Huawei's sale of its Honor mobile brand was likely pressured by US ban on its access to semi-conductors. Image: Facebook

SHANGHAI – Zhixinxin Technology Co Ltd will take over Huawei’s Honor mobile phone brand in a widely reported 100 billion yuan (US$15.3 billion) deal, a tech giant divestment to a lesser-known entity that has raised as many market questions as it has answered.  

Days after the deal’s announcement, commentators and analysts have raised questions about the state’s role in the transaction and whether it has been designed specifically to circumvent US sanctions imposed against Huawei, including bans on its access to semi-conductors made with US equipment.

Huawei’s divestment of the low-tier brand marks the first major revamp since US President Donald Trump imposed a catalog of sanctions and bans against the privately-held Huawei in a widening tech war between the US and China.

“The sale is also the bid by Honor’s nationwide suppliers and distributors to salvage themselves and attenuate Honor’s market dominance and its successful business model,” Huawei said in a statement. “Huawei, after the completion of the deal, will have no roles or stakes, none whatsoever, in Honor’s future operations and endeavors.”

Huawei said the statement was prepared to “set the record straight.”

Yet questions remain, particularly about the state’s role and financing of the deal. Zhixinxin was incorporated less than two months ago with capital contributions from more than 30 Honor suppliers and distributors including state-owned China P&T Appliance and leading e-commerce group Suning, an Honor press release said.

The Shanghai-based news portal Jiemian reported that Zhixinxin’s largest stakeholder is the Shenzhen government’s State-owned Assets Supervision and Administration Commission, according to Zhixinxin’s company registration files at Shenzhen’s Municipal Market Regulation Administration.

A corporate pitch for Huawei’s Honor smartphone sub-brand on May 31, 2019. Photo: AFP

The commission, through a wholly-owned investment vehicle founded to promote the city’s telecommunications and smart city development, owns 98.6% of Zhixinxin’s shares and according to the report is expected to call the corporate shots at Honor following the takeover.

Chen Ke, a spokesperson of Shenzhen’s Industry and Information Technology Bureau, told Asia Times that the bureau would always encourage “acquisitions and mutual help” by tech companies based in Shenzhen, and that the city’s deputy major and other senior cadres had “personally coordinated and brokered” the Honor sale.

The spokesperson said the deal was facilitated by cheap loans guaranteed by local lenders to ensure that Zhixinxin could make swift payment to Huawei. 

Asia Times’ searches on third-party Chinese company registration information platforms showed that Zhixinxin’s registered capital was a mere 100 million yuan ($15.3 million). That means the new company will apparently rely largely on loans and capital raised from investors to make the 100 billion yuan ($15.3 billion) acquisition. 

State backing for the deal and the proceeds Huawei will reap from the sale give Huawei’s eponymous flagship smartphone line-ups like the Mate and P series breathing room at a time when the company’s chip stocks sourced from TSMC, Qualcomm and others is reportedly running low due to the US imposed bans.  

An employee with Huawei’s R&D center in Shanghai who requested anonymity told Asia Times that by selling Honor, Huawei’s semiconductor stockpile could support continuous shipments of its other brands until the first or second quarter of 2021.

He added that Huawei would typically need at least 100 million chips each year to meet demand for its smartphones and other consumer gadgets. Huawei is now pouring money into its HiSilicon chip design and manufacturing arm, but it is not expecting any immediate breakthroughs, the Huawei R&D employee said. 

America’s tech war on Huawei misses the technological point. Image: Twitter

With its low cost and sleek designs that sought to ape more expensive foreign brands like the iPhone, Honor sold about 70 million handsets in 2018 and 2019, mostly to price-sensitive buyers in China’s lower-tier cities and counties.

Huawei founder Ren Zhengfei once said that Honor represented a strategy to piggyback on Huawei’s high-end models to tap China’s massive rural market.

“When we have a design of a top-line model, it’s easy and economical for us to copy the same design for a cheaper phone under the Honor brand, with less advanced components at a more affordable price,” said Ren at the time.

It is unclear if the brand’s sale was Ren’s initiative but the deal has nonetheless brought existing US sanctions and bans on Huawei into sharper relief.

Indeed, there are already doubts if Honor, following the spin-off, can resume buying chips from Taiwanese and Western suppliers and using Google’s Android operating system just because it is no longer under Huawei’s corporate umbrella.  

“Huawei has called the sale a ‘transitional retreat’ from its low-end smartphone business and now aims to dissociate itself from Honor’s future sourcing of parts,” said the Huawei technician in Shanghai. 

“But Honor, an independent company as it may now look like, may still be entangled in sanctions and legal rows already targeting its former parent, because the link and the lineage are still there and the US government won’t be so early fooled,” he said.

Wan Biao, Huawei’s senior vice president and chief operating officer for consumer business, will transition to become Honor’s new president. He will lead a team whose members are largely poached from Huawei, including Huawei’s former IT, quality assurance and retail managers.

Honor has also reportedly promised not to undercut Huawei’s products in future head-to-head competition. Honor’s 8,000-strong staff, meanwhile, will reportedly see minimal changes to their contracts and benefits as they were at Huawei, according to reports. 

Huawei’s public relations department declined to comment on the transaction, but Wan told the Shenzhen Special Zone Daily state newspaper that the company is now “independent from Huawei,” and would seek to float shares on the city’s bourse to “enhance transparency and win the trust of regulators, suppliers and consumers.”