Reuters had an interesting article last week featuring an interview with the CEO of handset maker Honor. Honor is a spin-out from Huawei, and the focus of the article was Honor has signed agreements with a host of leading component suppliers including Qualcomm, Mediatek, Intel and more. The short article left us with more questions than answers which serves as a great example of the muddle that is the US-China relationship in technology.
At one level, this is a simple story. New handset company signs a bunch of supply agreements with leading component vendors as it prepares to do business. As a standalone company, this probably would not even merit an article in the press. Just one more company going about its business.
Of course, Honor is not just one more company. Honor makes low and mid range phones and has had a fair amount of success with distribution in large parts of the world, but it was built in conjunction with Huawei’s broader telecom business. Huawei sold the business to a consortium of “more than 30 buyers” backed by the Shenzhen government late last year. Huawei, of course, was effectively cut off from the handset business when the US government prohibited US companies from selling it any components as part of the US-China Trade War. Huawei had warned that the trade sanctions would have effectively forced them out of the handset business, and so they chose to sell for a reported $15 billion. This worked so well that there are rumors Huawei is thinking of selling off their high P and Mate phone lines as well, this time to a consortium backed by the Shanghai government. Huawei is based in Shenzhen and its phone business is largely run out of their Shanghai offices.
But who really owns Honor? US press reports, like the one we linked above, say that the group consists of companies like Digital China who are Honor distributors. This is an interesting move for a phone maker, as distributors typically operate on much lower margins, at the mercy of the brand owners. So we will stick a pin in this one and come back in a year to see if they have come up with a new model for the industry. That being said, it is not entirely clear who all these parties are. Our quick web search in English and Chinese did not shed too much light on the subject. This article from Global Times, a propaganda tabloid owned by the Chinese government, did include some more detail on the deal. Ultimately, we do not really know who owns Honor, but may find out more if the company moves ahead with its planned IPO.
One thing about that Global Time article, in particular, caught our eye:
This “package deal” also means that the operations and structure of the new Honor could still adopt the “Huawei way.”
We take the “Huawei way” to mean a rigorous, hard-working engineering culture, Huawei’s version of China’s 996 wolf-warrior work ethic. But it certainly leaves open the question as to how close the two companies will be. Tracing ownership of China’s companies is very hard, even when they set up entities outside of China. Does this leave open the possibility that Honor and Huawei will continue to work together? Huawei often bundled handset sales as part of its broader infrastructure sales. Will Honor still be able to tap into State-backed credit facilities which have been such an important part of Huawei’s rise? Given Huawei’s track record of setting up shell companies in markets where it operates, this is not that far-fetched.
Another question is how will Honor compete in silicon? True, it can now buy parts from US vendors, but handset makers are increasingly competing on the design of their own silicon. The leading handset makers all make their own applications processors. But Honor does not seem to have taken any of the HiSilicon team with them, HiSilicon is Huawei’s semis subsidiary and is subject to their own set of onerous US trade restrictions. And as successful as Honor has been we do not think they have sufficient scale to support their own chip design team. We will know more when (if) we see their IPO filings. So maybe they have the resources to do this, but it is also possible they could end up as a straw man for HiSilicon. One scenario we heard repeatedly last year was that Huawei was looking for intermediaries to purchasing chips for them, getting around the US trade restrictions. As far as we know, none of the rumored candidates actually took Huawei up on this, for fear of the Eye of Saruon turning upon them as well, and ending up with their own US restrictions. But now Honor is an independent company. Could they source chip IP form HiSilicon? There is no way to know now, but we suspect this rumor will come back.
Ultimately, we see this heading in two possible directions:
- The Honor spin-off is a front, leaving a company still tied to Huawei under the hood with all sort of implications. This would eventually come out, but perhaps by then the trade relationship will look different.
- Alternatively, Honor is truly independent and as such offers an important new development in the handset industry.
Either way, the mobile industry has a new player and its development will tell us a lot about where that industry is headed.