(WSJ) China’s Huawei Technologies Co. moved to shore up its U.S.-sanctions-damaged business by selling budget smartphone brand Honor to a state-led consortium.
The Chinese telecom company said Tuesday that it would sell Honor to a new company that records show is majority owned by a unit of the government of Shenzhen, the southern Chinese city where Huawei is based. More than three dozen other Chinese entities, including state-owned companies and dealers of Honor devices, also have an unspecified stake in the consortium.
The companies didn’t disclose the value of the sale or how it would be financed, but Chinese media reports before the deal’s announcement placed its value at about $15 billion.
The deal is in response to “tremendous pressure” on its consumer business from component shortages caused by U.S. curbs on its supply chain, Huawei said. Unloading Honor could enable the unit to sidestep restrictions from the Trump administration that block Huawei from buying computing chips or other parts made using American technology.
Huawei executives have described the company as fighting for survival following the U.S. actions. It has been drawing on inventory stockpiles to build its smartphones and telecom equipment since it became unable to buy virtually any chips in mid-September. Executives have said its smartphone business, which requires vastly more chips than other business lines, faces the most urgent shortfall.
“The company is now running into substantial operational challenges,” said Dan Wang, an analyst at Gavekal Dragonomics. “The consumer business, which made up over half of revenue in 2019, is in greater trouble than its carrier business because it’s more challenging to stockpile chips for so many smartphones.”
Honor gadgets, aimed mainly at young, internet-savvy consumers, accounted for 24% of Huawei’s 156 million smartphone shipments this year, according to market tracker Canalys.
Selling Honor is the most visible sign of the strain placed on Huawei by Washington’s restrictions on its ability to obtain parts. Honor has been a driver of smartphone sales, with shipments peaking in the first quarter of 2019 thanks to strong demand overseas, particularly in Central and Eastern Europe. But its popularity ebbed after Huawei was added to a U.S. trade blacklist in May last year that blocked its access to apps on Google’s Android operating system.
Huawei’s overall market share, however, continued climbing through much of this year, thanks to strong domestic sales. It was the No. 1 seller of phones in the second quarter world-wide and No. 2 in the third quarter, though its sales have been dropping outside China.
Without the Honor brand, Huawei would have been the world’s fourth-largest smartphone vendor in the third quarter, behind Samsung Electronics Co. , Apple Inc. and China’s Xiaomi Corp., according to Canalys.
The deal leaves Huawei with its own-branded devices, including its high-end Mate series and P series smartphones, as well as laptops, wearables, smart devices and other gadgets.
There is no indication that the sale reflects an imminent cash crunch at Huawei. The company says it has remained profitable through this year, with a net profit margin of 8% in the third quarter. The company had $53.1 billion in cash and short-term investments at the end of 2019, the last time it revealed balance-sheet details.
Analysts said the deal could be aimed at throwing a lifeline to suppliers and vendors of Honor, while potentially setting it up to become an early customer of Huawei’s new line of smartphone software. Huawei will begin selling smartphones running its self-designed operating system, called Harmony OS, next year.
“I think the immediate benefit is to give themselves more breathing room and keep the phone business afloat, especially in China,” said Nicole Peng, an analyst at Canalys who called the sale a “drastic move” for Huawei.
Despite the popularity of Huawei’s smartphones globally, telecom carriers won’t carry its devices in the U.S. Washington has long considered Huawei’s telecom gear a security threat, allegations the company has repeatedly denied.
One risk for Honor is that the U.S. extends the supply-chain restrictions on Huawei to Honor or to its new owner. However, U.S. policy makers’ concerns about Huawei have focused largely on the Chinese company’s giant telecom-equipment business, rather than on its smartphone business, and officials could decide against imposing new restrictions on Honor under new ownership.
Huawei has wound down other parts of its business in recent years in the wake of U.S. pressure. It has slashed its staffing in the U.S. and Australia, and last year sold its stake in an undersea cable venture.
Honor’s new owner is Shenzhen Zhixin New Information Technology Co. Chinese corporate records dated Nov. 13 show it is 98.6% owned by a Shenzhen Smart City Technology Development Group Co., a unit of the state assets branch of the Shenzhen government, according to Tianyancha.com. The remainder is held by a partnership made up of private and public companies.
Source: Wall Street Journal by Dan Strumpf