U.S. chip sanctions forced Huawei to sell its budget smartphone brand

Chinese telecommunications giant Huawei Technologies is selling its budget smartphone carrier Honor to a group of Honor resellers and suppliers to shield the brand from U.S. sanctions that have starved Huawei of semiconductor chips.

In a statement announcing the sale on Tuesday, Huawei said that a “persistent unavailability of technical elements needed for our mobile phone business” has put its consumer business under “tremendous pressure.”

The sale of Honor is a bid to ensure the “survival” of the subsidiary and its suppliers, according to the statement.

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In August, the U.S. government imposed new restrictions that banned semiconductor chip manufacturers that use U.S. technology from selling their products to Huawei. The chips are essential to smartphones, and it’s unclear how Huawei will access the components to build new phones once it uses up its existing stockpile.

The U.S. government has tightened restrictions on Huawei over the past two years owing to Trump administration claims that Huawei represents a national security threat. (Huawei denies the allegations.)

The restrictions take advantage of Chinese companies’ dependence on foreign-made chips. Self-sufficiency in semiconductor manufacturing is a strategic priority for China, but the nation has long struggled to produce its own chips.

The group of Honor resellers and suppliers that is acquiring the brand proposed the deal. The consortium, called Shenzhen Zhixin New Information Technology Co., was formed for the purpose of buying Honor. It’s made up of more than 30 companies involved in the supply and distribution of Honor phones, including firms backed by the Shenzhen city government. (Huawei is headquartered in Shenzhen.)

In a Tuesday statement, the consortium called the deal “a market-driven investment made to save Honor’s industry chain.”

After the sale, Honor will no longer be a subsidiary of Huawei. Huawei will hold no shares in Honor, nor will it have any say in management or decision-making for the brand, suggesting that Honor will be exempt from the supply chain restrictions that target Huawei once the deal closes.

Neither side disclosed the financial terms of the deal, but Reuters previously reported that the Honor sale would be worth $15.2 billion. Huawei declined to comment.

Honor launched in 2013 and ships over 70 million units annually, according to Huawei’s Tuesday statement. That figure represents around 29% of Huawei’s total smartphone shipments for 2019, according to research firm Counterpoint.

Honor-branded smartphones are priced lower than Huawei-branded phones and sell in mainland China, where they compete with other low-cost smartphone brands like Xiaomi. Honor is also available in Southeast Asia, India, and Europe.

“This sale will help Honor’s channel sellers and suppliers make it through this difficult time,” the Huawei statement said.