Huawei became the most profitable Android smartphone maker during the third quarter according to Strategy Analytics. The research firm states that the Chinese tech giant claimed 2.4% ($200 million) of all smartphone operating profits worldwide during the quarter.
That put it ahead of Vivo and Oppo, which claimed 2.2% each, and ahead of all other Android OEMs worldwide (including Samsung (NASDAQOTH:SSNLF)) -- which had a combined share of 2.2%.
That's a pretty steep drop for Samsung, which was consistently the most profitable Android device maker in previous years. Let's see how Huawei displaced Samsung, and whether or not that lead can last.
How Huawei rose to the top
Huawei's mobile division posted 74% sales growth last year and accounted for a third of the company's top line. Its smartphone shipments surged 25% during the first half of 2016 to 61 million units, crushing the average industry growth rate of 3%. That growth made it the biggest smartphone maker in China, beating out its domestic rivals Oppo, Vivo, and Xiaomi -- in that order.
It also became the third largest smartphone maker in the world. Back in February, Huawei told CNBC that it planned to surpass Apple (NASDAQ:AAPL) as the second largest smartphone maker in 2019, and pass Samsung as the biggest player in 2021.
Huawei initially mimicked Xiaomi's strategies of selling high-end hardware at paper-thin margins and selling devices online instead of at brick-and-mortar locations. However, Huawei recently started manufacturing its devices in India, which reduced its production costs. Meanwhile, Chinese consumers started buying more expensive premium devices, giving Huawei more freedom to move upmarket with pricier products like the P9.
Huawei's patent portfolio (from its core telecom equipment business) gave the Chinese company the strength to expand overseas. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google also had Huawei create its well-received Nexus 6P flagship device, and Huawei partnered with German optics and camera maker Leica to create a standout dual-lens camera for its P9 flagship.
That combination of higher sales, lower manufacturing costs, upmarket appeal, and overseas expansion have enabled Huawei to make a profit from its Android devices -- something that many rivals, including Xiaomi, have failed to do.
Samsung could bounce back next year
Samsung mainly lost its crown to Huawei due to declining device shipments related to the Note 7 fiasco. However, the company has since stopped manufacturing the device, and most analysts expect Samsung to recover over the next few quarters. A recent Reuters/Ipsos survey also found that the debacle hadn't hurt the company's brand appeal.
Therefore, a new flagship launch next year could help Samsung regain lost ground from Huawei and other rivals in China -- especially among affluent urban customers who favor status symbol devices from Samsung and Apple.
But both companies are overshadowed by Apple
Huawei is now the most profitable Android device maker, but its 2.4% operating profit share pales in comparison to Apple's whopping 91% share ($8.19 billion). That percentage is remarkable when we consider that Apple only controls around 12% of the smartphone market, according to IDC, while Samsung and Huawei respectively hold shares of 23% and 9%.
Strategy Analytics director Linda Sui attributes those "monster profits" to "Apple's ability to maximize pricing and minimize production." Its overall profitability was also amplified by the fact that other vendors, like HTC and LG, had negative margins.
It also demonstrates how Apple's "walled garden" approach of controlling its hardware and operating system shields it from market commoditization. Android users can easily switch between expensive and cheap devices without leaving Google's ecosystem, which helps Google but hurts hardware makers.
Apple users, however, are "locked in" to the iOS ecosystem -- meaning that they lose all their digital purchases and content if they switch to Android. That advantage gives Apple tremendous pricing power, and ensures that it will stay much more profitable than its Android rivals for the foreseeable future.
The key takeaway
The Android OEM market is a brutally competitive one, and only larger companies like Huawei and Samsung can squeeze out profits with economies of scale. That's bad news for also-ran Android players like HTC and LG, which will likely keep losing money as a handful of bigger players gobble up all the profits in the market.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.