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Reuters/Paul Hanna
King without a crown.
KING OF WISHFUL THINKING

Huawei’s stagnating profit shows why Android smartphones make for terrible business

Josh Horwitz
By Josh Horwitz

Asia Correspondent

Huawei has spent the better part of the past two years gunning to become the next smartphone king. But the Chinese handset maker’s annual report for 2016  revealed a plunge in profit growth, marking a plateau to the company’s fast ascent. The drag in growth tells a familiar lesson—you can be king (or crown prince, rather) of Android smartphones for a day, but not for a lifetime.

Huawei, while little-known in the United States, has enjoyed soaring sales in in China, Europe and the Middle East for several years. The company used its relationships with telcos in those regions to refashion itself from a supplier of network equipment, to a maker of Android phones capable of competing with the best that Samsung and other rivals could offer. But even as its global market share approaches Apple’s, a pressing question looms—what’s next?

The company’s latest financial report suggests phones will no longer grow the business meaningfully. In 2016, the company’s top-line revenue remained healthy, hitting 521.6 billion yuan (about $75.6 billion). That marks a 32% increase from the year prior.

Okay, so everything’s great, right? Not quite. The company earned 37.1 billion yuan (about $4.5 billion) in net profit by year’s end. That marks an 0.5% increase from the prior year, and brings a grinding halt to years-long growth.

Huawei makes money through three business units—one that sells network equipment to carriers, one that sells enterprise software to large businesses (like banks and transportation providers), and one that sells phones that consumers purchase. The latter one has played a large part in the company’s growth—data show that it now accounts for 34.5% of the company’s revenue, up from 21.9% of revenue in 2012.

But as Huawei continues to sell more phones, its devices have become less profitable as greater competition has required them to spend more spending on marketing. The new darlings of the China smartphone market are now Oppo and Vivo, which have spread across China and Southeast Asia with aggressive marketing, a savvy retail sales strategy and competitive pricing. They’re on their way to unseating Huawei as the world’s number-two top selling Android brand (and arguably already have, if you consider that they’re owned by the same parent company).

One possible route to continued growth is to sell more phones in the US. Political issues have kept Huawei from putting its devices in front of Americans, though the company has reportedly made some progress toward inking a distribution deal with AT&T (paywall).

If it can’t do that, however, the company has two options to keep growing—double down on its existing lines of business, or develop new ones to make money. This crossroads can spell life or death for Android smartphone makers. Samsung’s stock price has soared since it fell back on components amid slowing smartphone sales. Xiaomi, on the other hand, is scrambling to find a new revenue stream to make up for its phones’ waning popularity, lest its valuation collapse (paywall).

To that end, Huawei has dipped its toes in the predictable hot areas—wearables, “internet-of-things”, and now artificial intelligence. The company’s growing top-line gives it some runway to experiment. But with competitors on its tail, it will have to move quickly to transition from “Future King of Android” to “King of Something Else.”