How Should Huawei’s Smartphone Business Respond to the US Tech Ban? Part 2 (Tech Strategy – Podcast 17)

In this class, we continue the discussion about what Huawei should have done after the US tech ban. In Part 1, we discussed the telco business. Here we talk about the consumer and smartphone business.

You can listen here or at iTunes and Himalaya.

I presented four options for what to do:

  1. Fix the supply chain and stay the course.
  2. Become a digital platform. This means building a smartphone operating system.
  3. Ignore Europe and focus mostly on China.
  4. Try to build an anti-US alliance for smartphone operating systems. Europe would be key.

Concepts for this class:

  • Digital Platforms vs. Products
  • Innovation Platforms
  • Operational Marathon
  • Innovation Marathon (also under Rate of Learning)

Companies for this class:

  • Huawei
  • Apple
  • Xiaomi
  • HTC


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

—–transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the question for the class today is, how should Huawei’s smartphone business respond to the US tech ban? And this is actually gonna be sort of part two. We did a previous episode class on, you know, how their carrier business should respond, which has been traditionally their larger business. but this time we’ll talk about the smartphone one, which has actually been more significantly impacted in the short term. So that’s gonna be the question for today’s class. But first, if you haven’t subscribed, I would appreciate it. Please go over to and you can sign up for the class. And as part of that, we sort of lay out a series of learning goals, a process, and all of these lectures, articles, daily updates, all fit within that. So you get a lot more content and you sort of get the whole class structure. So if you could do that, that would be great. There is a 30 day free trial. Okay. Let’s get into the subject. So the last time we talked about Huawei, it was about the carrier business, which is, um, it’s a bit complicated and it’s a bit sort of on the, the periphery of what I do. So I get a little shallow when we get into the more technical hardware aspects. Uh, today’s class is going to be about. their other big business, which is really consumer devices, mostly smartphones, but you know, it’s got smartphones, smart homes, smart speakers, maybe smart car devices, anything that’s sort of a B2C smart device, as opposed to the carrier business, which is a B2B business to business, a longer term contracting business. So really sort of different businesses, different dynamics. You can kind of see their strategy in doing this is they are they’re going for an end to end solution. That’s the idea. If you look at their various businesses, they have, you know, in your hand, there’s the smartphone, they have tablets, they’re putting smart speakers in people’s homes, they’re doing smart TV, smart devices, wearables, everything that’s a consumer device. And down at that level, they’re also doing things like software. They’re doing. you know, an operating system, which they’ve talked about a bit, but that’s really for IoT. When people said, oh, you know, Huawei needs to have its own operating system, and they have this operating system they’ve been working on, that was never really for smartphones. That was for IoT devices, because it turns out you need a very different operating system to run on little sensors in your house and door than you do to run a smartphone. So they were always focused that level. Then you get to the connectivity aspect, which is what they’re known for, 5G, 4G, 6G’s coming, that’s the connectivity. And then all the way up in the cloud, they’re doing cloud, they’re doing AI, they’re doing enterprise software, they’re doing storage, all of that. So they really wanna do the whole solution. Device to connectivity, to cloud, to AI, and the net result of that is their phrase, ubiquitous connectivity, pervasive intelligence, that we’re building a network that connects everything. And it’s getting increasingly smart. So we connect everything, all the devices, 5G, everything together, connects to the cloud. That’s where the intelligence, most of it comes from. Okay, it’s a pretty cool vision. If you actually look at their business today, let’s say 2017 to 2018, before the sort of bombshell dropped, I mean, it’s pretty amazing. Like, it’s pretty stunning actually. If you look at their sort of, they have, let’s say, four main businesses. Carrier, enterprise, consumer, and then other. Carrier business is what we talked about. Their carrier business looks kind of like Nokia and it looks kind of like Ericsson. It’s just a little bigger. Let’s say 2017 they’ve got about 297 billion rem and be in revenue. That jumps up to about the same. 294. in 2018 so pretty much the carrier business was large. You’re talking about 300 billion in revenue so 30 to 40 billion dollars but flat in terms of growth and that’s actually pretty good when you compare it into Nokia and Ericsson which were smaller by about half and shrinking. So their flat business at Huawei was better than their competitors in the carrier business. and that’s about 41% of their business. Okay, you jump to enterprise business, we’re not gonna talk about this, this is selling things to businesses, that’s about 10% of their business, we’re not gonna talk about that. Although it’s been growing about 20%, so good growth but smaller. No, the action was really coming out of their consumer business, where you go back to say 2017, revenue was about 240%, or I’m sorry, 240 billion. Remin B so smaller than your carrier business in 2017, but they get 45% growth 2017 to 2018. Suddenly they’re at 350 billion Remin B in 2018. So massive growth in their consumer business, smartphone sales, all of this. And actually before they got pounded in early mid 2019, They were putting up similar growth of 40% growth again. So absolutely stunning consumer business story, 2017 to 2018 to 2019. Then the bomb drops. There’s all this talk about, oh, Huawei got pummeled. And they did, their growth went down, but their growth was still up 20%, even after the bomb, not the bomb, it’s a bad expression, even after the US tech ban pummeled them. their growth was still 20% and almost everyone else in the consumer smartphone business was shrinking. So, you know, even with all of this going on, they were doing dramatically better than their competitors in smartphones and carrier. So it’s like, yeah, they got problems, but you know, we would trade our problems for their problems, probably. So that was kind of the story, 2017, 2018 to 2019, amazing consumer story. especially smartphones, but really all the devices. So that was kind of the situation before all of this happened. If you look at their finances, you know, the numbers, their gross margins, their operating profits, you know, 10%. They’re making 10%. Okay, that’s not bad. You know, that’s pretty good actually. I mean, that’s solid. With that 10% operating margins, they were pulling out about $10 billion in free cash flow. So those are pretty good numbers when you compare them to their competitors. If you look at Nokia and Ericsson, you know, Huawei was spending about 15% of its revenue, and keep in mind its revenue was about $100 billion overall for all their businesses. That went up to $120 billion in the last year, but about $100 billion. They’re spending 15% of that billion dollars per year in R&D. Ericsson and Nokia are spending nothing like that on R&D. And similarly, they’re spending about 15 to 20% on marketing. Now it turns out, to win in carrier, it has a lot to do with how much you spend on R&D versus your competitors. To win in smartphones, it tends to have a lot to do with how much you’re spending on marketing relative to your country. You go to any city around the world, I mean they’re big markets for the consumer business. China, that’s about half, and Europe. I mean that’s their other big source of revenue. Now outside of that, you go to Mexico, you go to Brazil, you go to Thailand, you’re gonna see Huawei ads everywhere. The Chinese smartphone companies are absolutely killing it, but most of their revenue’s coming from Europe and China. Now obviously they’re not in the US anyway, so that wasn’t a big deal. And they’ve got great market share other places, but you know, you look at… let’s say China revenue overall for Huawei all their four businesses 50% of that’s coming from China 28 to 30% is coming from Europe Middle East really just Europe Asia Pacific let’s say 10% 11% Latin America’s North America 7% so you know big business doing very very well and then they get hit with this big issue. We talked about Carrier, that was obviously a big deal. But really, when I went to see their first press release after, this happened in May of 2019, they released their first financials in July, I went out to Shenzhen, I was at the press conference talking to people, and this was actually their mid-year results, and the funny thing is the press jumped on them, saying, They’re only giving their first half year results, not the quarter that just hit. You know, whatever. I mean, it was kind of silly. This was a, this is a private company. They don’t have to release any numbers at all. So, you know, if I was them, I’d be like, yeah, well, you want to know our numbers, talk to our shareholders, or we’ll talk to the, they were not under any obligation to release numbers, let alone half year numbers, let alone to have a press conference, which they’d never done at half year before. and they put their numbers on the table and I thought that was pretty good behavior in terms of a company. Okay, so what happens? That’s the story, the situation happens and what the CEO, the chairman at that time was Liang Hua. You know, their chairmen and CEO, they rotate them a lot so they keep changing. But what he basically talked about at the press release in July 2019 at the meeting He talked about the consumer business. He didn’t really talk about the carrier telco business that much. And basically my takeaway was the carrier business is in pretty good shape. When you get hit with a tech ban like this, I mean it hits you in two places. I mean it hits you in a lot of places. But the two that everyone talked about were supply chain. Okay, where are you getting your, you know. all the hundreds of components you need to buy every month to do these things. And the supply chain for telco is global. There are no national telecommunications companies. If you’re going to be big in telco, Nokia, Ericsson, Huawei, you have to be global. You have to win outside of your own country. And you need to access a global supply chain that comes out of Asia, comes out of China, comes out of the US. Lot of components you’re buying all the time. Some of them are critical like semiconductors. Some of them are batteries, memory chips, not that big a deal. You can get those kind of a lot of places. Okay, so you get hit in the supply chain and then you get hit on the market side. In the carrier business, the idea was are they gonna retain the trust of the big carriers? Are carriers gonna stop buying Huawei products? Maybe not even because there’s a big problem, but because they feel like there might be a problem. Trust is a big deal when you’re buying this equipment and installing it and training your people and counting on it. And that was kind of the question on the carrier side, I thought was, is their supply chain okay? And are they gonna maintain the trust of carriers? And the answer to those both at this point seems to be yes. The 5G contracts are still coming in pretty quick. You never really know what’s going on unless you’re on the management team, but so far everything looks reasonable. Okay, we get to the consumer side, same questions. Are they gonna get hit on the supply chain? Okay, this actually was a bigger deal because immediately when everyone started to, actually what the CEO was talking about was they punched holes in our supply chain in a lot of the mechanical parts. There’s a ton of parts that go into these smartphones. They’re always advancing the cameras, the memory chips, the boards, all of that, very, very complicated. The two that everyone was talking about was the operating system, obviously, because Android is what everyone builds their smartphones on except for Apple, and that comes out of the US. And part of the Android operating system is sort of freeware that anywhere can use, and part of it is not. Part of it is more proprietary, and you have to get contracts from Android. And that was… big concern. Is that going to be open to them? And it looks like the answer is probably no. And then within the operating system you have a lot of popular apps. The Google App Store, the Play Store. Can you have that on your phone or not? Facebook, YouTube, all of those popular apps, can you have those? And you know the quick answer to that is in China it’s not that big a deal. because nobody uses the Google Play Store in China. In the US, there’s a couple app stores you use. You use the iOS and you use the Play Store. If you go to China, there’s like nine or 10. There’s lots of them. Nobody dominates that much. Every smartphone you buy, they have their own app store. You can get all the apps. So it wasn’t a big deal for the app store. And these apps people were talking about, Facebook, Google, all of it. Well. they’re not allowed in China anyway, so they weren’t really there. So it was pretty clear or looked pretty obvious that on the China side, this wasn’t going to be a big deal in terms of what you offer the consumers. The big issue was clearly going to be on the supply side was going to be some of the semiconductors, depending how rapidly they advance, and there’s a lot more associated with those, and then it was going to be Android. not a big deal in China today. The one everyone talked about was, okay, is this a problem in Europe? And yeah, it looks like it’s a problem in Europe and a lot of the international market, because if you’re gonna buy a nice Huawei phone in London, and it doesn’t work with Google App Store, and it doesn’t have Facebook, and it doesn’t have YouTube, and it doesn’t have any of those, that’s a big problem for consumers. So, I mean, that’s kind of what everyone focused down on really quickly on the consumer side is they have to fix all these holes that have been punched in their supply chain, but the critical areas seem to be semiconductors, the Android operating system, and how that affects the European market. And that was kind of what everyone was looking at. And then back in July, it wasn’t clear what was gonna happen with that. They were applying to get a license from Android. A lot of their up and coming smartphones had already had the licenses approved from Android so they could still use them. It was sort of the new devices and the next devices and how much those were going to take a hit and how much as phones continue to progress are they not going to have access to the latest edge sort of technology and chips. Are they going to become sort of frozen in time on the semiconductor side? and sort of offering a non-competitive offering to European, Latin American consumers. So that was kind of the situation in July and August when this all hit. And that’s gonna be sort of my question for you for this class is what should they have done? What should they do today? Because this is still sort of playing out. All right, let’s talk a little bit more about their consumer biz. The sort of learning goals for today’s episode class are. To get smarter about Huawei, which is on my list, I believe that’s learning goal number 10. I gave you 10 learning goals for this sort of segment of the class, which is the first several months. And number 10 on that list was getting the basics of Huawei, which is we talked about their carriers, okay, this is a smartphone side. And then learning goal number nine, which I’ve called the basics of smartphones, ecosystems and bundling. Smartphones are important to understand. And we talked a bit about the economics of bundling and how when you start to bring software into a business like telephones, they become different because the economics of digital are different than the economics of selling consumer electronics. And one of the ways that plays out for smartphones is bundling the consumer surplus and compliments which we talked about in a previous lecture. Okay, so this is gonna tie into that sort of getting the basics of smartphones, ecosystems, and bundling. That’s learning goal nine, learning goal ten, get smarter about Huawei. Okay, let’s talk a little bit more about their consumer business. Now the numbers are pretty amazing. Lots and lots of growth. And I thought they had a really good explanation for where their business is not called smartphones, it’s called the consumer business. which is basically everything that you might sell to consumers in this world. And the way they’ve laid it out, which I think is very convincing, is they call it one plus eight plus N. So number one plus the number eight plus an N, like a capital N. And basically, that’s the argument for how this is gonna evolve, that okay, the one is gonna be your smartphone. It looks like the smartphone is the center of the consumer digital world. We’re gonna keep them in our pockets. They’re gonna get better and better. We do more and more with them. They’re getting faster. The connectivity makes them do things. You know, I saw a VR lab at Huawei when I was there a couple months ago, which was basically virtual reality you can run off your smartphone, where 5G is getting so fast. I mean, you can’t really do virtual reality because it takes a lot of processing power, takes a lot of memory. You can do it in your house if you have like a an Xbox or something where you’ve downloaded a huge file and you’re running the game and you put on your goggles and they run off your PS4 or whatever. You can’t really do that on a smartphone because the computing horsepower and memory is too much for a smartphone. Okay, but if you have 5G you can pull that computing power and information very very quickly from the cloud. So they’re doing so to what they call VR cloud. where you start to do virtual reality in the cloud, it pulls down to your smartphone very very quickly because of 5G and you can start to do it on your phone. And they basically showed me what looks like a big pair of sunglasses and you put them on and you plug them into your smartphone and you can sit on the subway and do virtual gaming because it’s fast enough now. So anyways, the smartphone, that’s the one. devices or portals. That’s the eight. So this is your AI speaker at your house that you can talk to or when you’re walking in the supermarket. Or that you’re putting next to your child so that it can read them bedtime stories. Which is like a big usage of smartphones. I’m sorry smart speakers. Like people don’t know what smart speakers are gonna do yet. Like the use cases are not awesome. Everyone thought this was gonna be like an Amazon thing where you order on them. and your smart speakers hears you and buys you detergent. Doesn’t look like people are doing that. One use case people are using is music and they’re also using it to teach their kids or when your child asks you to read the same story for the 15th time, you just have the Tmall Genie read the story. So smart speakers, smart tablets, smart TVs. Smart doorbells, you know, the little camera in your door, smart homes where everything is connected, the thermostat, the lighting, the music, the security system. Smart devices in your house that can feed your pet. So they have like smart pet devices, where if your dog, I guess, barks or goes to the bowl, it releases the food and you can approve it. If someone comes to your door, wants to leave a package, you can see them on your phone at work because you have the camera on your door. A lot of these sort of supporting portals and maybe smart cars. This is kind of the eight, but the eight really tied to the one. So I like that idea, one plus eight. We’re gonna have one primary device and then we’re gonna have eight supporting devices. And then we get to the end, which is the ubiquitous IoT devices that we’re gonna put sensors and little control devices in everything. There’s gonna be the sensors in my clothes and the sensors in my shoes and the sensors in the walls and the sensors in the street and the street light and the office and the elevator. And when I check in from work, sensors and everything, and that’s all gonna be connected in real time to everything else, as well as to my smartphone. So when I walk into my home, there’s devices in the walls and the beds, heating in the blankets, I don’t know. that changes color in real time, the refrigerator knows what I want. That’s the ubiquitous connectivity we put, that’s why it’s N, like the letter N like in mathematics. It’s devices in everything, but those devices are probably gonna run on IoT. They’re gonna have IoT operating system, they’re gonna have different types of chips, but they’re all gonna be connected to the eight and to the one. So one plus eight plus N. That looks like the consumer ecosystem going forward. I think it’s a pretty good approach to this. And that’s pretty much what Huawei is building. If you go to their labs and they show you all the devices, it’s everything. I mean, it’s smart toothbrush, smart refrigerator, smart sneakers, smart sunglasses. I mean, it’s just literally smart underwear. It’s a thing. It’s not Huawei, but you can buy it in the US, smart underwear. You can sell it to hospitals and stuff. Anyway, so they call it the smart home and they have the high link smart home protocols. They’re trying to connect all this. They have a lot of laboratories. Looks like smart vehicles are a big aspect of this. Health and fitness. Okay. Within this, everything I told you so far has been sort of a consumer electronics story. And this is the key takeaway, well, this is one of the sort of key learning goals, ideas, concepts for today, is the reason the smartphone was so powerful as a device when Steve Jobs introduced the iPhone is because it took a regular product, which is a telephone. Okay, it had some functions on it, it had some software on it. It was a hardware device plus some software, but it wasn’t awesome. And it turned it into a platform. This was one of the superpowers we’ve talked about. Yes, when you add software to something, the economics start to change. Bundling, compliments, consumer surplus. And if you’re selling coffee, like luck in coffee, not a huge deal. If you’re selling bicycle rides, Mobike, It’s actually pretty powerful because when you add software to a bicycle and you make it a little bit smart, it can do things like hop on, hop off, pay for a dollar ride. A very clever business model. Okay. But the other thing that can sometimes happen when you start to add software to a traditional device, a piece of hardware, a product, is you can sometimes get a platform business model, a digital platform, right? This is one of the big learning goals, which is you know, super platforms, digital platforms, the super predators of the business age of our time are digital platforms. When Steve Jobs added software to a telephone, he turned it into a platform business model. And the two sides of the platform are the consumers, you and me, we buy the phone, and application developers. Now there’s more to it than that, but those were the two first, those were the two sides of the platform. and this was what we’d call an innovation platform. We talked about marketplace platforms, that’s Alibaba. Two sides to the platform, two user groups. On one side you have consumers, on the other side you have merchants and brands selling things. We also can talk about audience builder platforms. On one side you have consumers, on the other side you have content creators. That’s YouTube. Well, the smartphone is an innovation platform. So that’s a third type of platform business model. On one side you have consumers and on another side you have application developers of which there are millions who write software and create products and services and put them on the platform that we can then access them. So the platform is serving as a innovation hub where people can start to build things. Now some people will say content creators on YouTube or TikTok are also they would call that an innovation platform because it’s enabling people to create content, to be innovators, to create. I don’t actually think it’s the same thing, so I don’t use it the same way. I consider, like, if you’re writing software and creating services, that’s innovation. So all these app developers start making apps, we put them in the iOS store, we put them in the Play Store, and suddenly you have hundreds of thousands and millions of services that your phone can do, and poor old BlackBerry didn’t have this. and they were saying our phone is really cool, it has a keyboard, that’s our feature. And Steve Jobs was saying, our phone has millions of services you can use. It was, he built a platform, it was competing against Blackberry and Nokia, which were products, and a platform almost always beats a product, crushed them, and they learned a hard lesson there. Okay, so that’s kind of one of the big ideas for today is platforms versus products. This was an innovation. platform and it was pretty amazing and when you look at smartphones way to think about them is it’s really two things it’s a product which is the handset you know it’s a nice handset oh it’s got a new camera oh it’s got a keyboard as opposed to a touchscreen I actually liked the keyboard you know oh it’s got a little it’s a little thinner and oh it’s cool that’s a product business you’re competing on features and then there is the platform. And those are two different things. They’re two different types of businesses. And some people are competing in both and some people are competing in one and not the other. Apple is competing in both. What you’re buying from Apple, the iPhone, it’s the handset plus the ecosystem, the platform. It’s all the software, it’s all the applications, it’s all of that plus the handset. Now what Apple does because they’re so smart, is they basically give you the applications and the software for free. All that value they’re creating, that massive value of services, products, I mean how much free stuff do you get on an iPhone? They’re giving that all to you for free. That’s the consumer surplus. And then they’re charging you for a, basically an overpriced handset. They’re charging you for the device. Now a company like Xiaomi or HTC or OPPO or Vivo, they don’t really have the ecosystem. I mean, they’re mostly selling you a handset, and then you buy the handset, oh, I have a new Xiaomi phone, a new OPPO phone, a new Huawei phone, and for the most part, I’m not using their software. I’m using WeChat, and I’m using, maybe I’m using the OPPO store, or the Huawei store on my phone. They have limited control of the ecosystem. They’re mostly handset makers. Apple is mostly an ecosystem provider, and then their phones are okay, but the iPhones are not terribly good. The newest Huawei phones, as phones are much better than the iPhones. They’re much better phones. Camera’s better, works better, it’s cooler, that’s kind of thing. So really what we’re seeing with these smartphones is we’re seeing you’re in the product business or you’re in the platform business. And if you’re in the platform business, There’s a lot of cool economics. You get the innovation platform, you get switching costs, you get all the cool economics of digital there. If you’re in the product business, you’re pretty much in what we call the operational marathon. You’re competing on basically two things. You’re competing on how good you are at marketing and how good you are at retail. That’s pretty much it. An Oppo phone is not very different than a Vivo phone. and a Xiaomi phone is not very different and an HTC phone is not very different. They’re all basically in the product business and their big guns are pretty much marketing and how much power they have with all their retail stores and their retail push, their point of sales activity, that’s it. But the phones aren’t actually very different. They’re all pretty much using these same components. And you know, company like Xiaomi was very good at marketing. A company like OPPO was incredibly good at retail sales and point of service. Okay, so I think depending on what you’re competing in there and all the product companies want to become platform companies. That’s what they’re all trying to do. Xiaomi has been trying to become a software and platform business forever and they’re still selling their handsets at like a 5% gross margin because they say this is going to get them users and when they get a lot of users by selling their hardware cheap, Those users are gonna use their software and that’s gonna get them to platform. Hasn’t really happened, but that’s been their story. A company like HTC, which you may not be familiar with, a smartphone maker out of Taiwan, they’ve really kind of collapsed in the last year, their revenue’s down something like 70%. They’re in deep, deep trouble because they basically make smartphones and they’re a very small player and not doing very well. And… They did do sort of a daring move where they started to become a VR company, where they wanted to be a virtual reality company, and they started making handsets that were, in theory, good at virtual reality, and they started to build an ecosystem around VR, where they have a VR store where you can use lots of apps and content that are suited for virtual reality. They started to fund. Startups doing technology and virtuality they basically tried to get to virtual reality first and build a platform. Which was a really pretty good strategy i mean they were trying to jump ahead at the newest thing and become a platform business. Unfortunately for them virtual reality didn’t really take off as a consumer product minutes in gaming but outside of that there’s not much there so what’s a pretty. Bold strategy and if it worked it would have been a game changer for them. didn’t really work and now they’re basically a smartphone maker that’s in deep trouble so sort of Xiaomi, HTC, OPPO within this game of and then on the other side we have let’s say the iPhone which in the united states is actually very very powerful because they dominate the ecosystem and they dominate the platform and they they’re good at hardware so someone like my mom uses an iPhone and she’ll never switch because all of her friends are there, her stuff is in the cloud. She’s bought a bunch of movies and songs on iTunes and she would lose those. There’s a lot of switching costs, platform is great. Apple’s big problem in China is nobody uses their software. In China, Apple is basically a product company. They’re a handset maker like OPPO, like Vivo, and like Huawei. They don’t really control the software and platform. In the United States they do. In Europe they’re in much better shape. So when we look at China that’s kind of what we see. So if we look at Huawei, the consumer business, okay they have all the devices I just talked about, which are, this looks like a product company. So not unlike OPPO and Vivo or like Apple in China. That’s mostly what they’re doing. However, we have connected, let’s say, health and fitness wearables, smart home. you know, AI assistants, smart assistants, smartphones, all of that, okay, product stuff. But they’ve also been sort of building an ecosystem for developers. So they have, when I last checked, they had about 560,000 registered developers, and they have about 500 million Huawei device users, people who are using various products of them. Okay, do they have the components to do a platform? Are they a platform? I mean, if you’ve got 500,000 developers, who knows what that means in practice, and 500 million users, maybe they should be their own platform. Maybe they should be their own operating system. Why use Android? And if you look at what they actually have, they have a group called Huawei Mobile Services. You know, they have what you’d expect. They have Huawei Mobile Cloud, lots of stuff there, Huawei Mobile Assistant, the App Gallery. the pay, they have life services, they have a browser, they have a reader, they have music, they have video. So they have a lot of the pieces, but if you look at Xiaomi and all those, you’ll see the same thing. You’ll see they’ll all have basic software doing these things. So I would describe them as having sort of a limited presence in as a platform business. It’s mostly Android in most of the world. and then all the stuff that sits on Android, all the Google services in China, it’s mostly Android, and then things like WeChat. You know, they’re not really a dominant software platform company. Now they could be, and I think that’s what they’re trying for in things like smart homes. You know, try to get there first, maybe not virtual reality, but maybe smart homes, maybe to have the smart home link that connects everything there, or maybe to control the operating system for IoT devices, which they were clearly focusing on. But… You know, I would say overwhelmingly Huawei looks like a product company in terms of consumer stuff. Okay. So how do you win as a product company if you take them apart as a product company? Product companies are pretty straightforward. I mean, you can kind of look at their head count and see what their people are doing. And if you do that for smartphone companies, what you realize is they’re basically, most of their people are doing some design and a lot of marketing and sales and retail. There’s not a huge amount of design. The phones are pretty similar. They’re generally not doing the manufacturing in-house. They contract that out. They’re buying the semiconductors from this group and the camera lenses from that group. And that’s pretty much what you see. And a company like Xiaomi was very clever when they launched where they said, we’re not going to have retail stores. We’re going to do everything with online marketing and we’re going to brand ourselves very cool. And they were very cool for a while. And the lack of retail stores really gave them some pretty good margins. But then companies like OPPO and Vivo came right up on their flanks. and did a lot of pressure on the retail side and pretty much crushed them in about a year by being very affected at the point of sale where they would have people in stores telling people why you should buy the opal phone. And then as a response, Xiaomi opened their own stores and started doing more of a retail game. So when we look at sort of the product business, the smartphones, smart homes maybe are interesting, but it’s pretty early days. You know, smartphone, okay, you walk yourself through the consumer process. Why do people, how do people buy smartphones? Well, they buy one every one to two years. Are they loyal to a brand? No, not really. And they might, but no, people tend to shop around. Anything unique about a smartphone? Nah, they’re pretty much the same. What’s the route to market that matters? Overwhelmingly, it’s retail and online sales. You have to have a presence in the stores. You have to market like crazy. It turns out the product side of smartphones is a pretty tough business to be in. I don’t really like the telco business, which I talked about before for Huawei. I like the smartphone product business even less. I think it’s a very difficult business. All the interesting sort of… competitive strengths are on the ecosystem side and not on the product side. So it’s a tough game and one of the things that tends to matter when you look at these smartphone businesses is how cool are you this year? It’s kind of like making hit movies. You have to be cool every 6 to 12 months. You have to come up with a new phone that really thrills people. and they say, oh my God, the new Huawei phone is great, which by the way, this year’s Huawei phone is amazing. Like it’s so much better than iPhones and anything else. Okay, you have to thrill them and make people think, oh my God, that camera’s amazing and it looks cool and the foldable screen is great. It’s kind of like having to release a hit movie every year. You know, you might’ve been cool last year, but if you weren’t cool this year, your sales drop like a rock. It’s a pretty hard game to be in. and the revenue tends to be volatile and the market share tends to shift fairly significantly within that. And one of the things you then look at is, is it better to be a standalone business versus a linked business? And there’s sort of two ideas, really three ideas I wanna leave you with today in terms of concepts. Well, let’s say four ideas. Big idea number one for today is this idea of innovation platforms, which is really what smartphones are. And that’s a huge, powerful thing if you have them. If you’re on the product side of smartphones, not on the platform side, you don’t really have that. On the product side, there’s kind of three ideas that I want you to focus on. Idea number one is this idea of being sort of in an innovation or operational marathon, where it’s like running a restaurant. If you’re running a restaurant every year, every month, you have to do things well. You have to make your marketing better. You have to come up with new products. You have to have good locations. You have to train your staff. You’re playing an operational game that never ever ends. Well, if you’re releasing smartphones every six to 12 months, it’s the same thing. You’re in a game that never ends. And there’s an operational component, which is a lot of retail sales and effective marketing. So it is an operational marathon. So that’s big idea number two, operational marathon. Big idea number three is you’re also in somewhat of an innovation marathon, where you have to keep coming up with new products that are cool. And Xiaomi is actually quite good at this. If you look at their annual report, what they will talk about is that they see their core activity is to continually thrill their customers. That’s actually their phrase, to continually thrill their customers. They have to come up with new sexy stuff every 6 to 12 months. We have smart scooters, we have smart backpacks, we have smart chopsticks that sense your food and what’s in it. You’re sort of in this innovation marathon. We have to continually release new products because the stuff you sold two years ago, one, people don’t want it at all. I mean, your old products become obsolete pretty quick. And that’s kind of what movie studios have to do. They have to keep coming up with new hit movies every year. So you’re in this operational marathon. and an innovation marathon. We talked about that a little bit as a rate of learning. And the fourth idea is linked businesses. That if you’re in a volatile business where it’s kind of hit and miss and you have to continually release hit movies, it’s very hard to spend big. Let’s say you’re the, you know who I always feel sorry for in life? I feel sorry for the CFO of movie studios. Because They are always trying to plan their spending against completely volatile revenue streams. Like if you have a hit movie, all the money comes in. If your movie bombs, no money comes in. How do you plan spending for next year against that? That’s kind of the same for these companies like Xiaomi. If you’re a standalone smartphone company like Xiaomi, Smart Devices, how do you spend big on R&D if you don’t know how much money you’re going to make next year? That’s a very different trade-off between volatile revenue and big spending. So if you have a linked business model versus a standalone business model, you can actually spend more aggressively because you have stable revenue coming in. And that’s what Huawei has. Because they have a carrier business, a telco business, which is not growing. In fact, it sort of went down 1%. But it is stable. Because they have these stable other business. they can flood money into something like smartphones in a way that a standalone business cannot. Xiaomi can’t do that, HTC can’t do that. Oppo and Vivo much harder. So that’s a real advantage to have a stable linked business to a volatile business like smartphones on the product side. The other thing they have that really helps them out is they have a huge R&D spend on their telco business. That fifteen billion a lot of that can be spent on R&D. So they can massively spend on marketing, on retail sales activities, operational activities, and on R&D in a way that a standalone smartphone product company really cannot. And I think that’s pretty much how they’ve ground their competitors down year after year. Okay, that was a lot of me talking today. It’s been a good 40 minutes of me talking about stuff. So. Before I give you the question for today, let me recap the big ideas, because I’ve given you a lot. Big idea number one, think about platform versus products. Platform business model versus product. And smartphones and smart devices, especially smartphones, are actually both. But that doesn’t mean a business gets both. Some businesses are mostly product companies, like Huawei smartphones, and definitely HTC, and definitely Xiaomi. And some get them both because they’ve set it up beautifully like iPhones in the United States, but not in China where they’re mostly products. So you got to know which you’re competing against. If you’re on the platform side, then you’re talking an innovation platform, which has beautiful economics, huge competitive strengths and a lot of interesting stuff going on. If you’re on the product side. So big idea number two, innovation platforms. Big idea number three, if you’re on the product side mostly, you’re probably doing an operational marathon because the sales activity, especially your retail operations are very, very important. That’s big idea number three. Big idea number four, you’re also in sort of an innovation marathon. I sort of put this together with rate of learning, which we talked about a little bit. So that’s kind of the other idea. And the final idea is this idea of, linked versus standalone business model. So when I looked at you know, Huawei, well let me ask you the question first then I’ll tell you how I thought about it. Okay so that brings us back to Huawei. They just took a big hit in terms of their consumer business but I already sort of told you in the last class or two class, three classes ago that their carrier business was stable. It took a hit but the contracts are still coming in. and the supply chain has been repaired. So they’re linked business, the carrier is stable, as far as I can tell. All right, what should they do being hit with the tech ban? What should they do in China? And what should they do in the US? I’m sorry, not the US. What should they do in Europe? They’re not in the US basically. What do you do in those two situations? And you can think about a couple options is they could take the hit in Europe. You know, the fact that they can’t offer a Google Play Store in Europe is a big deal. The problem in not having YouTube and Facebook and all of that is going to hurt them with European consumers. But they’re not going to take that hit on the consumer side in China where people use other software. They’re also going to take the hit on the operating system and the semiconductors. Is that a big deal? Does it hit them in China? I mean, what would you do if you were the head of their consumer business? I met with the head of their consumer business and we kind of talked about this, but I can’t sort of do that on the record. I mean, what would you do? It’s July 2019, you just took the hit. Is it just a matter, I’ll give you some options. Is it just a matter of building out an alternative supply chain? That would be sort of, let’s stay the course. Keep doing what we’re doing. We are mostly a product company, but our supply chain took a hit. So we need to rearrange our supply chain and find other sources for an operating system, maybe semiconductors, maybe our, you know, we’ll just patch the holes as best we can. We’ll call that, you know, option number one. Option number two, we can’t patch the holes in semiconductors and operating system, Android. So we’re gonna have to build our own and we’ll do that either in-house or maybe we’ll do it with partners. Option number three, we will sort of recognize that we’re gonna get killed in Europe and we will just focus on the China market where it’s not that big of a problem for us because people don’t use Android here and they don’t use YouTube and they don’t use any of that. So option number three, take the hit, focus on China. And option number four, pull out the big, pull out our big cash flow, raise a ton of money, which they can, and just start buying things. Let’s buy companies, let’s buy in the supply chain, let’s buy on the consumer side, let’s start buying European companies. And go to European companies and say, hey, how do you like the fact that the world’s two operating systems are both American? And the major applications that sit on those operating systems, Google. Facebook, Amazon, they’re all American too. There aren’t any really major European players on smartphones. Why don’t we work on that together and start buying and supporting European companies so they start having their own digital giants? So those are four options. And write them down and then I want you to pause the tape and sort of write down what you would do. But option number one. was just try and fix the supply chain, stay the course, patch the holes as best we can. Option number two, let’s build our own operating system and let’s build our own chips. Do it in-house or with partners, but let’s just, let’s become a platform company. That’s that. Option number three, write off Europe to a large degree and focus on China. Option number four, Let’s partner with Europe in some form and build some sort of a line like an anti US Alliance in smartphones. So those are your four options and I’ll put them in the notes for this, but let’s have you pause this write it down. This is where you’re going to learn more if you do it than if you just listen to me. So take a minute take two minutes write down why you would do it which one you would do and why okay pause and then please come back. Okay, did you do it? It’s, you know what, it’s actually kinda hard to nag people on a podcast. Like it’s real easy to do in class. You can just kinda walk up to people and stand next to them and they all work on stuff. But it’s, yeah, I’m not sure how I’m gonna be able to do this on a podcast. I’ll work on it. Anyways, okay. So let me give you my take. This has been kind of a lot of me talking this time. This is sort of a lot of theory today. So let me give you my tape and we’ll finish up here. Okay. Now when I looked at Huawei in July, August, my basic take was, okay, telecommunications, the carrier business, it’s not a very good business. I don’t particularly like it, but it is a relatively stable business. And there’s a lot of value in not great stable businesses, because what you can do is you with other businesses that are more volatile. Like Disney’s famous for this. Like making movies is actually quite difficult. You make a hit, you make a miss, but they have their product, their merchandise, and their theme parks that throw off so much money that they can keep flooding money into movies. And if half of them flop, it’s okay. Independent Studios, very hard business to be in. Well, so I liked that they were using their telco business. they were using the cash and they were using their massive R&D abilities to fund their consumer business and to support it, which is a naturally difficult business. I don’t like smartphones. I don’t like consumer devices as product businesses. I think they’re quite bad businesses. But if you have the ecosystem, that’s different. But if you’re just on the product side, so I saw this as sort of an okay but stable business great business. But they were doing great and they were rocking and rolling in consumers. Those numbers I gave you at the start, their consumer business has been absolutely crushing it relative to the fact, relative to these stand-alone smartphone businesses. That was really a lot of why they’re crushing it, is these other businesses are stand-alone. It’s very difficult. Okay, so that’s kind of how I saw it. Now my answer was… Yeah, they have to fix the supply chain. And obviously, and the nice part about this, well, it’s both good and it’s bad. The good part about this, it has convinced not just Huawei, but pretty much every tech company in China that you can’t be dependent on US tech anymore. Because if they can do it to ZTA, they can do it to Huawei. And if they can do it to Huawei, they can do it to Alibaba. If you’re a reasonable manager being responsible, you have to prepare for that circumstance, which means you need to create alternative supply chains and sources. It’s okay to buy semiconductors from the US. You just can’t be dependent on it. It just needs to be one of two sources, or one of three, not one of one. So you’re seeing all the China companies grappling with this problem. So Huawei has that problem. The good news is it’s everyone’s problem. So all the companies of China are trying to source their own semiconductors from other places, build them in-house, whatever. So yes, that’s a problem, but it’s solvable. The other part on the operating system, I think it’s actually good for Huawei, because there’s no reason. The biggest smartphone market in the world is China. The biggest producers of smartphones in the world are Chinese companies. You go to Mexico, Latin America, Brazil, it’s… mostly Chinese smartphones plus Samsung plus Apple. So why are the only two operating systems or smartphones in the world American? Why isn’t there a Chinese or if not a Chinese, an Asian operating system? Or why isn’t there a China, Asia, Europe operating system? Why is it only American? So I think that probably was enough of a kick in the pants to get pretty much every tech company in China building its own operating system. And I think that’ll happen. I don’t think it has to be a Chinese operating system. I think it can be open source. I think it can be China, Asia. I think it can be Asia, Europe. I mean, they don’t need to control it. They just don’t want to be dependent. So I think it’s going to be very bad news for Android long term. There’s no reason Google dominates smartphones everywhere. There’s no reason that should be the case. So number one, I think they’re going to do that. Number two, I think they’re gonna do number two as well, which is look, if you’re a smartphone product company, okay, and you’re gonna build your own operating system, well, you might as well go for becoming a platform business. Why not? Why not become a really great business? And I think they’re absolutely doing that. I mean, they’ve announced these huge funds, like I think it was a billion and a half dollars that Huawei is gonna use to support developers who wanna write apps for their system. I mean, they’re gonna take their checkbook and they’re gonna start flooding money to developers. And they’re gonna probably, I would assume they’re gonna partner up with other smartphone companies like Xiaomi or OPPO or Vivo or any of these and say, look, we should all do this together. There should be another operating system where all the developers of the world, there should be a whole ecosystem around this. You know, it shouldn’t be American companies because by the way, if they can cut us out, they can cut you out. So I think they’re gonna try and become an innovation platform. That’s an awesome move, gonna be cool. Number three option, are they gonna write off Europe? No, they’re not gonna write off Europe. They’re gonna go at it all the way. They did obviously focus a lot more on China in the last seven months. When they released their numbers in December, the shocking number was they have increased their market share of smartphones sold in China. 43% I believe they went from about 25 up to about 43% of the entire market in something like eight months I mean they absolutely doubled down on China. They crushed their competitors and that big expansion all came from their competitors So they’re absolutely pushing China as hard as they can because you know, they can grow there and Then option number four. Are they gonna spend money and partner with Europe? I don’t know. I don’t know I think they’re doing number one and number two and part of three. I think they’re going to basically, my biggest question when I was looking at Huawei was is the telco business going to be stable or not? That was my number one question because if the telco business took the hit but didn’t go down and is still stable, then they’re in good shape because that’s linked and their consumer business will be supported by that. But if they took, if the telco business went down. that would be a huge concern because I don’t think their consumer business can be nearly as competitive without that. So that was my number one question is how stable is telco and it looks pretty stable. Anyways, that’s kind of my answer for this. I think they’re going to try and become an entire I think they’re going to try and become a smartphone and consumer device platform business, which is an amazing business by the way, that would be like a tremendous business and we’ll see if they get there. Okay. That was a lot of talking for today. Okay, I think that’s pretty good for Huawei. This’ll go under learning goals number nine and number 10. Learning goal number 10 is get smarter about Huawei, which I think is important. And learning goal number nine is start to think, you know, get the basics of smartphones, start to think about ecosystems and bundling, things like that. Okay, but I think that’s it for today. So thank you so much for listening. participating and for all my subscribers I’m gonna send you a bunch of emails every day like I do every week now and please read those a lot of that is going to be reinforcement repetition repetition repetition and if you aren’t a subscriber please consider doing so you can go over to Jeff Towson comm and sign up there but that’s it have a great week and I will talk to you next week

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