Huawei and Xiaomi both need to rapidly fill in their supply chains. They're doing it for different reasons, and they're doing it in different ways, too.
Huawei and Xiaomi, two mobile handset suppliers, are key contributors to the upward trajectory of China’s electronics industry, but the two took quite different paths to get to where they are. Huawei has pursued a conservative, almost stodgy growth strategy, but current events are forcing it to become expansive, and do it quickly. Xiaomi is as ambitious as its competitors, but lacks influence; it has had to adopt a more freewheeling attitude just to survive.
How did they get that way, and where do they seem to be heading?
The 10-year period between 2005 and 2014 was a golden decade during which China’s mobile phone cottage industry rapidly sprang up. China gave birth to many new startups, all gunning for the mobile phone market.
Fast-forward to 2020: Players in the mobile industry have narrowed down to only a handful — namely Huawei, Xiaomi, Oppo, and Vivo. They emerged as China’s four mobile phone giants competing in the global market.
As smartphone technology development exploded, Huawei/HiSilicon has rapidly ascended from a niche player to a 5G mobile chip powerhouse that could compete with Qualcomm.
The rise of China’s mobile phone is a microcosm of China’s prowess in terminal production and chip development. China now ranks among the leading suppliers of technology in the global market.
Two diverging approaches
From 2019 until now, Huawei and Xiaomi have taken two distinctly different investment strategies. Huawei has always been cautious in investing. Casting a wider net, Xiaomi has made investments in everything from materials to integrated circuits. From January 2019 to February 2020, Huawei invested in a total of seven semiconductor companies, while Xiaomi invested in 15.
In making investments overseas, corporations, in general, have two different goals in mind. One is aimed at a pure financial gain, as they look for a quick return on funds. The other is to look for a way to fill the gaps in supply chains. Companies hope to obtain resources that are conducive to their own technology/business development. They make investments, believing that such investments can help them pave the way for long-term technology and business development.
In cultivating the supply chain, Huawei and Xiaomi are both stuck in a similar place. Huawei is well known but has not been embraced by the United States. Xiaomi lacks presence in the supply chain, but when it comes to building its own ecosystem, Xiaomi is way ahead of Huawei.
Transformation of Huawei’s investment strategies
Because of Huawei’s strong position in the competitive market, its investments attract a lot of attention and scrutiny, both from media and investment communities. But Huawei has remained cautious in making investments abroad.
In fact, Huawei, since its inception, has invested in very few companies.
According to Tian Yan Cha, one of China’s credit reporting agencies, Huawei has disclosed only 14 investment cases thus far. Nine of them were mergers and acquisitions. Huawei’s investment targets tend to involve companies in the internet of things, chips, and cloud storage, as well as a small number of Internet projects. Huawei’s investment strategy adheres to its two basic rules: 1) Resist temptations of making pure financial investment; 2) Follow the “Huawei Basic Law” — meaning the company should refrain from investing in industries that are outside the communications field.
Are there any common threads among those 14 investments?
- The investments outside the communications business have been moving slowly. Most of them are likely to fail.
- Huawei made investments in a host of companies ranging from those in the IoT to cloud computing, but the amount of investment remains small and they remain unfocused.
- Most of the investment targets have already had some business collaboration with Huawei.
- Huawei made almost no investment in applications and internet-related ecosystems.
Around 2010, Huawei, keen on the development of the internet, successively invested in projects such as HopeRun Technology, Kunlun Tech Co., Ltd., and Stormplayer. With the successful IPO of these three companies, Huawei made considerable profits. But because Huawei was accustomed to business-to-business “operator business” and was not so familiar with the rules of the game in the business-to-consumer sector, Huawei’s shares have been diluted or even completely withdrawn.
Around 2014, Huawei shifted its business focus to the development of enterprise network, cloud computing, and the IoT. At that time, the “Investment Development Department,” Huawei’s internal unit in charge of investment, took a lead in the investment and acquisitions of several projects. Of these projects, 90% are related to communication technologies and IoT businesses and they hold some collaborative relationships with Huawei. However, such investments have not yet taken shape.
Hubble Technology established
Huawei continued to stumble with its investing until April 2019, when it decided to set up a dedicated investment operation. Hauwei’s Hubble Technology Investment Co., with a registered capital of RMB 170 million, invested in five semiconductor companies in one fell swoop: Shandong Tianyu (SICC) Advanced Materials Technology Co., Ltd.; Joulwatt Microelectronics Co., Ltd.; iDeepWise Technology Co., Ltd.; Suzhou MotorComm Electronic Technology Co., Ltd.; and Shanghai North Ocean Photonics Technology Co., Ltd.. That’s when Huawei’s investments began to take strategic shape.
The aforementioned businesses range from semiconductor materials to optics and IC design. Huawei’s investments in application areas are now directed to smartphones, smart cars/autonomous driving, AI, industrial automation, and others.
Hubble’s legal representative, chairman, and general manager is Yi Bai, president of Huawei Global Financial Risk Control Center and who previously served as vice president of Huawei’s Financial Management Office. Hubble’s business is described as venture investment. Huawei named the investment after the Hubble Space Telescope, a reference to exploring new possibilities. Hubble is likely to push Huawei to broaden its investment strategy.
After the establishment of Hubble Technology, the industry’s most frequently asked question was: Why did Huawei change its investment strategy?
We believe there are several reasons for it.
First, on May 16, 2019, the U.S. Department of Commerce put Huawei on the “entity list,” restricting Huawei’s and its 70 subsidiaries’ sales and purchasing activities in the United States on the grounds of “national security.” This ban severely damaged Huawei’s supply chain. Huawei had no choice but to build its own supply chain. On Jan. 16, 2020, Huawei invested in Wuxi Haoda Electronics, a manufacturer of surface acoustic wave (SAW) filters. SAW and bulk acoustic wave (BAW) filters are key components of the RF front end of smartphones.
Second, the growth of the smartphone market is slowing down while the competition is intensifying. The IoT, the internet of vehicles, artificial intelligence, and cloud computing are all inevitable trends that Huawei can’t afford to miss. Huawei plans to lead the industrial ecosystem for such emerging areas to fuel technology development momentum among these enterprises.
Huawei is gradually breaking out of its self-imposed “communication only” investment rules. The company is expanding the application side of its investment activities — including smart cars, AI, and other trends.
Here’s what we have observed so far in Huawei’s recent investment strategies:
- Communication technology. Communication technology is Huawei’s foundation. Huawei will continue to use “Huawei Basic Law” as its investment compass. Huawei is expected to invest further in communication technology.
- Supply chain. Huawei will focus on complementing what it lacks in its supply chain. Missing today are RF front-end, FPGAs, IP, and semiconductor materials.
- Smart cars. Huawei’s investment in MotorComm is an indication of Huawei’s keen interest in the smart car field. In 2019, Huawei also established a “Smart Car Solutions” business unit to provide smart car ICT components and solutions. Xu Zhijun, Huawei’s rotating chairman, clarified the company’s strategic choice last year for the first time: Huawei is “committed to becoming an incremental component supplier for intelligent connected cars.”
- Huawei Mobile Services (HMS) ecosystem. Huawei’s terminal business has surpassed that of the company’s operator business. Mobile terminals are now Huawei’s main growth engine, thus prompting Huawei to spend real money on building an ecosystem for them. We predict that the establishment of Hubble will help Huawei supplement the ecosystem that it previously lacked.
Today, Huawei’s operating system is restricted by Google. Starting in 2020, Huawei has begun implementing the HMS strategy to create a Huawei terminal ecosystem centered on “Harmony OS” (first in automotive and other fields) in response to the Google Mobile Services (GMS) system. Huawei’s business is no longer limited to hardware; Huawei aspires to move the company’s software services closer to what Google and Apple are offering.
Xiaomi’s sprawling investment activities
Unlike Huawei’s strong “technology” gene, Xiaomi was born with the Internet in its DNA. Xiaomi has been extremely active in investment, launching a wide range of investment models since the company was founded.
As of now, Lei Jun’s personal angel investment, Xiaomi Technology, Hubei Xiaomi Yangtze River Industry Fund Partnership (limited partnership under Xiaomi Technology), and associated investment companies including Shunwei Capital (held by Lei Jun) have invested in a total of 400 to 500 companies. Many of them are now Xioami’s subsidiaries — including Yujiahui, Huami, Viomi, and Rockrobo.
The company’s venture arms invest in smart hardware, consumer goods, education, games, social networks, culture and entertainment, medical and health, automobile transportation, finance, and others.
Compared with rivals such as Samsung, Huawei, Apple, and others, Xiaomi is at a disadvantage. Xiaomi lacks brand influence, core technology, product profitability, and a voice in the supply chain. Therefore, Xiaomi invests in companies and technologies that can fulfill Xiaomi’s gap. They invest in both ecosystems and supply chains.
Xiaomi is focusing on building an “ecosystem” on intelligent hardware related to the IoT. It includes everything from the popular mobile power supply to smart home products (i.e., smart bracelets, air purifiers, and Xiaomi rice cookers). Xiaomi has also expanded its business to daily necessities such as towels, shoes, and pillows, thus forming a unique ecological circle and value chain for Xiaomi.
As freewheeling as its investment strategy is, Xiaomi still practices a kind of conservatism: it will not hold a majority share of these companies. Xiaomi generally keeps investment in the target company at less than 30%.
Since 2017, Xiaomi has begun investing heavily in chip design companies, with a focus on the supply chain investment. In 2017, Xiaomi Technology and the Hubei Yangtze River Economic Belt Industry Guidance Fund jointly established an industrial fund company specialized in investing in chips called Hubei Xiaomi Yangtze River Industry Fund Partnership. It is often referred as Xiaomi Yangtze River Industry Fund.
As of now, the fund has invested in more than 15 chip design companies, covering mobile phone and intelligent hardware supply chains, core products of electronic products, new materials, and new processes while considering related fields such as intelligent manufacturing and industrial automation. Since the establishment of Xiaomi Yangtze River Industrial Fund, the investment in semiconductor companies has accelerated.
Motives behind Xiaomi Yangtze River Industrial Fund
Smartphones are still Xiaomi’s core business. But because smartphones are at the bottom of the food chain due to low technological content and fierce competition (within 5% of Xiaomi’s mobile phone profits), the upstream core technologies are in the hands of others.
Xiaomi is fully aware of the significance of having core technologies, and the company has had some success lately, as it recently rolled out a Type-C 65-W gallium nitride charger and Wi-Fi 6 technology. They have become hot products since the release of Xiaomi 10 Pro. In fact, Xiaomi invested in the GaN company Navitas Semiconductor in the first half of 2018. In February 2020, it also invested in Wi-Fi 6 chip company Senscomm Semiconductor. The launch of the Xiaomi 10 series made Xiaomi’s intention to build its own supply chain crystal-clear.
In contrast, Xiaomi’s efforts to follow the footsteps of leading smartphone suppliers (including Apple, Samsung, and Huawei) to develop their own applications processors did not end well. The failure of Xioami’s homemade Surging S1 made Xiaomi realize that such an endeavor takes a lot of talent, technology, and capital, and it should not be taken lightly.
But at the same time, now that the development of home-grown chips has become China’s national strategy, this is not something that Xiaomi can pass up. It is Xiaomi’s responsibility to get this done.
Xiaomi must realize that for such projects as internal chip development, the return on investment takes a long time. It takes a much greater investment, and naturally, the investment risk is also much greater.
To sum up, Lei Jun’s personal and Xiaomi’s early investment approaches are investing in people but not investing in the industry. Xiaomi invests but would not hold a big share of those invested companies. Xiaomi zeros in on building an ecosystem.
Where we are today
In 2019, Huawei’s revenue grew up to 850 billion yuan, an increase of 18% compared to that of the previous year. According to Huawei’s financial report, the company’s smartphone shipments increased from 200 million units to 240 million units, ranking second in the world (Huawei ranked third in 2018, with Apple second).
Huawei claimed that the company in 2019 held 17.6% of the global market share (Yu Chengdong, CEO of Huawei’s consumer business, presented the data at an online press conference in February). Samsung was ranked first in 2019, with 290 million shipments and 21.6% market share. Apple ranked third, with 190 million shipments and a market share of 13.9%.
Meanwhile, Huawei’s wireless wearables and PCs have increased by more than 200%. In 2019, Huawei invested more than 50 billion yuan in R&D, ranking ninth globally. As of January 2020, Huawei’s 5G mobile phone shipments have exceeded 10 million units.
Next up, Huawei will implement what the company calls a “1 + 8 + N” strategy. “1” refers to smartphones; “8” includes PCs, tablets, cars, wearables, AR, VR, smart big screens, and smart speakers. These eight products are all home-grown, aided with Huawei participation; “N” refers to a large number of IoT devices, anticipated to provide consumers with a full range of intelligent services.
Huawei’s terminal ecosystem is rapidly forming, and the “1 + 8 + N” strategy will also bring many changes to Huawei’s future development, including investment directions.
In contrast, Xiaomi, Oppo, Vivo, and others are having a tough time increasing annual revenue, shipments, profit margins, and core technologies. Their road to “making core technologies” is much more difficult.
In April 2019, Xiaomi reorganized its wholly owned subsidiary Songguo Electronics team — splitting some, for example, to form a new company, Nanjing Big Fish Semiconductor. After independent financing, Xiaomi accelerated the process of self-developed IoT chips. In 2019, the industry has even heard the news that Oppo is about to develop its own chips. With the increasing concentration of mobile phone chip suppliers and global competition, it is a legitimate concern for Chinese OEMs to not be able to source chips that they need from the international market. Meanwhile, for any OEMs to develop chips on their own is a long-term strategy.
We believe that Xiaomi and Huawei share the same goal — to control their own destiny — by investing in upstream semiconductor companies. China’s domestic companies should form a united front to get engaged in technical competition, rather than in price competition in which they ruthlessly undercut one another.
In today’s globalized world and a highly divided industry, it is difficult for companies to develop the entire ecosystem on their own or rely on a single business entity. Mastering the most advanced core technologies is the key to survival. If Huawei, Xiaomi, OPPO, and Vivo can continue to invest in upstream semiconductors or self-developed chips, it would be the first step for China to grab the next golden decade for the electronics industry.
— Fendy Wang is managing chief analyst of ESM-China, EE Times’ sister publication.