Q419 will be a crucial test for Huawei as its new flagship (Mate 30) will not be a Google ecosystem device, meaning that Huawei faces a Herculean task to convince users to buy its device. I think that without the Google (NASDAQ:GOOG) (NASDAQ:GOOGL) ecosystem installed at the factory, market share outside of China will trend to 0% down from the 19.3% that it held in Q2 19 (Counterpoint Research).
My research firm (Radio Free Mobile) has long argued that user purchase decisions are based on the ecosystem within which they live their digital lives. Outside of China this choice is either Apple (NASDAQ:AAPL) or Google and shipping a device with neither is going to bewilder consumers.
The situation in China is much less clear cut, as devices tend to ship blank and users then download the digital ecosystem services that they want to their devices after they have bought their device. This has resulted in Baidu (NASDAQ:BIDU), Tencent (OTCPK:TCEHY), and Alibaba (NYSE:BABA) all having a few dominant services within China and sharing the digital life of the user between them.
If Huawei thinks that it can replicate this model outside of China, I think that it is in for a rude awakening. Non-Chinese users are used to having the digital ecosystem installed on their devices at the point of sale and in Q4 19, all of Huawei’s competitors will still have Google installed. This will make it very difficult to entice users to buy Huawei devices as they will lack the single most important feature that needs to be present when a user buys an Android device outside of China.
Instead of Google, users will be offered Huawei’s user experience EMUI and a series of apps which they have never used before.
Penetration of smartphones is now so high that almost every buyer will be switching from an older smartphone and so that user will already have preferred apps and services (a lot of which will be Google). Hence, not offering these on the device is likely to be a major turn-off driving existing Huawei customers into the arms of its rivals.
I can see a potential workaround, but I do not believe that it is going to solve the problem. This would involve placing a link on the home screen that when clicked, downloads and installs the software for Google Play, which is freely available from multiple sources. Once this is installed, then the user can log in and download and install all of the other apps and services he had on his previous device.
On the surface, this sounds like a good solution but there is more to the Google ecosystem than just the apps.
OEMs install a package called GMS (Google Mobile Services) which, in addition to the Google apps, includes a series of other software packages and services which enable the apps on the device to perform optimally. Most Android developers expect these services to present on devices that they develop their apps for and there is no way that Huawei will be able to install these packages and services on its devices.
The net result is that apps from both Google and third parties will perform unpredictably on Huawei devices, which do not have GMS installed at the factory.
This will still be an inferior experience for users compared to Samsung (OTC:SSNLF), Xiaomi, Oppo and Vivo devices making the offering of its opponents far more attractive.
Hence, I continue to think that Huawei’s ex-China market share will continue to collapse unless it can somehow restore GMS to its Android devices. There is little sign of this and so Huawei’s share looks certain to accrue to someone else.
The prime candidate for this remains Samsung has it already has the infrastructure and the boots on the ground to hoover up the sales that Huawei fails to make. I continue to think that this is not reflected in Samsung’s valuation and so I am happy to keep Samsung in my portfolio. The outlook for Huawei remains very grim indeed.
Disclosure: I am/we are long SSNLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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