Phone business

Huawei sells Honor phone business as US sanctions bite

HONG KONG—China’s Huawei Technologies Co. has moved to shore up its US sanctions-damaged business by selling off-price smartphone brand Honor to a state-run consortium.

The Chinese telecommunications company announced on Tuesday that it will sell Honor to a new company that records show is majority-owned by a government unit in Shenzhen, the southern Chinese city where Huawei is based. More than three dozen other Chinese entities, including state-owned companies and resellers of Honor devices, also have an unspecified stake in the consortium.

The companies did not reveal the value of the sale or how it would be funded, but Chinese media reported before the deal was announced to be worth around $15 billion.

The deal comes in response to “tremendous pressure” on its consumer business due to component shortages caused by U.S. restrictions on its supply chain, Huawei said. Offloading Honor could allow the unit to circumvent Trump administration restrictions that prevent Huawei from buying computer chips or other parts made using American technology.

Huawei executives have described the company as struggling for survival following US actions. It has been dipping into its stocks to build its smartphones and telecommunications equipment since becoming virtually unable to buy chips in mid-September. Executives said its smartphone business, which requires far more chips than other lines of business, faces the most pressing shortfall.

“The company now faces significant operational challenges,” said Dan Wang, analyst at Gavekal Dragonomics. “The consumer business, which accounted for more than half of revenue in 2019, is in greater trouble than its carrier business because it’s harder to stock chips for so many smartphones.”

Honor gadgets, aimed primarily at young, internet-savvy consumers, accounted for 24% of the 156 million smartphones shipped by Huawei this year, according to market tracker Canalys.

Selling Honor is the most visible sign of pressure on Huawei from 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 on strong demand overseas, particularly in Central and Eastern Europe. But its popularity declined after Huawei was added to a US trade blacklist in May last year, which blocked its access to apps on Google’s Android operating system.

Huawei’s overall market share, however, continued to climb for much of this year, driven by strong domestic sales. It was the top seller of phones in the second quarter globally and the second in the third quarter, although its sales fell outside of China.

Without the Honor brand, Huawei would have been the world’s fourth largest smartphone vendor in Q3, behind Samsung Electronics Co.

Apple Inc.

and Chinese 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 impending cash crisis at Huawei. The company says it has remained profitable throughout 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 disclosed balance sheet details.

Analysts said the deal could aim to throw a lifeline to Honor’s suppliers and vendors, while potentially setting it up to become one of the first customers for Huawei’s new line of smartphone software. Huawei will start selling smartphones running its self-designed operating system, called Harmony OS, next year.

“I think the immediate benefit is to give ourselves more breathing room and keep the phone business afloat, especially in China,” said Canalys analyst Nicole Peng, who called the sale a “move radical” for Huawei.

Despite the popularity of Huawei’s smartphones around the world, telecom carriers will not ship their devices to the United States. Washington has long viewed Huawei’s telecommunications equipment as a security threat, allegations the company has repeatedly denied.

The technology battle between the United States and China has beaten TikTok and Huawei and surprised American companies producing and selling in China. The WSJ explains how Beijing is pouring money into high-tech chips as it wants to become self-sufficient. Video/Illustration: George Downs/The Wall Street Journal

A risk for Honor is that the United States will extend Huawei’s supply chain restrictions to Honor or its new owner. However, U.S. policymakers’ concerns about Huawei have largely focused on the Chinese company’s giant telecoms equipment business, rather than its smartphone business, and officials may decide not to impose further restrictions on Huawei. Honor under new ownership.

Huawei has shut down other parts of its business in recent years following US pressure. It has downsized in the United States and Australia and last year sold its stake in an undersea cable business.

Honor’s new owner is Shenzhen Zhixin New Information Technology Co. Chinese corporate documents dated November 13 show it is 98.6% owned by Shenzhen Smart City Technology Development Group Co., a unit of the public assets of the Shenzhen government, according to Tianyancha. .com. The rest is held by a partnership made up of private and public companies.

Write to Dan Strumpf at [email protected]

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