Bottom line: Huawei’s decision to go ahead with a US market entry for its latest high-end phone, despite collapse of a tie-up with AT&T, is likely to produce very limited results due to lack of a carrier partner.
If you can’t get a serious business partner, at least get a pretty face. That seems to be the message coming from a frustrated Huawei, which has announced it has signed on “Wonder Woman” star and model Gal Gadot as chief experience officer as it prepares to enter the US. This somewhat frivolous move was most likely part of a bigger announcement the company hoped to make for a grander entry to the US in partnership with corporate partner AT&T (NYSE: T).
But as many market watchers may already know, the AT&T deal reportedly collapsed at the last moment for unexplained reasons. The new tie-ups were all set to be unveiled at the Consumer Electronics Show (CES) taking place this week in Las Vegas. While the show went on and Huawei announced plans to release a version of its high-end Mate 10 in the US, with Gadot as product spokeswoman, the AT&T announcement never came.
To understand this story and what may have happened, let’s dive into a bit of background before returning to the main points. Despite its superstar status as the world’s biggest maker of networking equipment and the No. 3 smartphone brand, Huawei has been handicapped by the status of its founder, Ren Zhengfei, who started off as a military engineer in the People’s Liberation Army.
That fact has convinced some in Washington that the company is controlled by Beijing, and therefore not to be trusted. Huawei has repeatedly denied any such connection, and I personally believe that none exists, even though Beijing is famous for poking its nose into the affairs of its vibrant private sector. But some in Washington are more convinced of sinister intentions, and succeeded in blocking all the big US wireless carriers from buying Huawei’s networking equipment 5 or 6 years ago.
Now some of those same politicians are reportedly trying to pressure the big US carriers from signing deals to offer Huawei consumer-oriented smartphones, which is what some media are saying may have sunk the AT&T deal. (English article) The reports are quite murky and just say the deal collapsed at the last second, noting out that some politicians had sent a letter to AT&T earlier urging it not to use Huawei phones.
The story does seem to be accurate, since Huawei’s smartphone chief Yu Chengdong made some angry remarks on the sidelines of CES saying it was America’s loss that the AT&T deal fell apart. (Chinese article) But as they say in the entertainment business, the show must go on, which is what happened with Huawei. The company went ahead with its splashy event, announcing the partnership with Gadot and a US release date for its Mate 10 Pro on February 18.
Despite the loss of AT&T, Huawei still has a relatively impressive lineup of distribution partners, including retailing giants Best Buy (NYSE: BBY) and Amazon (Nasdaq: AMZN). But as anyone in the US knows, partnerships with the big carriers are key to gaining any kind of foothold in the market, since a big portion of smartphones are distributed by the carriers.
In this case I do find it somewhat ironic that some politicians may be coming down hard on Huawei, since the company’s cross-town rival ZTE (HKEx: 763; Shenzhen: 000063) has been selling to big US carriers including AT&T for years. But unlike Huawei, ZTE isn’t really seen as a threat in terms of its ability to create premium smartphones, nor state-of-the-art networking equipment. Huawei has gained a strong reputation in both areas, and I’ll acknowledge that I personally use a Huawei phone here in China and find it quite dependable and good value for the money.
Some are implying that US politicians are less worried about security and more about Huawei giving Apple (Nasdaq: AAPL) a run for its money. Other reports hint at similar protectionist sentiment, saying US telecoms chip giant Qualcomm (Nasdaq: QCOM) may be worried about Huawei encroaching on its turf with its own-developed chips. At the end of the day, at least Huawei can be relieved that its attempts to enter the US smartphone market weren’t formally blocked by Washington. But the company will still face a steep uphill battle in the market without a major carrier partner, even if it has a pretty face to show the public in Gal Gadot.