A Third Mobile Ecosystem

Given its recent trajectory, Huawei was on a path to surpassing Samsung and becoming the number-one global maker of smartphones. It’s been a long-term ambition for the Chinese company. Although reaching the top spot seemed a unattainable goal just a few years ago, thanks to strong demand in Asian markets, clever brand-building in Europe and, quite simply, impressive products, Huawei has quickly climbed the ranking.

But just as things were going its way, Huawei suddenly finds itself shunned by its software and component suppliers as they are forced to comply with sanctions imposed as a result of Huawei being added to the US Bureau of Industry and Security Entity List (see Instant Insight: Huawei Consumer Devices Uncertainty in Face of US Restrictions). Google, Arm, Qualcomm and Broadcom, among others, have withdrawn from agreements. The phone-maker now finds itself needing to develop a third mobile ecosystem and supporting hardware. There’s a bad track record here.

The mobile industry knows the challenges. Companies as large as Amazon, Facebook and Microsoft have worked to break up the smartphone ecosystem duopoly of Android and iOS, only to have their investments be relegated to the discount rack. As Huawei is now being pushed into a situation where it will need to develop and promote its own mobile ecosystem, it’s impossible not to observe that many have been there and tried that.

But Huawei has proved itself a quick learner, and endeavours to develop a robust new mobile ecosystem will doubtless be more than just a fringe project. If sanctions drag on or expand, its much-rumoured project to develop its own operating system could be all that it has to fall back on. Recent reports speculate that Huawei has trademarked Hongmeng as the name of its platform, but there are few firm details.

If Huawei has been preparing for a worst-case scenario, it was wise to do so. The sheer volume of sales in its home market of China should be one of the few positives in its current predicament: China accounts for about half of the phones Huawei sells. Arguably, Huawei is fortunate that change is on the horizon in the smartphone industry, with the potential of new device designs and a new generation of connectivity technology kicking in to alter computing architecture. There will be more cloud-based apps and processing, more voice input and network smarts supporting mobile devices.

Yet these advantages are vastly outweighed by the impact of the US restrictions. Even if Huawei could immediately establish a home-grown operating system, it wouldn’t be enough. An ecosystem is defined by a healthy diversity of participants. Without access to Google’s Play store or long list of apps and services, Huawei’s competitiveness is hamstrung. Creating alternatives isn’t that simple outside China.

The same applies to semiconductors. Huawei’s moves to create more of its own components have been impressive, but it’s not possible to eradicate a reliance on American-made products or intellectual property from its supply chain. It needs Arm for the underlying architecture of its processors, and although Arm is headquartered in the UK, its second-largest design hub is in Austin, Texas, making the company subject to the ban.

Huawei needs suppliers such as Broadcom, Qualcomm and Qorvo for the various semiconductors that it doesn’t make in-house. Even the equipment needed to manufacture the silicon comes from a US company, Applied Materials.

Huawei is making a bold stand in the face of enormous pressure. But its predicament involves far more than establishing a new mobile ecosystem and bolstering its supply chain, as if those were not already Herculean tasks. Until Huawei is removed from the Entity List and ceases to be a pawn in a trade war between the US and China, the company has limited options.