Under Ren Zhengfei's clear bottom line of "not making cars," Huawei is deeply influencing the direction of China's automotive industry through technology and capital partnerships.

As a key player in the era of smart cars, Huawei has new moves.

On August 20, AVATR Motor and Huawei officially signed the "Equity Transfer Agreement" to officially invest in Yinwang Intelligent Technology Co., Ltd., acquiring a 10% stake with a transaction value of RMB 11.5 billion.

Huawei's partnership with AVATR is intriguing. The cooperation between Huawei, AVATR, and Changan Auto behind it has been through many setbacks. Last November, Huawei and Changan Auto signed the "Investment Cooperation Memorandum," and Huawei completed company registration in January this year. The agreement, originally scheduled to be completed in 6 months, was finally concluded after delays, including rumors that Changan Auto internally assessed the project as too complex and had to be postponed.

AVATR Motor is a joint venture of Changan Auto, which was one of the earliest automakers to commit to investing in Huawei's automotive BU. Changan Auto hopes to deepen its partnership with Huawei and enhance AVATR's market competitiveness through AVATR's investment in Yinwang.

During this period, Huawei has been active in its automotive business, from deeply binding with Thalys to transferring trademarks and “letting go” to facilitate, from competition among three automotive business models to revising to “helping automakers build good cars.” Huawei's internal debate on the direction of its automotive business has always been publicly exhibited.

At the time of selling trademarks, Huawei's big turn took place, and as a mainstream automaker, Changan Auto's cooperation was the most suitable partner: one in urgent need of intelligent upgrades and the other eager to demonstrate the service capabilities of a super vendor.

The establishment of Yinwang is an important symbol of Huawei's split from its independent automotive BU. It is seen as an intuitive demonstration of the rebirth of the new industrial chain in the era of smart cars. It is also Huawei's in-depth influence on the direction of China's automotive industry through technology and capital partnerships, under the clear bottom line of "not making cars" established by Ren Zhengfei.

Part.1

Route Controversy

Analyzing Huawei's automotive business route controversy cannot be separated from its business model.

As early as 2020, when Huawei announced its entry into the smart car market, Ren Zhengfei clearly stated in Huawei's EMT Resolution [2020] No. 007 issued on October 26, 2020: "Huawei does not manufacture complete vehicles but focuses on ICT technology to become a supplier of incremental components for intelligent connected vehicles, helping enterprises build good cars."

This attitude of being a vendor can be seen as Huawei's demonstration of a new player's posture of win-win cooperation with traditional automakers. However, in reality, Huawei's strategic decision to enter the automotive market is closely related to its own production crisis.

Since 2019, Huawei has faced comprehensive sanctions from the United States, including bans on Huawei technology equipment, inclusion on the Entity List, and chip procurement restrictions, which severely impacted its communication, mobile phone, and other businesses. Revenue dropped from RMB 890 billion in 2020 to RMB 630 billion in 2021.

From this perspective, finding new business growth poles became Huawei's top priority, leading to its strong entry into the automotive market. Huawei's combat effectiveness in the in-vehicle information field is formidable, with products such as HiCar, HarmonyOS in-vehicle system, 5G chip-equipped vehicles, and charging pile modules successively launched, giving Huawei sufficient bargaining chips to deeply participate in the market without directly manufacturing cars, positioning itself as a Bosch-like automotive technology supplier, which is strategically safer and more stable.

Initially, Huawei focused on two business models: components and HI mode.

From a practical business model perspective, the advantage of the component model lies in efficiency, with hardware and software products such as electric drive systems, motor controllers, and HiCar providing debugging services without the need for commercial-level integration with customers. In contrast, under the HI mode, Huawei provides a full set of HI solutions including HarmonyOS in-vehicle computers and self-developed in-vehicle computing chips to automakers and authorizes the use of the HI logo on the vehicle body. Technically and commercially, this is deeper than the component model. In actual business, traditional automakers such as Beijing Automotive Group, Changan Auto, Dongfeng Motor, and Guangzhou Automobile Group have also cooperated with Huawei under this model.

However, a turning point occurred in 2021. In November, Huawei grandly launched the third model of its automotive business—the Smart Selection Car.

Under this model, Huawei provides a complete set of new energy vehicle solutions and participates in product definition, styling design, marketing, user experience, quality control, and other aspects, while the cooperative automaker is responsible for vehicle development, manufacturing, and delivery. Compared to the previous two models, the Smart Selection Car model undoubtedly better demonstrates Huawei's comprehensive capabilities but also requires partners to accept deeper integration with Huawei.

The launch of this model has actually deviated from Huawei's established automotive business route. The reason for this deviation is likely revenue, which remains the primary factor. According to media reports, for every M5 sold, Huawei can earn approximately RMB 26,000, and for every M7 sold, RMB 35,000. In contrast, the HI cooperation model has been questioned internally at Huawei for its high investment costs and inability to generate profits in the short term.

Looking at Huawei as a whole, the 2022 Annual Report disclosed that the automotive BU generated revenue of RMB 2.077 billion, with a cumulative investment of USD 3 billion since its inception and over 5,000 R&D personnel in the automotive business. Such an input-output ratio naturally necessitates change.

To improve revenue, the Smart Selection Car model is undoubtedly a better choice.

From a timeline perspective, in April 2021, Yu Chengdong took over as CEO of Huawei's automotive BU team. During the same period, Huawei announced a cooperation with Lifan Auto (now Thalys Group) and launched the Thalys SF5. In November, the Smart Selection Car model was officially launched, and in December of the same year, Thalys and Huawei unveiled the AITO brand and its first model, the AITO M5. The rapid promotion of the Smart Selection Car model reflects Yu Chengdong's urgency, bringing Huawei closer to actually manufacturing cars.

Facing the dual challenges of survival and development, Ren Zhengfei and Yu Chengdong have demonstrated different approaches to solving problems in the development path of Huawei's automotive business. Ren Zhengfei, as Huawei's overall strategic helmsman, tends to focus on the B-end supply chain, adhering to a long-term perspective. In contrast, Yu Chengdong, as the head of Huawei's consumer business, has taken a more proactive stance in the automotive business, betting on the C-end market and driving Huawei's transformation from behind the scenes to the forefront in the field of smart cars.

The two implemented business models have vastly different paths and have not achieved the expected results, so the route controversy will only escalate further.

Part.2

The Soul That Crosses Boundaries

Regardless, Huawei's high-profile entry into the automotive field has been a significant impact on existing players. Internal route differences can be resolved through consultation among senior executives, but from the perspective of industry veterans, even though Huawei forms partnerships with them, it still faces an unavoidable question—who is the soul?

This question stems from the different genes of each party. Traditional automakers have extensive experience in design, manufacturing, craftsmanship, and quality control, while Huawei has been involved in the market as an automotive component supplier since 2012, with its core business long focused on in-vehicle communication modules, IoT, and other information fields.

What automakers cannot avoid is that with the advent of the new energy vehicle wave, electrification is accelerating comprehensively, and the ultimate goal of electrification is intelligentization, a trajectory that complements Huawei's years of technological accumulation.

However, the problem is that intelligentization will eventually evolve into a core functional area of automobiles. If traditional automakers fail to prepare for this transformation, they are likely to be at a disadvantage in market competition and even jeopardize their survival.

Therefore, the cooperation between Huawei and automakers faces a long-term issue: who will sell their soul? Large automakers cooperate with Huawei through the HI model to a limited extent, and the Smart Selection Car model is also approached with the attitude of experimenting with one model. If it becomes popular, it's a bonus; if not, they don't lose much. Consequently, the range of automakers that Huawei can truly cooperate with on the Smart Selection Car model is limited to those that trust Huawei's products and allow it to deeply participate in vehicle development and pay for it.

The automaker that meets these conditions is undoubtedly Thalys.

Source: Chaoliukj.com

To some extent, Thalys's cooperation with Huawei is more like clinging to a powerful partner. There is a huge gap in size and brand between the two parties. If the vehicle launch is unsuccessful, Huawei may take over. In 2021, Thalys SF5 sold only about 8,000 units. However, after Yu Chengdong took charge of the cooperative model AITO in 2022, a large number of Huawei stores began purchasing sample cars, and even the logo was suddenly changed from "AITO" to "HUAWEI AITO." With this strong empowerment, annual sales reached 75,000 units, significantly increasing market share.

However, even if Thalys intentionally cedes management rights to facilitate deep cooperation, it must still face resistance from the non-automotive faction within Huawei. Shortly after the AITO logo appeared with Huawei's mark, Ren Zhengfei issued the "Resolution on Huawei Not Making Cars," reiterating that "Huawei does not make cars" and prohibiting the use of "Huawei" or "HUAWEI" logos on vehicle promotion and exteriors. Shortly thereafter, at the annual report press conference, Rotating Chairman Xu Zhijun bluntly stated to the media that some people did not cherish the Huawei brand and emphasized Huawei's basic principle of "not making cars."

Obviously, Huawei's senior executives' successive statements indicate that someone has crossed the line internally. However, externally, Huawei's cooperation example with Thalys has left many automakers with the impression that Huawei's soul has crossed boundaries.

Precautions followed. Although the front motor of the Ideal MEGA uses a motor product provided by Huawei, amidst fierce competition with AITO and L series models, Ideal abandoned Huawei's intelligent driving system and chose to develop its own. Among mainstream automakers, either self-research or choosing Bosch and DJI solutions are preferred, with Huawei's high-profile intelligent driving system not being the first choice.

The reasons are twofold: on the one hand, Huawei's increasing involvement in car manufacturing makes customers wary; on the other hand, its high product and service fees leave little profit margin for partners.

As early as 2021, BAIC Motor's ARCFOX HI model garnered much attention as the first to equip Huawei's intelligent driving system. However, the model, scheduled for delivery at the end of the year, was delayed until July 2022. Even more surprising was that the price of the ARCFOX HI version was RMB 85,000 higher than the non-HI version. Under Huawei's high technology premium, the market did not buy into the model, and ARCFOX did not publicly disclose specific sales figures for the HI version.

Such a failed cooperation deterred other automakers and indirectly corroborated the view expressed by an SAIC executive in June 2021: Intelligentization is the most profitable part of automobiles. Once it falls into the hands of other partners, vehicle profits will be significantly affected.

In fact, it is not only defensive traditional automakers who recognize the soul-like role of intelligent driving functions but also the aggressive Yu Chengdong. On the afternoon of April 1, 2023, at the China EV100 Forum, Yu Chengdong admitted to many peers that neither new forces nor traditional large automakers would use their intelligent solutions, implying that only partners like Thalys would accept their crossing of boundaries.

Thus, Huawei's paradoxical logic in car manufacturing emerges: To enter the market with its intelligent solutions, Huawei must deeply participate in vehicle design and development, which will occupy partners' profit margins. Occupying profit margins will shake the foundation of cooperation, leading to doubts that will harm the brand.

It's a vicious cycle, a tangled mess.

Part.3

Independence or Integration

The automotive BU is indeed in an awkward position within Huawei. As early as 2022, Ren Zhengfei specifically mentioned Huawei's automotive BU in the document "The Company's Overall Business Strategy Should Shift from Pursuing Scale to Pursuing Profit and Cash Flow," requiring it to become more refined and larger, achieve a commercial closed loop, and play the role of an industry technology platform.

However, over the years, the automotive BU has become Huawei's only losing business unit internally and faced external doubts about soul misalignment from peers. The answer to reversing this situation lies in Huawei's recent cooperation with Changan Auto.

Last year, there were persistent rumors of Huawei selling its automotive BU. According to media reports, Huawei's automotive BU contacted the Chongqing State-owned Assets Supervision and Administration Commission in August, and in November 2022, rumors of a split resurfaced, with an overall valuation of RMB 250 billion and Changan Auto confirmed as the investor.

Although both parties denied it at the time, they subsequently signed the "Investment Cooperation Memorandum," revealing Huawei's independent automotive technology.

According to Huawei's plan, the company invited investments from Thalys, Dongfeng Motor, FAW Group, and other automakers, with the intention of becoming an open platform for the electrification and intelligentization of the automotive industry with the participation of the entire industry. The primary role of establishing the new company is to inject Huawei's automotive intelligent driving solutions, automotive smart cockpits, automotive digital platforms, smart car clouds, AR-HUD, smart headlights, and related technologies, assets, and personnel (approximately 7,000 people) into the new company.

In addition to its business appeal to automakers, Huawei's BU for vehicles is also attracting significant attention for its promising future. At the China Electric Vehicle 100 Forum (2024) held in March, Yu Chengdong, Chairman of Huawei's Consumer Business Group and Smart Car Solutions BU, stated that the vehicle BU had previously lost 10 billion yuan annually, followed by 8 billion yuan, and 6 billion yuan last year, but there is a strong hope of turning a profit this year.

All conditions necessary for the independence of Huawei's vehicle BU have been met. If the establishment of the new joint venture goes smoothly, it will fundamentally resolve the "soul debate" between automakers and Huawei. For traditional automakers, the new joint venture, which transforms customers into shareholders, transforms paying for services into profit-sharing, and promotes transparency between parties, addresses all potential issues through mutual integration.

As for Changan's investment in the new joint venture, completing the investment at this juncture represents a severance from the past and a vision for the future for Huawei. Everything is perfectly timed.