How This Chinese Company Broke Apple's Smartphone Domination

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China has been infamous for making low-priced knockoffs of Apple's (NASDAQ: AAPL) iPhones. However, the country's smartphone manufacturers have come a long way from only producing cheap clones of Cupertino's much-vaunted device. In fact, one of them has now led Apple in worldwide smartphone sales for two quarters in a row.

The Numbers

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Huawei -- which is also known for providing telecommunications infrastructure -- has made quite a name for itself in the smartphone space. It sold more smartphones than Apple in the second and third quarters of 2018 and looks all set to expand its lead in subsequent quarters. More specifically, Huawei's smartphone sales stood at 52 million units during the third quarter, an increase of nearly 33% over the prior-year period, according to IDC's estimates.

Meanwhile, Apple's sales were almost flat year over year at 46.9 million units, and its market share barely grew 80 basis points to 13.2%. Huawei's massive growth gives the Chinese company a 14.6% share of the global smartphone market, up from 10.4% in the prior-year period, and also proves that smartphone companies can achieve impressive growth despite a perceived slowdown in global sales.

What's working for Huawei

Unlike Apple, which primarily caters to premium customers, Huawei covers a wider spectrum of the market with its various sub-brands. The Honor and Nova brands, for instance, are known for providing mid-range devices with flagship-like specs. This allows Huawei to lure younger-generation customers into its ecosystem by the barrier to entry for anyone looking for a flagship-like experience on a budget.

That's a smart way of creating a pool of young customers who will go on to buy a more expensive phone once they are ready to upgrade. Apple, on the other hand, sets a high barrier to entry for anyone looking to get into its ecosystem thanks to its premium pricing strategy.

For instance, the mid-range Honor Play launched at a price of 329 euros in Europe a few months back, while the two-year-old iPhone 7 starts at a price of 539 euros. What's more, the Honor Play trumps the iPhone 7 in terms of specifications and power, while also providing more storage and a bigger display.

But there's another aspect to Huawei's smartphone strategy: Huawei also competes against Apple's flagship phones with premium devices of its own. Huawei's latest flagship, the Mate 20 Pro, retails for 1,049 euros in Europe, while Apple's iPhone XS Max has a starting price of 1,279 euros on the continent.

The Mate 20 Pro isn't available in the U.S., and it likely won't ever be launched there. However, if it had been released stateside, it would have been priced close to $1,200 (based on the current euro exchange rate). That would have make it more expensive than the iPhone XS Max, which starts at a price of $1,099. As such, Huawei isn't scared of challenging Apple in the premium end of the market.

Going high end

While Apple has been accused of failing to bring new and innovative features to the iPhone, Huawei has done well in this department. The Mate 20 Pro comes packed with three cameras to support new shooting modes, supports fast wireless charging, and allows users to charge other wireless charging-compatible phones (acting as a power bank).

Some of these features might be considered gimmicky, but they are something that Huawei has and Apple does not. What's more, Huawei is capitalizing on another emerging tech trend -- artificial intelligence (AI). The company is heavily promoting this technology in its phones, claiming that it is using AI to process better images and extend battery life depending on usage patterns. So, Huawei is bringing high-end features to its phones and compelling users to pay a premium for its flagship devices, which are still cheaper than Apple's offerings in most cases.

Huawei is gaining acceptance as a premium smartphone brand. In fact, it is the brand of choice for affluent customers in a critical smartphone market like China. Research firm MobData has found out that iPhone users in China are typically high school graduates with a monthly income of less than 3,000 yuan. Meanwhile, Huawei users were found to hold a diploma or a bachelor's degree with a monthly income in the 5,000-yuan-to-20,000-yuan range.

Additionally, MobData points out that Huawei customers own real estate and cars, unlike their Apple counterparts. Now, the research agency didn't disclose the number of respondents who took part in this survey, but, assuming a reasonably large sample size, it suggests that the perception of Huawei's brand has changed.

Aiming for the top

That Huawei has overtaken Apple in smartphones isn't surprising. The company has been making the right moves to grow sales by boosting its real estate footprint, which has nicely complemented sales of its well-priced and feature-packed phones across different price segments.

Huawei is now gunning for the top spot in smartphone sales, aiming to overtake South Korean giant Samsung in the next two years. Apple, on the other hand, doesn't seem capable of reclaiming its lost spot, as its smartphone sales aren't growing anymore. The company is counting on higher average selling prices to boost revenue, but that strategy might backfire if Huawei keeps cutting into the premium end of the market.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.