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By Wang Hailu

At the last minute of the joint venture, Huawei's automotive business unit became profitable, giving Huawei another bargaining chip at the negotiation table.

According to Yunjian Insight, Richard Yu, Executive Director of Huawei and Chairman of the Automotive BU, recently announced internally thatHuawei's Intelligent Automotive Solutions BU (hereinafter referred to as the Car BU) achieved semi-annual profitability.

In March this year, at the China Auto 100 Forum, Yu Chengdong said that the automotive business unit was on the verge of breaking even. He expected that from April onwards, "it should be able to turn losses into profits."

Smart CarAsk the worldThe sales volume not only helped the car BU to turn losses into profits ahead of schedule, but also achieved half-year profits. According to data from Autohome, Wenjie sold a total of about 181,000 vehicles in the first half of this year.QJM9 About 59,000 units were sold, with the starting price of RMB 250,000.QJM7 About 107,000 units were sold.

The mass delivery of high-premium models helped Seres turn losses into profits in the first quarter of this year. In the second quarter performance outlook, Seres also predicted that it would achieve semi-annual profitability, with net profit attributable to the parent company of approximately 1.39 billion to 1.7 billion yuan.

Following closely, the car BU, which had been losing money for many years, also ushered in a turning point in its performance.

Huawei's Automotive BU has been established for five years, with an investment of more than 30 billion yuan and a 7,000-person R&D team. But until the first quarter of this year, it had been losing money.

Last November, Huawei decided to split the Automotive BU and introduce Changan and other automakers to form a joint venture. People close to the Automotive BU said that Huawei's move was to "stop the bleeding" and quickly recover funds to invest in more important R&D projects.

However, just a few months later, the car BU achieved self-sustaining growth.

The negotiation of Huawei's car BU spin-off began last year, involving many parties and with many twists and turns. In January this year, the largest investor of the joint venture,Changan AutomobileChairman Zhu Huarong also pointed his gun directly at Zhixuanche, which is led by Yu Chengdong.

In the second half of the negotiation,Car BUProfitability may allow Huawei to take more initiative in the final game.

Car BU split, Changan supports HI mode‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍‍

Huawei's automotive BU was spun off, led by rotating chairman Xu Zhijun, with Changan Automobile and its affiliates as the largest investors.

According to the "Memorandum of Investment Cooperation" signed by Changan and Huawei in November last year, Huawei will register a new company (later named "Yinwang") and inject the assets and personnel of the automotive BU. Changan and its affiliated companies will acquire shares with a shareholding ratio of no more than 40%.

Dongfeng and FAW also plan to participate. According to foreign media reports, the shareholding ratio of these two companies does not exceed 5%.

Seres, a partner of Huawei Smart Car, also received an invitation to invest in the joint venture at the first opportunity. Cloud Insight learned that Seres is currently actively raising external funds to attract investment. Huawei promised not to withdraw for three years and not to engage in competing businesses. After three years, the joint venture has plans to go public.

Although many automakers have shown great interest in taking over the BU, at present, Changan will be the largest automaker shareholder in the joint venture and will have greater say.

In January this year, at Changan Automobile's supplier conference, Chairman Zhu Huarong publicly declared his sovereignty. "Three monks can't drink the water." He said, "This time, it must be Changan and Huawei. First, drive this car and make it a public platform, and then open it to other vehicle companies and all walks of life."

Changan and Seres both use parts from Huawei's Automotive BU, but Seres benefits more from it. As a partner of Smart Car, Huawei not only helps Seres build cars, but also sells them. The hot sales of the Askjie helped Seres turn losses into profits, with a market value of over 100 billion yuan.Avita, only 29,000 units were sold in the first half of this year, 6 times lower than the world's. Changan paid for the equity of the car BU, hoping that Huawei would allocate more resources to itself rather than its competitors.

Zhu Huarong also said that Changan supports the HI model and believes that "other models" have problems. He believes that there are two main reasons why Changan chose to cooperate with Huawei in the HI model instead of the smart selection model: first, car companies must have their own brands - the smart selection car brand was owned by Huawei at the time; second, under the smart selection model, the responsibilities of Huawei and car companies are unclear, which is not in the interests of users.

Huawei took action quickly. In May, June and July of this year, Huawei transferred the trademarks of the three brands "Xiangjie", "Zhijie" and "Wenjie" to its partner car companies. Among them, the trademark "Wenjie" has the highest value, with an evaluation company's valuation of 10.2 billion yuan, and finally Seres won it for 2.5 billion yuan.

At a recent live broadcast event, Yu Chengdong could not hide his regret. He said that selling the Wenjie trademark to Seres for 2.5 billion yuan was a requirement of national laws and regulations, and the brand owner and manufacturer must be the same company. "We have invested a lot in Wenjie, and this brand is worth at least tens of billions of yuan."

Changan’s concerns about brand ownership have been dispelled. What will happen to the smart selection model next? Zhu Huarong once said that Huawei and Changan “did a good job of research and discussion.”

Insight has learned that:After the car BU became profitable, some subtle changes took place in Huawei's internal discussions on smart car selection.

A person close to Huawei said: "When discussing the joint venture before, they wanted to cut off Zhixuan, but now it is obvious that with tens of billions of dollars in monthly turnover, the top management has taken a more neutral stance."

Car BU is profitable because of Smart Car

Although Changan supports the HI model, it is the smart selection model initiated by Yu Chengdong that has turned the car BU from loss to profit.

The competition between the two major models of Huawei's automotive business has become an open "secret". The HI model was proposed by Huawei's rotating chairman Xu Zhijun, advocating that Huawei, as a supplier, empowers car companies and provides full-stack smart car solutions.

The Smart Selection model was initiated by Richard Yu, Chairman of Huawei's Automotive Business Unit. Huawei controls the entire product definition, R&D, supply, and manufacturing process, and sells cars to automakers through offline channels. Under the Smart Selection model, Huawei has greater control, the brand belongs to Huawei, and the cooperating automakers are more like Huawei's OEM factories.

Before 2021, Huawei had been exploring the supplier model.BAIC, Chang'an,Guangzhou AutomobileThree automakers have signed HI model cooperation agreements with Huawei. However, among the three companies, the cooperation between Huawei and GAC has not yet reached mass production.BAIC ArcfoxThe Alfa S sold a total of several hundred units in the first half of this year, and the HI version was directly cancelled for this year's replacement model. BAIC switched to the smart selection mode in 2023 and launched the "Xiangjie" brand. The first car, S9, is scheduled to be launched in August.

The only remaining brand with a strong reputation in the HI model is Changan's Avita. Avita has launched two models, Avita 11 and 12, based on the HI model. According to official data, it has sold about 29,000 units in the first half of this year.

This is far from enough for the Automotive BU, which has 7,000 R&D personnel. If we roughly estimate the per capita R&D expenses of Huawei's 114,000 R&D personnel last year, the annual R&D expenses of the Automotive BU are around 10 billion.

Yu Chengdong once pointed out the problems of the supplier model in an internal speech: "How can the products of those companies that choose our automotive BU be sold? They have no brand, no channel, no retail, and no product design or experience. They can't even beat the new forces in car manufacturing, so who else can they beat?"

In 2021, after Yu Chengdong took over the automotive BU, he began to vigorously promote the smart selection model. Huawei first cooperated with Seres to launch the Wenjie brand, and then copied the same model toChery, BAIC andJAC。

Smart Car was not a huge success from the beginning. The first three cars Huawei and SERES jointly developed - SF5, the first generation M5 and M7 - did not go through a complete development cycle. After the products were launched, their sales and reputation were not satisfactory, and there were even after-sales problems in terms of quality and safety.

But through these three cars, Huawei has figured out the basic process and methodology of car manufacturing. In September 2023, Huawei released a modified model of the M7, upgraded the product, but reduced the starting price by 70,000 yuan. Combined with the popularity brought by the launch of the Mate 60 mobile phone, the M7 became a hit, receiving 100,000 orders in two and a half months. Smart Car won its first victory.

At the end of the year, Wenjie took advantage of the success and launched the high-end SUV Wenjie M9. This is a car that Huawei and Seres spent three years to build from scratch, equipped with all the advanced technologies of the car BU at that time. After the M9 was launched, the orders exceeded 100,000, and it became the sales champion of models above 500,000 yuan for nine consecutive weeks.

With the launch of new products and the continuous replacement of old products, the "Chinese content" of smart cars is getting higher and higher.

First GenerationQJM5 The M7 is only equipped with Hongmeng cockpit and Huawei DriveONE three-in-one electric drive, while the M7 adds intelligent assisted driving function. The new generation of these two cars this year has made the intelligent driving function standard. The M9 is equipped with Huawei's "full family bucket", including the Tuling chassis, the Jujing 800V high-voltage battery platform, ADS 2.0 intelligent assisted driving function, Hongmeng cockpit 4.0, AR HUD and smart projection headlights.

With the growth in sales and the improvement in “Chinese content”, the revenue earned by the Auto BU also increased, and finally crossed the break-even point in the first half of this year.

Huawei established the Automotive BU in order to become a supplier to automakers. However, being a supplier of Smart Cars has enabled the Automotive BU to complete its business cycle.

Selling more cars is the premise of all cooperation‍‍‍‍‍

After the separation of the car BU, can it maintain today's profitability?

The car BU's turnaround was mainly due to the launch of the M7 and M9 models, the M5 and the Huawei-Chery collaboration.SmartS7 The Car BU relies on the continued hot sales of its two main models and also needs more successful products to maintain today's profitability.

In the past, the Automotive BU was unable to install components on more mass-market models for two main reasons: some automakers were afraid that Huawei would build cars and did not dare to cooperate with Huawei, while others were discouraged by the high prices of the Automotive BU's products.

Huawei has always adhered to a high-gross-profit pricing strategy to maintain high R&D costs. According to the annual report, Huawei's sales gross profit margin in 2023 was 46.2%.

The gross profit margin of the auto parts industry is far lower than this. As automakers engage in price wars and force suppliers to reduce costs, parts companies are in a particularly passive position.

Desay SV's gross profit margin in 2023 is only 20.4%, of which the smart cockpit and smart driving are 20.6% and 16.22% respectively. Some small suppliers will lower their gross profit margins in order to get orders.

But Huawei did not do so. Yunjian Insight learned that the software and hardware cost of Huawei's ADS 2.0 intelligent driving solution equipped in Wenjie is about 30,000 yuan, the Hongmeng cockpit is about 10,000-20,000 yuan, and the IDVP digital platform is about 10,000 yuan. Avita is equipped with Huawei's three-laser intelligent driving solution, which costs 10,000-20,000 yuan more.

These products can all be found in the market. Some of Huawei's products offer better user experience, but their prices far exceed those of its competitors.

Only car companies that are deeply tied to Huawei are willing to pay for the expensive parts of the car BU. Only high-premium models can afford the cost of parts for the car BU.

At the Blue Book Forum in June this year, Yu Chengdong also said impatiently: "Many people are complaining that our cars are too expensive. It's not that we don't want to sell them cheaply, but we don't have the ability to sell them cheaply. If we sell them cheaply, we will lose money."

Zhixuanche’s unique model and explosive sales have masked many problems.But today, the car BU is going to be removed from Huawei. With new shareholders, the business model is also facing new challenges.

In the past, Huawei mainly obtained three sources of income from car companies: brand marketing and sales expenses for smart cars, which were approximately 10%-15% of the average selling price after tax and belonged to the Terminal BG; R&D expenses for components, among which the overall R&D expenses for smart driving and Hongmeng cockpit were in the range of tens of millions to hundreds of millions of yuan.‍

Finally, there are the components themselves, including hardware and software license fees.Smart driving, smart cockpit, digital platform, car cloud, AR-HUD and smart lightsThe six major businesses will be assigned to the automotive BU, and those related to the three electrical businesses will be assigned to Huawei’s subsidiary Digital Energy.

The underlying technologies of the six major businesses of the Automotive BU all come from Huawei, so internal settlements are also required with Huawei HiSilicon, Hongmeng, cloud, and optical product lines. After the separation, the joint venture will become a customer of Huawei's various business lines.

It is still unknown whether the joint venture will renegotiate the settlement ratio with upstream and downstream companies.What is certain is that if we want to truly become an independent parts company and better empower car companies, we must make our products more competitive in the market.

This is also the common interest of all shareholders of the joint venture.

They came together with Huawei for different reasons. Changan hopes to form a closer alliance with Huawei through the joint venture and create the next world.

Although SERES has acquired the Wenjie brand, if it wants to maintain today’s momentum, it still needs to rely on the power of Huawei while constantly improving its own manufacturing and quality management systems.

Huawei needs to run the joint venture well so that its various business lines can continue to obtain sustained and stable income from it.

Whether it is HI mode or smart selection, Huawei's help for car companies to sell more cars is the premise of all cooperation.

Title image source: Huawei