SMARTPHONES: Huawei Meets 2016 Goals, Xiaomi Looks to 2017

Bottom line: Xiaomi could return to growth mode in China this year on the strength of stronger models, while Huawei’s local market share will contract as it focuses on profitable sales and backs away from money-losing businesses.

Two of China’s former smartphone leaders are in the headlines going into the weekend, casting a spotlight on the difficulties these past high-flyers face after becoming king of the world’s biggest market. In one story the faded Xiaomi is saying the worst is behind it, and the company is aiming for a relatively ambitious 100 billion yuan ($14.5 billion) in sales this year.

In the other, the still-buoyant Huawei is announcing its smartphone sales rose an impressive 29 percent last year. But that figure is still below its earlier target, and also is being revealed just a week after the company said it was abandoning its older model of growth at any cost. Accordingly, I expect we’ll see sharply slower growth this year for Huawei in China, as it looks for profitable gains over simply getting more market share.

Let’s begin with Xiaomi, which is being decidedly forward looking in a speech given by charismatic chief Lei Jun. The 100 billion yuan sales target is the centerpiece of his speech given at a company event, and we should point out this figure refers to company-wide sales rather than just smartphones. (company article)

Lei is quite selective about the information he gives from the previous year, conveniently omitting any comparable figure to compare the 100 billion yuan target with. He does mention that India has been one of the company’s most promising overseas markets, with more than $1 billion in sales for the year. He also mentions 15 billion yuan in sales last year for non-smartphone products that are part of the ecosystem Xiaom is trying to build.

At the same time, Lei acknowledges the difficulties Xiaomi faced last year, partly due to problems in its supply chain that led to product delays and shortages. The company did end the year on a relatively positive note, following the release of a new smartphone that won generally positive reviews for its unusual design.

Stable Waters Ahead

Resolution of supply chain issue and better designs should help the company regain a more stable footing in its home market in the new year. I’m less convinced about its ability to compete in tough overseas markets where competition is fierce. That could be especially true in India, where many of China’s smartphone makers are flocking these days in search of relief from their overheated home market.

Next let’s look at Huawei, which had been in its own period of adjustment. The company began 2016 on a high note, and took the smartphone crown in China for several quarters. But it lost that crown towards the end of the year to fast-rising opponents Oppo and Vivo, who are sticking to the traditional Chinese pattern of focusing on market share.

Huawei said it ultimately sold 139 million smartphones last year, representing 29 percent growth from 2015. (company announcement) That figure is just shy of the 140 million that the company set as its target in updated guidance back in October (previous post). But the overall figure is still well below the 40 percent growth Huawei posted in the first half of the year, and the rate is half of the 60 percent growth it initially hoped to achieve in 2016.

The bigger picture behind the Huawei story came in remarks from its CEO last week, when he said the company would put aside its previous strategy of growth at any cost in favor of targeting profitable businesses. (previous post) I have to credit the company for preparing everyone for these muted smartphone numbers, as Huawei has sent out numerous signals that it was honing its strategy as part of an effort to sell more expensive products with higher profit margins.

All the signals seem to show that Huawei is happy to give up its China smartphone crown to others like Oppo and Vivo, and focus instead of profitable sales of more expensive models even if the number of actual sales is less. I expect the company will ultimately set more modest smartphone growth targets for this year, perhaps at around 30 percent again, as it pares back its China ambitions while focusing more on other global markets.