The global epidemic has accelerated the reconstruction of Huawei's supply chain, and the shipment of P40 series is expected to be at least 20 million

The global COVID-19 pandemic is still spreading. Except for China, where the epidemic has been effectively controlled, major electronic product consumer markets in the world, including Europe, the United States, Southeast Asia, and Europe, are basically at a standstill. Many countries have taken measures to prevent the spread of the epidemic, and experts generally estimate that the global pandemic will last at least 3-6 months.

As the pandemic rages, it has a direct negative impact on the demand and supply of the global mobile phone terminal market, such as a decline in the willingness to purchase or replace new phones, limited market demand, and difficulties in transporting components in the supply chain. In today's globalized economy, all countries are part of the global industrial chain, and a single move affects the entire system. The development of the epidemic abroad has also had a huge impact on the production of Chinese companies.

From market demand to component supply, Chinese mobile phone manufacturers are facing a dilemma caused by the global epidemic. How will Huawei respond?

Huawei P40 series shipments at least 20 million units

As early as February this year, some analysts predicted that Huawei's smartphone shipments this year would drop by about 20% due to factors such as the failure to obtain Google GMS authorization in overseas markets, resulting in a decline in sales, and the domestic market epidemic leading to reduced demand.

Jiwei.com found in a survey in February that Huawei had channel inventory of about 20 million units in China during the Spring Festival. As the domestic epidemic cooled down in March and the market gradually resumed work and production, the market rebounded and the inventory was slowly being digested.

In March, Huawei started adjusting its supply chain order demand in response to the impact of the epidemic. People related to the supply chain also confirmed: "Huawei did cut some orders, but the amount was not large, about 10% to 15% overall, and did not have much impact on the annual order volume ."

Some industry insiders believe that "Huawei's supply chain order adjustments are just dynamic adjustments to market demand and there is no need to worry too much. It reduced supply chain orders for mid-to-high-end models in 2019 mainly due to the reduction in market demand caused by the epidemic , which is less affected than in previous years."

"Whether it is Huawei or domestic manufacturers such as OPPO, vivo, and Xiaomi, clearing inventory at the beginning of the year is the norm, and risk control of the supply chain is also a normal operation. Huawei estimates that the life cycle shipments of the P40 series products released in the first half of the year will be at least 20 million units . In the medium and long term, Huawei's supply chain demand is still very huge. " Li Ming (pseudonym), a mobile phone supply chain channel merchant, told reporters.

Revenue grew against the trend, stabilizing the domestic mobile phone market

In Huawei's 2019 annual report released on March 31, it was shown that Huawei was included in the Entity List by the United States on May 16, 2019. Subsequently, under pressure from the United States, Google cut off its supply and European countries "besieged" Huawei on the issue of whether to ban Huawei 5G.

In this harsh external environment, the financial report shows that from January to December 2019, Huawei achieved operating income of 858.8 billion yuan, a year-on-year increase of 19.1%; net profit of 62.7 billion, a year-on-year increase of 5.6% . Overall, Huawei's revenue for the whole year of 2019 still achieved counter-cyclical growth, but it cannot be ignored that Huawei's net profit growth rate has slowed down significantly. The net profit growth rate in 2018 was as high as 25.1%, a new low in the past three years.

Sales in Europe, America, and Asia-Pacific declined more severely year-on-year. In contrast, the Chinese market benefited from the development of 5G network construction, the continued growth in consumer business mobile phone sales, and channel sinking measures. The Chinese market achieved a year-on-year sales revenue growth of 36.2%.

Source: China and overseas market sales share of Chinese smartphone manufacturers in Q4 2019

Counterpoint smartphone market monitoring data shows that in the fourth quarter of 2019, Huawei 's sales in the Chinese domestic market accounted for 58 % , while Honor's sales accounted for as high as 70 % .

Huawei's rotating chairman Xu Zhijun said that before May 16, Huawei's overseas sales grew rapidly, but after being included in the Entity List, sales began to decline. Facing the US blockade of Huawei, Huawei has actually begun to take measures to respond since 2018.

Huawei first increased its investment in research and development to build a technological "moat". In 2019 alone , Huawei 's R & D expenses reached 131.7 billion yuan, accounting for 15.3% of its annual sales revenue . Compared with the R&D investment of 101.5 billion yuan in 2018, it also increased by more than 30 billion yuan.

In addition, Huawei's backup plan was formalized overnight in order to reduce the impact of the "Entity List". Take Huawei HiSilicon as an example. In the first half of 2019, Huawei HiSilicon's operating income increased by 25% year-on-year. At that time, the market predicted that HiSilicon's revenue would decline sharply due to the US ban. However, Huawei activated the "spare tire" that had been dusted for many years, and with the high-end development of its self-developed chips, HiSilicon's revenue increased significantly in the second half of the year.

As the global epidemic spreads, Li Ming told reporters: "Huawei has begun to accelerate the focus of its business back to the domestic market. In fact, since 2019 , it has been obvious that Huawei's overseas business has been hindered, and mobile phone terminals have shifted more to the domestic market, and the epidemic has accelerated this process. "

Li Ming believes: "At present, only the Chinese market is the most stable in the world. If we want to stabilize this year's revenue, there can be no mistakes in the Chinese market." According to forecasts, the domestic mobile phone market shipments this year will still be able to reach 340 million to 360 million units, and at the same time it will begin to fully turn to 5G. There are reports that in addition to Huawei's originally planned P and Mate series flagship products, it is also possible that more series of products in different price ranges will be launched to seize the market, and Honor will also increase investment in product research and development, marketing, etc., with the aim of stabilizing the overall revenue.

The epidemic may force Huawei to accelerate the reconstruction of its supply chain

Huawei has increased its R&D efforts and investment in order to restructure its supply chain, and domestic substitution is also an important means. In the Huawei P40 series of mobile phones recently disassembled by the media, except for the RF front-end module, the remaining components have been able to be de-Americanized, and the localization rate has reached more than 60% . In fact, Huawei has already started to take action on de-Americanization and domestic substitution.

A person in the domestic mobile phone structural parts supply chain revealed: "The domestic epidemic had a great impact on us in February. Many orders were produced before the New Year. In January, they could not be shipped due to logistics and other problems. In February, production was basically stagnant. In addition, Huawei and other manufacturers adjusted their originally expected new orders, which greatly affected our revenue in the first quarter."

" However, Huawei has already placed new orders for this year's new models, and the previously adjusted orders were for old models. Judging from current customer orders, the originally expected new demand has recovered, " the supply chain person added.

Although there is little room for growth in the domestic market, driven by 5G, the domestic market with stable epidemic control is expected to see a surge in demand for replacement . The epidemic has indeed had a significant impact on the Chinese mobile phone market. Jiwei.com found through industry chain research that the mobile phone market fell 40% year-on-year in February, but data from March showed that market demand has begun to pick up. Since the resumption of work, market demand has risen rapidly, and with major manufacturers launching new mobile phones and increasing production capacity, the year-on-year decline has gradually narrowed, with Huawei having a year-on-year growth of 20%.

According to Counterpoint research, as the COVID-19 pandemic spreads around the world like wildfire, its impact on the technology industry is unprecedented. Although global smartphone sales were weak in February, they only fell 14% year-on-year in February, which was not more than expected. The market is still vibrant, especially in the domestic market, as the outside world is worried .

China, the initial outbreak center, did see a sharp decline of 38% in the mobile phone market in February, but rebounded strongly in March . Peter Richardson, vice president and research director of Counterpoint, said: "Global smartphone sales were weak in many markets in February as consumers became cautious. However, with the growth of online channels, sales gradually shifted from offline to online. Even though offline sales in China fell by more than 50% in February, it was offset to some extent by stronger online sales , so the overall decline of 38% was not that serious."

When discussing the supply and demand and prospects of smartphones in the future, Peter Richardson said: "Global smartphones may be impacted in the coming period, but smartphones have gradually become a 'necessity' in people's lives. Although purchases may be postponed due to the COVID-19 pandemic, especially in the early stages, smartphones will still be replaced as planned when the epidemic is relatively under control. Therefore, mid- to long-term demand still exists, especially as the Chinese market has achieved rapid recovery. "