FIH's Bet on a New Smartphone Client Could Be a Winner: Gadfly

(Bloomberg) -- FIH Mobile's brief affair with the coolest kid on the block was good while it lasted.

Landing Xiaomi as its marquee client just as the little-known Chinese startup was reinventing the smartphone sales model was a stroke of luck. For a company previously tied to the likes of Nokia and Motorola, any customer that could promise growth and scale was a welcome change from six years of declining sales.

The relationship was equally important to Xiaomi. The company's young founders were initially turned away by an FIH sales team more accustomed to dealing with global names. Without a large-scale manufacturer, there was little chance for Lei Jun and Lin Bin's dreams of making it big by cutting out retailers and telecom operators, and instead selling phones directly to consumers online.

But senior managers at FIH, Foxconn Technology Group's handset business, saw the potential and made a bet that a company with no sales channel, no intellectual property and limited staff could actually sell tens of millions of smartphones.

The tie-up was a success. FIH, which had missed out on the largess of Apple iPhone orders, showed rare sales growth, and Xiaomi was climbing up China's smartphone market-share charts.

By late last year, however, the signs of Xiaomi's waning growth were evident. Despite management's public claims that things were fine, its own suppliers had started preparing for significantly lower sales than Xiaomi was publicly forecasting, and were shifting capacity to other customers.

Given its depth and breadth in the smartphone industry, FIH was no doubt among those making other plans.

Enter Huawei. Just as Xiaomi executives were about to publicly admit missing their sales target -- selling 70 million phones instead of an earlier forecast of up to 100 million -- the other Chinese smartphone maker was telling the world it had surpassed that magical 100 million mark.

Huawei phone-shipments milestone

100 million

Significantly for FIH, the 100 million units that Huawei shipped sold for an average 43 percent more per device than Xiaomi's, according to data from IDC and Bloomberg Intelligence.

FIH is now building a factory in Guizhou just for Huawei. That makes sense for several reasons. First, Huawei's higher phone prices offer FIH a better return per device, helping justify the investment in dedicated capacity. Second, Huawei has a vast intellectual-property library, its own semiconductor unit, and a strong design team, making its products more robust in the face of a slew of look-alike smartphones. Third, Huawei is a truly international brand with room to expand globally -- an advantage Xiaomi is unlikely to enjoy soon.

Not that the move is painless. Two weeks ago, FIH sprang a profit warning for the first half of 2016, saying the transition would result "in lower sales of the group's products."

In a conversation with Bloomberg News this time last year, FIH Chairman Vincent Tong said he was looking for the next Xiaomi and "our own way back to glory." And he saw opportunities in India, as the country looks set to become the industry's next growth market.

While Xiaomi has struggled to gain a foothold in India, Huawei's size makes its prospects there much better. By throwing money at a new Huawei factory, FIH may be telling investors it's already found the next Xiaomi.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

©2016 Bloomberg L.P.

Source: FIH's Bet on a New Smartphone Client Could Be a Winner: Gadfly