Huawei phones were super hot in Europe. Not anymore

Huawei phones had been flying off the shelves in Europe. No longer.

The Chinese tech giant has seen phone salesslidein its most lucrative international market after being placed on a US blacklist that makes it tough for Huawei to do business with American companies.

The company conceded as much this week. Founder and CEO Ren Zhengfei said that overseas smartphone sales dropped by 40% since the middle of last month.

Huawei has won a 90-day reprieve from the US sanctions. But the blacklist could limit the company’s access to Google (GOOGL) apps such as Gmail and YouTube. For most Europeans, such smartphone features are essential.

“European consumers need Google services,” said Ben Stanton, senior analyst at research firm Canalys. “In Europe, [the ban] is catastrophic.”

Europe’s importance

Huawei’s smartphone business had been a bright spot for the company as it faced enormous pressure from the United States, which claims its products pose a risk to national security (Huawei denies this).

Global sales soared 30% last year, positioning the company to ultimately overtake Samsung as the world’s top smartphone brand.

Europe played a huge part in this success.Huawei sold about 26.3 million smartphones in Western Europe in 2018, up more than 60% on the previous year, according to market research firm IHS Markit.

Visitors pass in front of the Huawei's stand on the first day of the Mobile World Congress in Barcelonaon on February 27, 2017 in Barcelona. - Phone makers will seek to seduce new buyers with artificial intelligence functions and other innovations at the world's biggest mobile fair starting today in Spain. (Photo by LLUIS GENE / AFP) (Photo credit should read LLUIS GENE/AFP/Getty Images)

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“It’s pretty much the one market where they’re able to sell their high-end phones, and [they] have been doing so successfully,” said Gerrit Schneemann, a mobile analyst at IHS Markit.

To build recognition, Huawei went on a marketing blitz, partnering with celebrities and emphasizing its high quality cameras.

Huge billboards advertising its new P30 smartphone have been plastered across the region, appearing near canals in Italy and on skyscrapers in Madrid. Travelers arriving at Terminal 5 of London’s Heathrow Airport are greeted by pictures of the phone and encouraged to “rewrite the rules of photography.”

These campaigns, as well as retail partnerships with top carriers such as Britain’s Vodafone (VOD) and EE that guaranteed shelf space in stores, gave Huawei real muscle, according to Schneemann.

Tourists on a boat pass by a Huawei billboard on the Naviglio canal, south of Milan.

“All the major carriers have Huawei handsets in their inventory,” he said. Vodafone and EE had also planned to include Huawei phones in their 5G launch plans.

That momentum has been largely blunted by the US ban on exporting software and components to Huawei. While second quarter sales figures have yet to be tallied, it’s clear that consumers are reluctant to buy Huawei phones in the current environment.

“Consumers are justifiably saying to themselves, should I spend $1,000 on a device when I have some uncertainty about whether it will continue to be supported?” said Peter Richardson, research director at tech consultancy Counterpoint Research.

Assessing the damage

The US ban could still be shelved as part of a trade deal with China. All eyes will be on the meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit next week.

Political consultancy Eurasia Group says there’s a 40% chance that Trump and Xi will strike a truce. That would mean that both sides agree to continue trade talks and find a solution on Huawei.

Uncertainty is keeping customers away in the interim.

Prospective customers have been hesitant to sign contracts, according to salespeople at London stores of mobile carriers O2 and Vodafone. Some people even tried to return their Huawei phones after the ban was announced.

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One salesperson said that when shoppers ask if they should buy a Huawei phone, they steer them toward a Google Pixel instead.

The employees asked to remain anonymous because they are not authorized to discuss sales information.

This poses a big problem for European carriers, which had been stocking up on Huawei devices. Vodafone and EE pulled Huawei’s Mate 20 X from their 5G launches last month.

Schneemann said that if the issue isn’t resolved soon, carriers will likely start to offer the phones at a huge discount to get rid of their inventory.

“Anything that hasn’t left China yet will probably stay there,” he said, adding that if the situation holds through the summer, it could do long-term damage to Huawei’s carrier relationships.

Huawei isn’t giving up just yet. The company says it will continue to support devices already on the market, and that customers will be able to get their money back if their phones don’t work as promised.

The company’s budget brand, Honor, is also launching sales of its flagship Honor 20 phone in Europe. It will be available in France, Germany and the United Kingdom on Friday, and in Italy and the Netherlands next week.

Richardson expects Huawei to lean into its Honor line internationally as the US-China fight continues. The reason? Most people don’t know it’s a Huawei brand.