HTC China

Google Returns to China, As a Hardware Company — Financial Times

Leave a Comment / August 12, 2020

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The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile. By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimise the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to achieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought in 2011 Motorola’s mobile phone business and unloaded it two-and-a-half years later to China’s Lenovo, a deal that has not worked out at all well for the Chinese company.

But, this time Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google introduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world”. Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies probably just got a lot harder to achieve.

In the seven years since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 per cent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

 

As published in the Financial Times

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China’s Mobile Phone Market Is Maxxing Out on Growth

3 Comments / September 23, 2010

Portrait of Kangxi Emperor from China First Capital blog post

During the first eight months of this year, 547 million mobile phones were sold in China, a 36% increase over the same period last year. At the current rate, more mobile phones will be sold in China this year than there are mobile users. In other words, on average, everyone of China’s 780 million mobile subscribers will buy a new mobile phone this year.

Can this possibly be true? Outside of China, mobile phone sales are basically flat, with most of the growth now coming from sales of smartphones like those made by Apple and HTC. Based on the current sales pattern, China will account for over 60% of all new mobile phone sales in 2010.

What is happening in China that could account for phenomenally high growth rate? I’m at a loss to explain it. Anecdotally, I can’t find much evidence of this remarkably high rate of new phone sales.

Most Chinese I know are using phones that are at least a year old. Nokia phones are particularly common in my circle. Overall, Nokia is still the biggest selling mobile phone brand in China. But, its sales in China are not doing very well, and the company is losing market share.

China’s Ministry of Industry and Information Technology compiles the statistics on Chinese mobile phone sales. They do a professional job gathering and transmitting data on China’s mobile market. So, I have no reason to doubt the basic accuracy of the numbers. The absolute number may possibly be off, but the 36% growth rate is probably correct.

If so, the larger question may not be one of accuracy, but of sustainability. In other words, if mobile phone sales are growing by 36% a year, is there any way that rate of year-on-year growth could continue into 2011 and beyond? I have severe doubts about this. For one thing, if the 36% annual growth rates continued through 2012, overall annual sales will double from the current high level. If so, every Chinese mobile subscriber on average would end up buying two new mobile phones a year. That, as the British like to say, “beggars belief”.

It may well be that the fantastically high growth rate we now see in China will begin to plateau very soon. If so, the overall market dynamic will change from one of rampant growth, in which even the weakest players register growth every year, to one where a company’s ability to generate sales growth will comes mainly from increasing market share.

In other words, from a manufacturer’s standpoint, the market changes from one of absolute growth to one of relative growth – or loss. It will happen soonest for products like mobile phones, where the market is reaching saturation.

There is still plenty of organic growth left for other fast-growing items like new cars, computers, white goods, and a full range of brand name products, from laundry detergent to Italian suits.

I bought a new phone recently,  an HTC Legend, running on Google’s Android operating system. But, it didn’t register on the Ministry’s figures.

Like a lot of people living in Shenzhen, I bought my new phone in Hong Kong, where prices are as much as 35% cheaper, and there’s far more certainty of getting a phone with all its original circuitry intact. It’s not all that uncommon for brand name phones in China to be doctored before sale. They look authentic on the outside, but have some cheaper, replacement parts within.

HTC is still a niche brand in China, though with very ambitious plans for growth over the next year. I bought the HTC in large part because the company is an investor and partner of one of my clients.  I like the phone, and like the fact it’s not an iPhone.

I have nothing against the Apple product. I just prefer, in phones and most other things, to choose brands that aren’t already dominant in their market.

Apple phones, either genuine or knockoff, are far more common in China than anywhere else in the world, as far as I can tell. Apple just announced plans finally to begin selling its new iPhone4 in China, months after it went on sale in the US, Europe and much of Asia. The price is still well above the level in Hong Kong, but I have no doubt the phone will sell well.

Apple computers are still very rare in China. There are very few places to buy one. This is a major untapped opportunity for the California company, since anything with the Apple brand is going to sell well in China. Apple has begun opening retail stores in China, but as of now, there are only two, one each in Beijing and Shanghai.

Apple is certainly one of the companies that should continue to thrive in China’s mobile market, even as it shifts from absolute to relative growth. HTC too. As for the others, both global and domestic brands, it’s going to be a dogfight.