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Will China's Fastest-Growing Smartphone Company Beat Apple and Samsung?

By Jamal Carnette, CFA – Feb 29, 2016 at 3:20PM

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Huawei has an ambitious goal to be the No. 1 smartphone maker. Can it beat Apple and Samsung in the next five years?

Many in the U.S. are unfamiliar with Nexus 6P manufacturer Huawei. Company executive Richard Yu aims to change that. Image Source: Alphabet

You can't blame Huawei's management for feeling confident. In 2015, the company edged out former technology darling Xiaomi to become China's fastest-growing smartphone manufacturer. According to market researcher IDC, Huawei increased its smartphone shipments a massive 44% in 2015 to become the third-largest smartphone vendor with 106 million unit shipments. While trailing No. 1 Samsung (NASDAQOTH: SSNLF) (325 million) and No. 2 Apple (AAPL 0.23%) (231 million) in total shipments, the company's growth far outpaced the 10.1% total market growth.

Perhaps confident is understating Huawei's ambitions. According to Richard Yu, Huawei's device chief, the company thinks it can be the No. 1 smartphone manufacturer in five years and take the No. 2 spot within two to three years. In what could be considered the understatement of the year in technology (so far), Yu followed his ambitious statement, according to a report in Re/Code, by saying, "Maybe I am not humble." Can Huawei succeed in this formidable goal?

Huawei wants to be No. 2 in 2-3 years
While Huawei quickly became the No. 3 smartphone vendor, claiming 7.4 % market share, the road to No. 2 will be much harder. As of last year, Apple claimed that title with 231.5 million unit shipments. Huawei would have to increase shipments 47% annually over the next two years or 29% annually over the next three years to eclipse Apple's current total. Note this is calculation is contingent on Apple not increasing its iPhone shipments at all during this time frame, a highly improbable scenario considering Apple increased shipments 20.2% last year.

It would help to increase shipments in the United States. Although the country has recently been surpassed by India as the world's second-largest smartphone market, the United States' position as the largest developed market should help Huawei increase shipments of high-end, profitable smartphones. Additionally, a highly successful U.S. launch has spillover benefits of elevating the company's brand profile in developing countries, much like how Apple is considered a luxury brand in China.

Last year, Huawei won the coveted manufacturing contract for Alphabet's current-gen Google Nexus 6P, but even Yu admitted the company is "quite late" in its U.S. smartphone strategy. While contribution from the United States is helpful, perhaps the best path for Huawei is to continue to focus on the developing markets.

Samsung may be an easier target... especially in developing markets
Ironically, Huawei's best strategy for achieving No. 2 status (and eventually No. 1) is to set its sights upon the current No. 1 vendor: Samsung. Samsung typically utilizes a bifurcated smartphone strategy by pushing the Galaxy smartphone line in developed markets and a host of low/mid-range form factors in developing smartphone markets. While this catapulted Samsung to the No. 1 smartphone manufacturer with IDC estimating 325 million shipments in 2015, Samsung's anemic growth rate of 2.1% points to trouble ahead for the South Korean electronics conglomerate.

In developing, price-sensitive markets like India and China, Huawei has a better chance of growing shipments. IDC credits Huawei's "affordable handsets in emerging markets," for the increased market share. In China, Huawei has a home-grown advantage in a country where many executives think the government tends to unfairly promote domestic competitors. The next battleground for these two will most likely be India. India's projected GDP growth rate of 7.8%, low current online-penetration rate, and fast-growing mobile Internet user projections make it an attractive market for low/mid-range smartphone models.

On a user-shipment basis it's possible for Huawei to continue its torrid growth. But I think the vast majority of future growth is going to come from the razor-thin margin low end while Apple and Samsung are more worried about high-end growth.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of AAPL. The Motley Fool owns shares of and recommends GOOG, GOOGL, and AAPL. 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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