How domestic solutions for intelligent automobiles reshape the industry landscape from Huawei's perspective-EEWORLD

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1. The historical context and background of Huawei’s entry into automotive intelligence

1. Overview of Huawei’s automotive business development

Huawei's development process in the automotive field can be roughly divided into three stages: the initial exploration of business, the cooperative research and development period, and the product landing period. In 2013, Huawei started with the vehicle communication module and initially explored the Internet of Vehicles business. In 2016, Huawei focused on building its own technical and ecological advantages in the Internet of Vehicles around 5G technology. In 2019, Huawei established the Intelligent Vehicle Solutions BU to clarify the strategy for incremental components for intelligent connected vehicles. In 2021, Huawei launched the HI intelligent vehicle full-stack solution, which includes computing and communication architecture, smart cockpits, smart driving and other intelligent components. At the same time, Huawei's three modes of cooperation with OEMs have taken shape, from shallow to deep cooperation, namely, the component mode, the HI mode, and the Huawei Smart Selection mode. Among them, the Huawei Smart Selection mode involves Huawei's business team, user experience team, etc. in OEM automobile manufacturing, jointly realizes product design with car companies, and provides sales support through Huawei's channels. Typical products include AITO.

At present, Huawei's car BU has become one of the largest suppliers of automotive intelligent solutions in the industry. Huawei has positioned the intelligent car solution business as a long-term strategic opportunity. Since the establishment of the intelligent car solution BU, the cumulative investment has reached US$3 billion, and the R&D team has reached a scale of 7,000 people. As of the end of 2022, nearly 2 million sets of components have been shipped, including smart cockpits, smart driving, smart electric, millimeter wave radar, laser radar, computing power platform, etc. (Data source: Huawei Investment Holding Co., Ltd. 2023 Fifth Medium-term Note Prospectus).

In 2023, Huawei and Changan will set up a joint venture, into which Huawei's automotive business will be injected. The new company will be positioned as Tier 1 and will be open to other automakers for equity. According to Changan Automobile's announcement (Source: Changan Automobile's announcement on the signing of the "Investment Cooperation Memorandum", November 26, 2023), the key points of the cooperation include: (1) The target company's business scope includes automotive intelligent driving solutions, automotive intelligent cockpits, intelligent automotive digital platforms, intelligent vehicle clouds, AR-HUD and intelligent vehicle lights, etc. Huawei will inject relevant technologies, assets and personnel dedicated to the target company's business scope into the target company; (2) In terms of equity structure, Changan and its affiliates intend to invest in acquiring no more than 40% of the target company's equity, and gradually open equity to existing strategic partner automakers and other investors with strategic value; (3) The target company will operate independently based on market principles. In principle, the components and solutions within the business scope will be provided by the target company to vehicle customers. In principle, Huawei will not engage in business that competes with the target company's business scope. Changan will fully promote strategic collaboration with the target company. This joint venture further clarifies the Tier 1 nature of Huawei's automotive business, and together with OEMs such as Changan, it will create a leader in the automotive intelligent system and component solutions industry based in China and facing the world. We believe that from the perspective of industrial development rules, this cooperation has to some extent reduced the concerns of car dealers about their independence and the resistance to cooperation.

(II) The automotive business is expected to become a new business with a value of hundreds of billions of yuan.

The consumer business is damaged, and the smart car business is expected to fill the gap and has the potential to become a new business pole worth hundreds of billions of yuan. Huawei started out as a carrier business, and in 2019 it had formed a revenue structure dominated by carrier business, enterprise business, and consumer business. According to Wind data, Huawei's consumer business revenue accounted for 54% in 2019.

From May to August 2019, the Bureau of Industry and Security of the U.S. Department of Commerce successively included the issuer's subsidiary Huawei Technologies and some non-U.S. affiliated entities of Huawei Technologies on the Entity List. On August 17, 2020, BIS amended the foreign direct product rule to expand the scope of export controls on foreign products and added some non-U.S. affiliated entities of Huawei to the Entity List. As a result, the supply of Huawei-related items and the sales of some products were negatively affected. (Source: Huawei Investment Holding Co., Ltd. 2023 Fifth Medium-Term Note Prospectus).

From a strategic perspective, Huawei's expansion from traditional ICT business to the smart car track is a choice that is in line with the company's technological advantages and industry trends. According to the 2022 financial data disclosed in Huawei's financial report, ICT infrastructure business and terminal business are the ballast stones of Huawei's business, accounting for 55% and 33% of revenue in 2022, respectively. In addition, the company also has outstanding competitiveness in the field of digital energy (such as the three-electric system of new energy vehicles, etc.), with revenue of 50.6 billion yuan in 2022. The strong technical accumulation accumulated by the aforementioned business can be reused in the field of smart cars. The smart car business is not only a smooth evolution for Huawei to expand its business scope, but also expected to make up for the terminal business gap caused by sanctions.

2. Advantages of Huawei’s smart car business

1. The trend of automobile intelligence is growing, but the pattern is still uncertain

The trend of automobile intelligence is just right, and the industry penetration rate has considerable room for long-term development. From the perspective of automobile intelligence penetration rate, according to Zoss Automotive Research data, from January to October 2023, the sales volume of L2-level models reached 6.136 million units, a year-on-year increase of 36.5%, and the penetration rate reached 36.8%, an increase of 8.4pct year-on-year. In addition, from January to October 2023, the sales volume of the three high-level smart driving models, L2+, L2.5, and L2.9, all achieved year-on-year growth, increasing by 86.0%, 79.4%, and 79.3%, respectively, and the penetration rates reached 2.7%, 1.9%, and 4.8%, respectively, an increase of 1.2pct, 0.8pct, and 2.0pct year-on-year, respectively. (Note: L2+ is defined as having L2 functions and also having the functions of changing lanes with lights or high-precision maps; L2.5 is defined as having L2 functions and also having the functions of high-speed NOP; L2.9 is defined as having L2 functions and also having the functions of urban NOP)

Intelligent driving is still in the early stages of development, the core hardware is still iterating rapidly, and the underlying software ecosystem has not yet been fully formed. Intelligent driving chips are the most important hardware foundation for automotive intelligence. From the perspective of the underlying software common platform, the underlying chips are still iterating rapidly, and the upper-layer bottom-soft common platform is not mature. At present, autonomous driving chips are iterating rapidly, and leading players such as NVIDIA and Qualcomm are planning to enter the "cabin-driver integration" domain fusion track, while Chinese local start-up chip manufacturers are constantly pouring into the field of autonomous driving. Therefore, the bottom-soft common platform (the part above BSP and below the general framework of autonomous driving, including OS kernel, middleware, etc.) is not mature and solidified, and still needs time for further development.

The distribution of the automotive industry value chain tends to be polarized. Front-end software design & core hardware, and back-end aftermarket services will gain more value weight, which is conducive to Huawei, which takes ICT as its core competitiveness, to enter the industry chain. In the past, the homogeneity of automotive hardware systems was serious. It was difficult for vehicle manufacturers to create differentiation in hardware, and the profit model was mainly one-time sales of automotive hardware. In the era of software-defined automobiles, the value of front-end design, underlying hardware, and vehicle-mounted software has become more important. Front-end of the industry chain: On-board chips (covering core bottom software, tool chain, etc.) and their domain control platforms, laser radars and other core hardware are the premise of software innovation, and their value in the industry chain will also be high. At the same time, software design is more important in the automotive R&D stage. The software development basic platform charges license fees, the supply of functional modules is charged according to royalty, and customized secondary development are all mainstream strategies for future software suppliers. Back-end of the industry chain: With the application of software in automobiles, software will become a new core competitiveness, which will break the one-time automobile sales model and form a new business model of "automobile sales + continuous software and service premium". Aftermarket services with software as the core have become the key to the value of automobiles. In the middle of the industry chain: the value that hardware suppliers and OEMs that lack software capabilities can share will be relatively reduced. Huawei takes the ICT information industry as its core business, and its product technology covers computing chips, communications, OS, sensors, AI systems, etc. It has full-stack capabilities from various mobile terminals to computing center infrastructure. In the era of software-defined cars and the expectation of future AI empowerment upgrades, it is more conducive to reuse the competitive advantages of its traditional main business and open up a new growth curve.

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