Huawei prepared to sacrifice its Honor to get round US restrictions

• Honor brand and R&D up for sale
• Buyer a consortium of other Chinese companies
• Move gives extra pace to US$ 1.7 trillion "Made in China 2025" programme
• ​70 per cent of nation's core technologies to be produced domestically within five years

It looks as though the rumours that first began circulating in October are true. Huawei will sell its Honor handset brand and business in an effort, in part, to get around the US embargo. Reuters has confirmed as much this morning in an exclusive posting. Honor handsets are high-tech, stylish, packed with features, comparatively inexpensive and globally popular (particularly with teenagers and the 18 to 30 years old demographic).

However, American sanctions mean that, just like parent company Huawei, it can no longer use Google services or embed the Android operating system in its devices. That has had a profound effect on Huawei's handset sales of which the Honor brand accounted for 26 per cent of the total of 51.7 million cellphone shipments made in the most recently reported trading quarter of July through September of this year. 

Huawei is working flat-out to design and manufacture its own 5G chips and come up with its own sort of Android-ish but non-Android equivalent OS to end its dependency on US technology but nonetheless the decision has been made to sell-off the Honor brand.

It will go to a consortium comprising the Government of Shenzhen (Shenzhen was established as China's first special economic zone back in 1980), Digital China (the largest integrated IT service provider in China and the main distributor of Honor phones), TCL Technology (a multinational electronics conglomerate) and Xiaomi (manufacturer of smartphones, laptops and mobile apps). The all-cash deal could be worth "up to" US$15 billion (but other estimates put it anywhere between $5 billion and $10 billion) and would involve the Honor brand, R&D and the accompanying supply chain.

Theoretically a sold-off Honor would not necessarily be subject to the US embargo and given that Donald Trump will no longer be president in 2021 when the deal would be completed, the new company would be, must be, hoping that the incoming Biden administration will be easier to deal with than that of its predecessor - although that is almost certain to be mere wishful thinking. A spun-out Honor may well be an entirely separate company but it would surely still be reliant, in both the short- and long-term, on a supply of Huawei components to build its devices. Meanwhile, Huawei will plough on alone and focus on very high-end 5G devices and the global business market (excluding the US).

Reuters says that the new Honor will retain its management team and its workforce of some 7,200 and plans to take the company public within three years of becoming independent. Given that ambition, it is likely that the new company will take due note of the current travails of Jack Ma. Having angered the Chinese Communist Party and seeing the IPO of the Ant Group stopped in its tracks as a result, he will be paying close attention to the dictum to "Honor and Obey" from now on.  

China wants to evolve from "world's factory" to world-leading technology powerhouse within five years

According to data from Germany-headquartered analysis company Statista, China produced over a billion handsets over the course of last year but total smartphone shipments fell early in 2020 as the Covid-19 virus began to spread and had a massive impact on both the Chinese domestic and export market. Nonetheless, it is expected that the number of smartphone users in China will hit some 800 million by the end of the year. 

Elsewhere, the China Academy of Telecommunication Research reports that in excess of 380 of the 529 handset makers in the PRC are making smartphones. Such companies are mainly clustered in and around Shenzhen in Guangdong province and the Pearl River Delta megalopolis, bordering Hong Kong to the south, Huizhou to the northeast and Dongguan to the northwest. 

The report adds that the manufacturing of mobile handsets in China overall will increase by a compound annual growth rate (CAGR) of 3.1 per cent between this year and 2025. Meanwhile, data from the online platform "Research and Markets" report on  Mobile Phone Exports in China 2020-2024" shows that between 2017 to 2019, the total volume of China's mobile phone exports actually declined from 1,213.22 million to 994.09 million. Nonetheless, export values rose.

Huawei's decision to hive-off Honor should be viewed through the lens of the Communist Party's "Made in China 2025" programme which has been given additional impetus by the restrictions imposed on Huawei by the US, the UK and other countries.

The intent is to move the PRC from its current position and role as "the world's factory" and to accelerate, enhance and modernise the production of high technology in strategic sectors such as aerospace, biotech, IT, pharmaceuticals, robotics, semiconductors, smart manufacturing and smart cities and telecoms and to achieve independence from foreign suppliers.

The goal is to boost the Chinese-domestic content of core technologies to a minimum of 70 per cent by 2025 and the government has allocated a budget of $1.7 trillion to the project. It is serious stuff but it would be as well to remember the words of Colin Powell, the US army general who was Secretary of State from 2001 to 2005. He said, "Leaders honor their core values but tend to be flexible in how they execute them." You can say that again.