This Gadget Maker Doesn't Trust Google or Microsoft

Many domestic smartphone consumers may not be as familiar with this hardware OEM, but it's been up and coming in recent times in the Chinese market. Huawei has attacked the low end of the Chinese mobile phone market with notable success, saving development costs by historically shipping its devices with stock versions of Google (Nasdaq: GOOG  ) Android instead of adding layers of modifications that other vendors are apt to do.

It's been done before
The company is starting to feel the pinch of competing heavily in low-end, commoditized markets; in July, it reported a 22% drop in operating profits for the first half of the year. Huawei's largest business remains selling telecom equipment hardware to carriers -- 74% of sales in 2011 -- but its consumer business in making gadgets has been steadily growing. The segment saw sales jump 44% last year and grew from 17% of overall revenue to 22%.

The OEM is at a pivotal strategic moment. Huawei has made a name for itself by making generically branded white-box devices, and is now tasked with taking control of its branding destiny in order to grow consumer perception of its wares. Taiwanese OEM HTC successfully navigated this transition years ago and has become a well-known hardware vendor, including in the important U.S. market, despite having fallen on hard times within the past year.

Follow the leader
Huawei has now decided to follow in the footsteps of nearly all Android OEMs before it, and last month unveiled a new modified interface, Emotion UI. By ditching stock Android like everyone else, it will hope to differentiate itself from its hardware rivals by using custom software. The interface even slightly resembles Apple's (Nasdaq: AAPL  ) iOS, removing Android's app drawer and putting all apps on a unified home screen. HTC has its Sense UI, Samsung has TouchWiz, and Huawei will have Emotion UI.

According to a recent Reuters report, Huawei is considering taking its software strategy to the next level. Earlier this week, CEO Wan Biao said, "We're also devoting resources into coming up with a phone operating system based on our current platform in case other companies won't let us use their system one day."

The gadget maker also has Microsoft (Nasdaq: MSFT  ) Windows 8 devices in its pipeline, so Wan's statement is a clear hedge in the event that Google or Microsoft decide to cut Huawei out of the loop for some unforeseen reason. It doesn't want to entrust its software future with those heavyweights, so it's putting together its own mobile operating system.

The trouble there is that the mobile OS landscape is an entrenched war among titans, and there simply isn't room for any other OS entrant to become viable. Building a platform from scratch is no easy task, especially when you're talking about potentially competing with Apple, Google, and Microsoft.

However, even exploring a rivaling OS might just land Huawei in hot water with Google, considering Big G recently strong-armed Acer out of using Alibaba's new Aliyun mobile OS. Android chief Andy Rubin defended this tactic by saying Aliyun is derived from Android, a claim that Alibaba denied. How will the search giant feel about Huawei working on its own OS?

What choice do we have?
The company will need a strong strategy to compete with Apple and Samsung in the important Chinese market, which is expected to become the world's largest smartphone market this year. Huawei is hoping to ship 60 million smartphones this year, which might be a stretch since sales so far have been shy of initial hopes. Right now, Huawei claims just 5% of the global smartphone market, a slice it wants to grow to 15% by 2015.

The strategic motivation for exploring a proprietary OS is clear, except any such move would be futile and likely fail. Huawei might not like it, but it might just have to trust Google and Microsoft.

Microsoft is taking a shot at iOS and Android dominance with Windows Phone 8. It's a risky proposition, but it might just pay off. Luckily, the software giant's other cash cows are as lucrative as ever, and you can read all about them in this new premium report. Sign up today and get free updates for a year.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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