How will Huawei Auto become profitable in 2025?

Regardless of costs, Huawei's automotive business must make profitability its top priority.

According to Wanwan Auto, at Huawei’s internal meeting on December 8, Yu Chengdong stated that Auto BU will achieve profitability by 2025. This year is the third year since CheBU was established, and Yu Chengdong’s second year as CEO of this business line.

Two years ago, Huawei's rotating chairman Xu Zhijun bluntly stated that revenue and profits would not be considered in the short term, but the actual investment had to force Huawei to start considering profitability in advance.

At the 12th China Automotive Forum held in November this year, Chi Linchun, President of Huawei Smart Car Solutions BU Marketing and Sales Service Department, said that in the past three years, Huawei has invested a total of about US$3 billion in the research and development of auto parts. (equivalent to over RMB 21.7 billion) and has recruited more than 7,000 R&D personnel.

This is only the research and development of auto parts. Huawei also has multiple departments such as the Intelligent Driving Product Department, the Intelligent Cockpit Product Department, and the Intelligent Network Product Department. The R&D investment in these departments cannot be underestimated.

Before setting a profit target, Huawei was already planning in advance. According to 36Kr, Huawei has successively finalized smart car selection business cooperation with Chery Automobile, Jianghuai Automobile, and Jihu Automobile. In the future, a number of smart selection models will be launched one after another.

Many car companies are willing to cooperate with Huawei in smart car selection, perhaps because they have seen the results of the cooperation between Huawei and Cyrus. Data from the Passenger Car Association shows that from January to November 2022, the cumulative sales of Wenjie M5 reached 60,100 units, ranking 52nd in SUV sales.

In addition to the smart car selection model, Huawei's automotive business also has the traditional parts supplier model and the Huawei Inside model that provides full-stack smart car solutions. These three models are how Huawei's automotive business makes money.

Now, after Yu Chengdong sets profit targets for Huawei's automotive business, he is bound to win over more car company partners in order to sell more parts and sell more cars for car companies to make profits. This may also indirectly indicate that Huawei will still not end up building cars by itself, because the investment in building cars is larger, and it is difficult to see returns in the short term. Currently, only Tesla, a new energy car company in the world, has achieved annual profits.

In the next three years, Yu Chengdong will be under greater pressure. Whether Huawei cars can replace the terminal business and become Huawei's cash cow will be answered in three years.

1. Huawei sets KPIs for its automotive business

Huawei's automotive business, which once did not consider profitability, finally set a profit target.

Looking at the establishment of Huawei Auto BU, we can see that this is a business that was established quickly and invested heavily. In April 2019, Huawei debuted at the Shanghai Auto Show as a Tier 1 (first-tier supplier to car companies). Xu Zhijun, then Huawei’s rotating chairman, mentioned for the first time that “Huawei does not build cars, but focuses on ICT technology to help car companies.” Build a car”.

A month later, Ren Zhengfei signed an organizational change document and established the Smart Car Solutions BU department. Wang Jun, who was originally responsible for Huawei's Japanese operator business, was appointed President of the Smart Car Solutions BU.

Within Huawei, BU is a first-level department alongside BG. When Auto BU is officially independent, it means that the automotive business will become one of Huawei's backbones in the future.

Since then, Huawei’s automotive BU department has rapidly expanded. At the Beijing International Auto Show held in September 2020, Wang Jun revealed that the total number of employees in the car BU department has exceeded 4,000. At the same time, CheBU has hatched 9 secondary departments, including five major product departments: Intelligent Driving Product Department, Intelligent Cockpit Product Department, Intelligent Connected Product Department, Intelligent Electric Product Department and Intelligent Car Cloud Product Department.

This was only one year after the establishment of this business line. At that time, Xu Zhijun also revealed to the outside world that Huawei's investment in smart car solution BU exceeded US$500 million that year, and it had made plans not to consider revenue and profits in the short term, and this cycle is expected to be about eight years.

After more than a year of staff recruitment and department establishment, Huawei veteran Yu Chengdong officially took over Che BU as CEO in May 2021. Wang Jun, the original president of Auto BU, serves as COO of Auto BU and concurrently serves as president of the intelligent driving solution product line.

After Yu Chengdong took charge of the terminal BG and vehicle BU departments, they quickly integrated them. On the one hand, Huawei's car BU can use the technology of Terminal BG. For example, in-vehicle 5G modules, TBox, Hongmeng operating system and other technologies all come from Terminal BG. On the sales side, Huawei's various stores have also begun to sell Huawei Smart Select vehicles simultaneously.

So far, Huawei Auto BU has formed three business models, namely the traditional supplier model that provides standardized components to manufacturers; the Huawei Inside model that uses Huawei to provide full-stack smart car solutions; Huawei is deeply involved in product and vehicle design, and at the same time Provides a smart car selection model through sales network channels.

The consequences of Huawei's push to advance its automotive business regardless of cost soon became apparent. In July this year, Yu Chengdong revealed at the China Automotive Blue Book Forum that Huawei’s automotive business alone has invested US$1.5 billion in R&D this year. The automotive business is Huawei’s only loss-making business. Currently, there are 7,000 people invested directly and indirectly. More than 10,000 people.

The high investment far exceeded Huawei's expectations. In 2021, Huawei's annual report showed that annual investment in smart car solutions reached US$1 billion. At that time, Yu Chengdong mentioned that this amount would exceed US$1 billion in 2022. But judging from the latest situation, it has obviously exceeded expectations, and the amount of investment is still expanding.

If this situation develops, Huawei's car BU may not be able to support the profit stage. Perhaps because of this, Huawei has begun to change its direction and start to focus on profitability indicators. According to Huawei's rule not to build cars, Huawei must develop more customers at this time and help car companies sell more cars in order to accelerate its path to profitability. Smart car selection is obviously one of the profitable models.

2. Can smart car selection support profit targets?

"The Wenjie M7 will completely surpass Toyota's Alphard, Lexus LM, and all luxury cars, high-end cars, and MPVs." Yu Chengdong said at the Guangdong-Hong Kong-Macao Greater Bay Area Auto Show at the end of May this year.

Although this statement caused a period of controversy, it did not prevent Wenjie M7 from receiving a large wave of traffic before it was released. Yu Chengdong has obviously applied his previous promotional routines in the mobile phone industry to the current automotive field.

As the second product under Huawei's AITO brand, the Wenjie M7 is also the third car through in-depth cooperation between Huawei and Cyrus. It is equipped with Huawei DriveONE pure electric drive range extension platform, HarmonyOS smart cockpit, Huawei Sound audio system and other Huawei-related product.

Wenjie M7, picture source AITO official website

The price of this car is not cheap either. The comfort version of the Wenjie M7 starts at 319,800 yuan, the luxury version starts at 339,800 yuan, and the flagship version starts at 379,800 yuan, with six body color options available.

According to the delivery data released by the AITO brand, 8,260 vehicles of the Wenjie series were delivered in November, a month-on-month decrease of 31.3%. In this regard, AITO Wenjie officially explained: Due to multiple impacts such as repeated epidemics and supply chain tensions, especially since November, the epidemic in Chongqing and other places has put a certain amount of pressure on the production and delivery of enterprises. The Chongqing factory of Cyrus, Some AITO user centers and some Huawei experience stores have been greatly affected.

This explanation seems understandable, because before this, from August to October, the delivery of new cars of the Wenjie series exceeded 10,000 units for three consecutive months.

According to the new energy SUV sales rankings released by the Passenger Car Association in November 2022, the sales volume of Wenjie M5 was 4,748 units, and the sales volume of Wenjie M7 was 3,529 units. Both performances were pretty good.

New energy SUV sales rankings in November 2022, picture source Passenger Car Association

This is also a good thing for Huawei. After all, by selling more smart cars, Huawei Car BU can make more money. Under this model, Huawei can first earn money for parts through the car BU, and then sell cars through the terminal BG and share the channel profits with dealers.

According to Auto Industry News, according to information previously disclosed by Huawei insiders, the share between Huawei and manufacturers in smart selection mode is approximately 1:9. Taking a Wenjie M5 model priced at 259,800 yuan as an example, Huawei can get about 26,000 yuan for every car sold. Of this 10%, it is said that 20% is Huawei's technology licensing fees and 80% is channel distribution fees.

Of course, just cooperating with one car company, Cyrus, is definitely not enough. Huawei needs to win over more car companies and produce more smart cars for sale.