other agents and dealers," the statement continued.

Neither Huawei nor the buyers disclosed the details of the deal, but about 7,000 employees will be moved from Honor to the new company, according to a person familiar with the matter.

Another source added that all qualified suppliers and the procurement system currently serving Honor will remain the same and be transferred to the new company.

"Honor did visit many suppliers recently, and ask for support from next year, but we are still evaluating the [planned sale of Honor], as we have to consult U.S. lawyers to see if it would fully comply with the export control regulations," another person with knowledge of the matter told Nikkei Asia.

Most Honor smartphones are assembled by China-based companies Huaqin Technology and Wingtech Technology, which also supply Xiaomi, Acer and HTC. These manufacturers could help secure some components for Honor before the deal is completed, a person close to Honor told Nikkei Asia, to ensure production continues to run smoothly after the sale.

Some chip suppliers, such as Intel and AMD, as well as image sensor providers Sony and Omnivision, have received licenses from the U.S. government to resume some business with Huawei, though it is not yet clear exactly what products those licenses cover, Nikkei reported earlier. Samsung Display, a major supplier of advanced organic light-emitting diode displays to Huawei and Apple, also got the green light from Washington. And Huawei's key mobile processor supplier Qualcomm recently received approval to ship some 4G products to the Chinese company.

Honor shipped around 68.7 million handsets in 2019, according to research agency Counterpoint, roughly 28.7% of Huawei's smartphone shipments of 238.7 million units last year. In 2018, it shipped 78 million Honor phones, around 37.9% of its total that year.

Flora Tang, an analyst with Counterpoint Research, said shipments of Honor phones started to decline in the second half of 2019 because the company faced difficulties in securing components.

"If the deal happens, and Honor finally becomes an independent [smartphone maker] under a new entity, we would remain positive about the near-term development of Honor in China market," Tang said, adding that this is based on the assumption the current trade ban on Huawei will not be extended to the new company and Honor will be able to procure 5G-related components.

Tang was less optimistic about the long term. "Without the R&D support, supply chain sharing and especially the Kirin chipsets from Huawei, Honor will have to rebuild its differentiation, and competitive edge, in intense market competition," Tang said.

And some analysts are questioning how the Honor brand will fare under new owners.

"I am cautious whether Honor phones made outside the Huawei umbrella could continue to thrive. Honor was doing well because it has had full support from Huawei. If it's no longer a Huawei entity, it's unclear whether the whole smartphone supply chain would provide the same support as in the past," said Jeff Pu, a veteran smartphone analyst with GF Securities.

"Meanwhile, all the smartphone makers, including Samsung, Oppo, Xiaomi and Vivo, are stepping up efforts to grab market share from Huawei and Honor. It will face different market competition than it did in the past."

The analyst added that if U.S. President-elect Joe Biden eases export control rules on Huawei, it could leave the newly spun-off Honor in an awkward position. "After all, it could be quite risky for the new investors to bid for a business that could face significant uncertainties."

Huawei registered a new company for Honor in April, with Huawei's consumer business group CEO Richard Yu as chairman, according to Qichacha, a Chinese companies information provider, paving the way for Honor to become fully independent from its parent.

The Honor brand emerged as a product line under Huawei's smartphone business in 2011, and started to operate as an independent unit in late 2013. As a Huawei sub-brand, it offers mid-range smartphones focused on younger buyers and online sales channels.

Huawei focuses on its flagship P and Mate series premium phones, as well as some entry-level models.

Huawei released its latest premium 5G Mate 40 phones in October, powered by the Chinese tech company's in-house Kirin mobile processors, built with Taiwan Semiconductor Manufacturing Co.'s latest 5-nanometer chip production technology -- the same technology used by Apple's 5G iPhone 12 range.

Honor's sales helped Huawei overtake Apple as the world's second-biggest smartphone maker by shipments last year. It took the No. 1 spot from Samsung in the second quarter of this year.

But as Washington's crackdown begins to sting, Apple, Samsung, Xiaomi, Oppo and Vivo are all looking to grab global market share from Huawei.

Huawei's Chinese compatriots Xiaomi and Oppo are especially eager to expand their presence in Europe, a region where Huawei had thrived over the past few years.

Xiaomi has managed to edge Apple out and became the world's third-largest smartphone company in the September quarter. Huawei maintained its No. 2 spot in the quarter, but the question now is how long the embattled company can hang on.

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