CELLPHONES: Huawei’s Big Order, Coolpad’s Continuing Struggle
Bottom line: Huawei’s big deal with JD.com reflects growing momentum that will see it overtake Xiaomi in China’s smartphone market by year end, while Qihoo’s boosting of its stake in its Coolpad joint venture could be a prelude to an eventual buyout.
Two big smartphone stories are in the headlines today, led by a massive new order for Huawei that could help it move up the charts to unseat the stumbling Xiaomi as China’s second largest manufacturer. Another struggling player is in the second headline, with software security specialist Qihoo (NYSE: QIHU) announcing it will boost its stake in its joint venture with Coolpad (HKEx: 2369), another former superstar that is fast fading out of the China smartphone race.
After a period of brief quiet at the start of this year, these latest developments reflect some major shuffling happening in China’s smartphone market, which is at once the world’s largest but also extremely competitive. The latest trends show that global giant Apple (Nasdaq: AAPL) has begun to resurge in the market, and that the stodgier Huawei is also rapidly moving up the food chain. Meantime, former high-flyers like Xiaomi and Coolpad seem to be moving in the other direction.
Let’s begin our smartphone round-up with Huawei, whose recent surge reflects the sudden success it is finding at the middle and higher ends of the market. That’s a far less competitive space than the lower end, which is crowded with dozens of cheap models that look and function similarly and often sell for $100 or less. Huawei’s success in higher-end phones is 2-pronged, based on its Ascend series bearing its own brand and its separately run trendy Honor brand that it relaunched in late 2013.
Honor was at the center of one of the latest headlines, with reports that the brand had secured an order for a massive 10 billion yuan ($1.6 billion) worth of phones from JD.com (Nasdaq: JD), China’s second largest e-commerce company. (Chinese article) The order was the largest ever in smartphones for JD.com, which has also previously signed other big deals with Coolpad and Meizu, another major homegrown player that is partly owned by Alibaba (NYSE: BABA).
The move comes as Huawei has been making steady progress in the China smartphone rankings, winning a spot as the nation’s third most popular manufacturer in the first quarter of this year with 11.4 percent market share. (previous post) That was behind Xiaomi’s 13.7 percent, as the former high-flyer slipped to second place behind Apple, which led the market with 14.7 percent. This latest JD.com deal seems to reflect Huawei’s broader upward momentum, and I wouldn’t be surprised to see it overtake Xiaomi later this year.
Next let’s look at the Coolpad news, which has Qihoo boosting its stake in the 2 companies’ recently formed joint venture. Under the deal, Qihoo will pay $45 million to boost its stake to 49.5 percent, up from a previous 45 percent. (company announcement) The companies formed the joint venture late last year, and I previously said the deal was aimed at helping Coolpad survive as its fortunes rapidly faded. Put simply, the deal gave Coolpad the cash it needed to fund its operations, as Qihoo used the company to enter the smartphone space.
This latest announcement doesn’t look that significant for Qihoo, as it will still only have a minority stake after the deal. Instead, I suspect the new deal is aimed at giving Coolpad yet more cash to fund its operations, which means its situation is still deteriorating. Coolpad’s profit dropped sharply in the second half of last year, and it’s quite possible its operations could now be losing money. Meantime, Qihoo is quite cash-rich and determined to move into smartphones. All that leads me to speculate that this latest equity move could be a prelude to Qihoo’s eventual takeover of the joint venture, or even an outright bid for Coolpad.
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