Huawei is planning on selling its budget smartphone brand unit Honor for a 100 billion Yuan (roughly 15.2 billion US Dollars) deal which will include the Digital China Group, and the local government of the brand’s home town, Shenzhen.

Previously, we had provided a closer look at the Digital China Group, which was just a potential buyer of the Chinese tech giant’s Honor subsidiary. Now, a new report from Reuters has arrived, which states that the company is planning on selling its subbrand for a large sum to the local government and others. For those unaware, Huawei had apparently been looking into selling its Honor unit as it has been facing various supply constraints due to US sanctions. It has lost its chip supply and having a budget oriented line would put further strain on its already dwindling chip inventory as well.

This report also arrives amid the US Presidency, which has had a change in leadership. Although, Huawei is clearly not hoping for any imminent changes in policy that would be favorable to its position. In other words, the security risk allegations might still persist despite Joe Biden taking over. The transaction is said to be “all cash” and will include almost every asset, branding, research and development capabilities, and even supply chain management as well.

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While this hasn’t been officially been announced, sources believe that the company might unveil this news by Sunday (15th November 2020). As per sources, the Digital China Group will be among the top two shareholders of Honor with a near 15 percent stake in Honor Terminal Co Ltd, which was previously fully owned by Huawei. The transaction will have Digital China finance the bulk of the deal through bank loans, which will further be supplemented by at least three investment firms that are backed by the government of financial technology hub Shenzhen. These firms would each hold about 10 to 15 percent of the shares.

After the deal goes through, Honor still plans on retaining most of its management and over 7,000 employees and workforce. Furthermore, it plans on going public within the next three years as per a source. At the moment, Honor has declined from commenting on the matter, while Huawei, Digital China, and the Shenzhen government have yet to respond on the matter.

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The US chip ban on Huawei in September was the final nail in the coffin for the brand’s smartphone business. Even though the Chinese smartphone giant has reportedly stockpiled chipsets for the next few months, it still won’t be enough to sustain the level of production and sales it has managed to achieve over the past few years. Considering the ban affects both its smartphone brands – Huawei and Honor, it will be difficult for the parent company to continue managing them with these constraints in place.

One viable option for Huawei would be to sell off its Honor business to someone who is not under the US’ radar. And according to Reuters, Huawei is in talks with several companies for the same. One of the likely candidates is a company called the Digital China Group. Other potential buyers include Xiaomi and even TCL.

While we have very little information on what’s happening behind the scenes, the Reuters report states that Digital China is one of the favorites to acquire a part of Honor’s smartphone business.

But who is Digital China and why would Huawei consider selling its booming Honor business to a company that’s relatively unknown in the international markets?

Who is Digital China Group?

Digital China Group is a popular name in the IT industry in China but has little presence outside of the domestic market.

Digital China Group was established in 1981 and is headquartered in Beijing, China. It is listed on the Shenzhen Stock Exchange. The company has a close relationship with Lenovo as it was once a part of its parent entity (Legend Holdings) before splitting off as an independent company in 2001. 

Lenovo and Digital China were part of the Legend Holdings in the 80s. The parent company started off its business working as an agency for top PC companies like IBM, AST, and HP before rolling out its own Lenovo PC brand in 1990. 

By 2000, Legend (Lenovo) was the No.1 PC brand in both China and the Asia Pacific. The company had grown to such an extent that it became necessary to split it off into two separate entities, one handling the Lenovo PC business and the other one, called Digital China Holding, focused on its agency and IT service businesses. The company’s agency business had tie-ups with hundreds of international brands. So the parent company decided to establish the agency division as a separate company to avoid internal conflicts with its own Lenovo PC brand. 

In 2015, Digital China Holding sold its sales and distribution business to Shenzhen Shenxin Taifeng Co Ltd for 4.01 billion yuan ($645.87 million). The resulting company was renamed as the Digital China Group Co Ltd in April 2016.

The Shenzhen listed Digital China Group Co. Ltd is China’s largest reseller of computers, servers, and network equipment. This includes the responsibility of distributing PC and smartphones for brands like Honor in the domestic market. The group has over 4000 employees and offices in over 50 cities across China.

According to Bloomberg, “Digital China Group Co., Ltd. engages in the communication service operation; research, development, production, and sale of communication equipment; and software development businesses. It also provides data and voice, cloud computing and digital transformation, IT distribution, and value-added services.”

Digital China is Very Close to Huawei

Digital China has been Huawei’s distribution partner for over a decade. The company has been the general distributor of Huawei’s enterprise products since 2011. And Huawei and Digital China have further deepened their partnership in the past couple of years.

In fact, Canalys reports that Huawei Enterprise Business Group (EBG) accounted for 25% of Digital China’s overall enterprise distribution business in 2016. In 2018, the two companies announced a joint strategy called ”Greater Huawei” to further strengthen its relationship in a number of emerging fields.

It is also worth mentioning that Digital China was one of the only two partners of Huawei Business Group to have exceeded sales worth 10 billion yuan ($1.49 billion) in 2018. The two companies work together in a variety of fields like smart agriculture, smart medical care, smart city development, and enterprise cloud services. 

The deep relationship with Digital china could be one of the big reasons why Huawei might consider selling of a part of its Honor business to the company.

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Why Digital China Group would want to buy Honor’s smartphone business?

While Digital China Group is primarily engaged in sales and distribution of enterprise and network products, it has shifted its focus on other businesses too. The company revamped its strategy recently, aggressively expanding into newer fields like smart city development and cloud services.

Digital China Group also has experience with Honor, acting as the distribution partner. Moreover, until the ban, Honor was doing really well in China and even internationally, it was one of the top 5 smartphone brands in some markets. The company sells devices in millions, with some of its individual series registering more than 10 million in sales.

Digital China’s close relationship with Huawei is another reason why it could be interested in this acquisition. Instead of selling off Honor to rival companies like Xiaomi or even TCL, Huawei would be more likely to accept a bid from someone who has experience dealing with the Honor brand and is close to the parent company. 

The Reuters report states that the deal could be valued anywhere between 15 billion yuan to 25 billion yuan (US$2.24-$3.7 billion). If Digital China is successful in its bid for Honor, it plans to finance this acquisition with bank loans in the coming weeks.

Win-Win for both the Companies

Honor is a very popular smartphone brand in China and is known in the international markets too. The brand has the ability to develop value for money smartphones targeted at the younger generation. If the company which purchases the brand manages to procure SoCs from chipmakers like MediaTek and Qualcomm, it could keep on selling a lot of Honor branded smartphones in China and abroad. Further, it could also reestablish the partnership with Google for GMS for Honor branded smartphones, opening up possibilities in the international market.

As for Huawei, it will be relieved to see that the Honor brand stays alive. Huawei along with Honor has captured 40% of the Chinese smartphone market. And Honor accounted for over 25% of Huawei’s sales in the second quarter of 2020 (14.6 million) according to Canalys.

Selling off Honor is probably the right move for Huawei. Even Ming-Chi Kuo, the popular analyst from TF International Securities says so. In his research note published last week, he mentioned, “If Honor is independent from Huawei, its purchase of components will no longer be subject to the U.S. ban on Huawei. This will help Honor’s smartphone business and the suppliers.”

But there are still a lot of questions regarding the potential sale of Honor. The biggest one is whether a change of ownership will allow Honor to procure components and software from US brands like Google and Qualcomm.

The Digital China Group has worked closely with state-owned clients in China to integrate IT services in the past couple of decades. But then it’s also close to Lenovo which so far has had a good relationship with the US. So it remains to be seen if a company like Digital China can be considered as the right candidate to bring Honor back into the market.

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