Huawei’s Honor brand of smartphones has seen a massive jump in sales from 1 million units per year to 20 million. According to a report by Reuters, Huawei has managed this by emulating the disruptive online-only strategy Xiaomi. However there is an interesting side-effect that could have an impact on all smartphone makers, not just those in China.
Some smartphone makers rake in profits of up to 18% per smartphone sold, however the transition to online selling (independent of the carriers) means that OEMs can reduce the price of handsets as they no longer need to factor in distribution expenses, that often added up to 30 percent to the price of the handset.
According to recent publicly published financial results, Xiaomi’s operating profit margin is just 1.8 percent, whereas Samsung’s 2013 margin was 18.7 percent. The result of the new pricing strategy by Huawei has been to re-ignite the price war and the battle over thin profit margins, often so prevalent in China.
E-commerce is massively changing the traditional channels for the smartphone industry.
“E-commerce is massively changing the traditional channels for the smartphone industry, and we needed to go in that direction too,” Honor brand president Jeff Liu said in an interview in Beijing, during the unveiling of the Honor 6 Plus.
This E-commerce strategy has been particularly effective during 2014. According to Garttner, Xiaomi sold 15.8 million smartphones in July-September versus Huawei’s 15.9 million. Looking back to 2013, Xiaomi sold just 3.6 million handsets, compared with 11.7 million for Huawei. With such massive leaps in sales, it is clear that 2015 will be a hotly contested year.
According to a recent Fitch Ratings’ report the continued success of Xiaomi and its aggressive pricing is likely to force other OEMs to reduce prices and hence profitability. “If Huawei wants to survive, we have to win in developed markets like Europe, a high-end market,” said Huawei consumer division chief Richard Yu. “Next year is very important for us to target the high segment.”