Huawei Deputy Chairman Ken Hu speaks during the Huawei Connect conference in Shanghai on September 18, 2019. Photo: AFP

Chinese telecom giant Huawei Technologies faces a challenging 2020 after a blowout 2019 when domestic growth more than compensated for market share losses abroad.

”It is going to be a difficult year for us … survival will be our priority,” said Eric Xu, Rotating Chairman of the company, in an internal memo to employees obtained by Asia Times.

“In 2020 we will continue to remain on the US Entity List. We won’t grow as rapidly as we did in the first half of 2019, growth that continued throughout the year owing to the sheer momentum in the market,” he said in a New Year’s Message for 2020. He estimated sales revenue would top 850 billion yuan (US$122 billion) in 2019 an increase of 18% over the previous year.

In May, the US Commerce Department put Huawei Technologies on a trade blacklist, citing national security concerns. This blacklist, called the Entity List, allows the US government to restrict sales of US-made goods to the company, and some items made abroad that contain US technology.

“2019 was an extraordinary year for Huawei. Despite concerted efforts by the US government to keep us down, we’ve made it out the other side,” he said.

He said 240 million units were shipped in 2019, an increase of around 17% over the previous year. This is higher than the estimate of 230 million forecast by Huawei’s Consumer Business CEO Richard Yu at a recent internal meeting.

Although it has a strong brand and its international success is well documented, time is running out for the world’s No. 2 smartphone maker.

“Despite Huawei’s outstanding performance in China, pressure is going to build in 2020 as the longer-term effects of being on the US Entity List start to bite,” said Ben Wood, chief of research, at CCS Insight in an email to Asia Times.

“Till now, the company has cleverly extended the lifespan of excellent devices such as the P30 device family, but as rivals unveil their 2020 Android-based portfolios it will become harder to compete in international markets without Google’s suite of applications and services.”

Competition is springing up everywhere – even at home. Smartphone rival Xiaomi has announced that it will launch at least 10 5G smartphone models in 2020. Other domestic competitors, such as Oppo and Vivo, are also likely to aggressively launch new smartphone models to meet rising demand for 5G smartphones.

As the US government increased restrictions on Huawei sourcing components from American companies, Huawei stepped up its drive to source and develop components in China.

In September it unveiled a smartphone that had no US parts and John Suffolk, the company’s top cybersecurity official, said in an interview to the Wall Street Journal that the company is now capable of producing – without US components – the 5G base stations that are key to the infrastructure needed for the high-speed network.

Still, it has miles to go.

“While Huawei is making significant efforts to substitute key components with domestic supplies to replace US suppliers, certain technologies could be more difficult to replace. For example, replacing the applications and services that run on Google’s Android operating system could take years,” said S&P Global telecom analyst Clifford Kurz.

“Huawei is currently working on its own operating system, Harmony, but developing an ecosystem of applications and services that run smoothly on the OS could be difficult in the near-term.  This could have a significant impact on Huawei’s overseas sales as smartphone consumers rely heavily on Android’s apps and services.”

This point is not lost on Huawei, which plans to install its Harmony operating system in more of its products next year in a bid to raise its popularity across the world.

Huawei’s Xu said in his internal note, the ecosystem for Huawei Mobile Services would drive smart devices sales outside China.

“In 2020, we need to go all out to build the HMS ecosystem, ensure that we can keep selling our smartphones in overseas markets, and support the innovation of our application partners.”

Nitin Soni of Fitch Ratings said Huawei may start further developing its Harmony OS and embedding it in its smartphones if the US-China trade war situation deteriorates.

And that escalation could come very quickly from Washington.

“If tensions flare up between US and China, there could be further tightening of sanctions on Huawei. Recently, some US trade representatives have publicly discussed whether 25% is the right ratio for the De minimis Rule, i.e. the amount of US content allowed within the value of the product before export restrictions take effect. US could consider lowering the threshold, thereby restricting more suppliers from doing business with Huawei,” said S&P’s Kurz.

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