Huawei's EV Conundrum: Bridging the Gap Between Innovation and Industry Acceptance
Huawei's EV Conundrum: Bridging the Gap Between Innovation and Industry Acceptance
A deep dive into Huawei's challenges in the dynamic Chinese EV industry
Recently on the China EV 100 Forum, Huawei's Richard Yu (CEO of their consumer & automotive group) made an interesting comment that created a lot of stir and debate in the industry and on social media:
"We are currently being sanctioned as a tier-1 supplier, so OEMs from the US, Japan, and Germany will not use our solutions. For EV startups, Li Bin and Li Xiang are both here presenting today. They also have their own aspirations and will not use us. Legacy OEMs who are afraid of losing their souls also will not cooperate with us."
It was a rare moment of candor and peak inside the group's own challenges & frustrations in finding product market fit. Today, I want to do a bit of a deeper dive into Huawei’s challenges in the industry and how they are navigating the competitive dynamics.
In late March, internal disputes arose regarding Huawei's strategy for its automotive division. Initially, the company appeared to be angling for a more significant role in the sector, as evidenced by the early March launch of "HUAWEI AITO" branding.
However, during the annual report meeting on March 31, Huawei reasserted its decision not to manufacture cars and condemned such behavior as "brand abuse." This suggests differing viewpoints within the organization concerning the development of its automotive division.
While Yu remains committed to growing the automotive sector aggressively. Managing this internal division has proven to be challenging.
Huawei's initial entry into the automotive industry attracted considerable attention. On paper, it was a no brainer decision, considering its strong brand, industry know-hows in ICT, and the timely emergence of smart electric vehicles. Their Harmony OS, which they developed in-house, is impressive by all accounts.
However, things haven’t been smooth sailing with their OEM partners. To date, they have partnership agreements with 4 OEMs under the Huawei Inside (HI) model: Sere (via Aito), BAIC (via Arcfox), Changan (via AVATR) and GAC. Under this model, Huawei provides full stack solution with the OEM and participates in vehicle design, quality control, drive unit development, as well as vehicle software (including infotainment and semi-autonomous driving).
To date, Huawei have seen limited success here:
AITO is the most successful to date (70k+ units sold in 2022), but sales have lagged behind leading players such as Li Auto, NIO, XPENG, and even ZEEKR.
AVATR shows some early promise, but its first model AVATR 11 is likely not a volume driver
Arcfox partnership have largely floundered and they have yet to launch anything with GAC.
So while Huawei is making steady progress, things have not progressed nearly as quickly as they would have hoped for. Today, I’d like to explore some of the Huawei’s challenges as well as how I expect them to navigate these choppy water.
Challenge 1: control over the "soul" of the car
One primary challenge that Huawei Harmony is encountering, mirroring Apple Carplay's experience, is persuading automakers to adopt the new technology in the first place. Top automakers have so far been hesitant to integrate Huawei’s third-party software into their vehicles.
The main reason is because they are worried about Huawei infringing on their own brand identity. Similar to the criticism Apple Carplay has received for supplanting the manufacturer's native infotainment system, Huawei's Harmony OS could be perceived as a threat to automakers' brands. If Harmony becomes overly dominant, it may obscure the distinction between the automaker and the technology provider, making it challenging for the automaker to set itself apart from competitors.
Two years ago, during a shareholder meeting, SAIC Group's chairman, Chen Hong, was asked whether the company would collaborate with Huawei on self-driving vehicles. Chen Hong declined, stating that such an outcome would be tantamount to SAIC losing its essence.
"If a company were to provide us with a comprehensive solution for autonomous driving, it would become the vehicle's essence, and SAIC would merely serve as the body. This is not an outcome that SAIC can accept. We must retain control of the essence."
This stance is not uncommon. In fact, GAC Aion made a similar decision recently to reclaim its "essence" from Huawei. On March 27, GAC announced that its AH8 project would no longer be a joint venture with Huawei. Instead, it would become an internal project with Huawei serving as a key supplier. As a result, the relationship between the two companies has been diminished from the HI (Huawei Inside) model—where Huawei participates as part of the core development team on communication architecture, intelligent cabin, and autonomous driving—to a more limited supplier role.
It’s not just the large state-owned electric vehicle enterprises reluctant to relinquish control of their own "essence," new EV startups also share this sentiment and are developing their technology independently.
At the moment, this really only leaves legacy OEMs that have neither the scale, know-how nor the ambition as potential viable partners. The problem here is that this is an incredibly small pool of players that fit this description.
Huawei is spending Billions of yuan to develop the technology and knowhow, but there simply aren’t enough partners in the pool to make this venture commercially viable in the short term.
Challenge 2: For OEMs, is Huawei a wolf in sheep clothing?
Huawei’s capabilities are both impressive. Upstream, Huawei can be a critical technology partner who is deeply integrated in OEM’s product planning, vehicle design, and software and hardware development process. They can help you develop anything from best in-class autonomous driving solutions to drive units and inverters.
Downstream, they can also simultaneously be the brand’s largest and most effective brand marketing and sales channel. They have more than 11,000 retail stores in China and is the largest consumer brand in China.
While impressive, these abilities are also simultaneously terrifying. Often an unequal relationship like this leaves very little room for the OEM to create and extract value. With Huawei's abilities, it’s not a stretch to say that the only thing preventing it from becoming an auto manufacturer is a contract with CATL and its willingness to get into the arena. It always feels like Huawei's path to become an auto manufacturer is just one official announcement away. The deep collaboration with AITO to date certainly doesn’t help dispel that rumor, despite what the company have repeatedly stated in public.
Challenge 3: How does Huawei auto business become commercially viable?
According to Richard Yu: "The automotive business has an annual investment of about 10 billion RMB, with over 7,000 direct R&D personnel and possibly more than 10,000 indirect Huawei platform personnel investment."
Meanwhile, the corresponding revenue for the intelligent automotive business is only 2.08 billion RMB. Incinerating more than 8 billion RMB ($1.1B+ USD) is a hard pill to swallow for any company, especially when there’s no clear timeline on when these investment can become viable in the future.
What’s next for Huawei
Based on the aforementioned reasons, if you play out the game theory, I think Huawei will eventually have to enter the automotive market on their own. They are placing massive investments in key EV technologies (motor, inverter, BMS, quality control, autonomous driving etc.) With growth stalled in all other areas due to economic sanctions abroad, Huawei has to make these auto investments payout. In this current situation, Huawei actually doesn’t control its own destiny, which is a very precarious place to be.
The industry changes quickly. In the medium term, there’ll likely be some consolidations in China’s automotive industry over the next 2-3 years. Maybe OEMs attitude will change in favor towards Huawei as some inevitably drop out of this technology arms race. Some might even go bankrupt or be placed on fire sale. At that time, Huawei can step in and soak up the idle industrial capacity, whether by acquiring those capacities outright or work out a deal similar to NIO’s partnership with JAC.