Global smartphone recession confirms consumer downturn


Q3 smartphone sales data show the global market in recession, as Strategy Analytics confirmed:

The global smartphone market has now declined for four consecutive quarters and is effectively in a recession.

The warning signs began in Q1, when the market plateaued for the first time, as discussed here in May:

“The global smartphone market has finally gone ex-growth as China’s slowdown continues. In turn, the market is starting to polarise – with Apple pushing further up-market whilst Chinese brands such as Xiaomi focus on volume. Samsung’s middle market positioning looks increasingly under threat.”

The chart highlights the key issues:

  • Samsung’s market share has declined from a third in 2013 to a fifth today, as its mid-market positioning leaves it without a clear value proposition for consumers
  • China’s Top 3 players have meanwhile soared from just a 12% market share to 29% today, powered by their low-cost positioning
  • Apple’s market share has remained very stable, as it has focused on the top end of the market, prioritising price over volume
  • “Others”, also usually without a clear value proposition, have seen their share drop to just 36% from a peak of 46% in Q3 2016


China remains the world’s largest smartphone market, with 103 million phones sold in Q3. But its volume was down 8% compared to Q3 2017, as the stimulus programmes continue to slow. As the Counterpoint chart shows, the market is now consolidating around a few winners:

  • Huawei are emerging as the market leader with a 23% share
  • Vivo and Oppo remain key challengers at 21%
  • But “Others” have dropped to 13%, and Samsung has almost disappeared at just 1%

As Counterpoint note, the top 5 brands now hold 86% of the market:

“The Chinese smartphone market is saturated with accelerated market consolidation. The competition in 2018 is almost a zero-sum game for the top five players. It is challenging however, even for the leading brands to create clear product differentiation. In Q3, only Huawei and vivo managed to achieve positive YoY growth among the top 5 brands.”

Meanwhile, of course, Apple continue to dominate the premium segment after the launch of the new iPhones in September.

This divergence between low-cost and premium will no doubt spread across the rest of the global market as the downturn continues.  And the main growth is likely to be in the low-cost area.

India, for example, saw volume grew 5% versus Q3 2017.  But with average per capita income less than $2000, price is all-important.  Reliance Jio’s ultra-low pricing strategy has been critical in making bandwidth affordable, and there are now over 400 million smartphone users in the country.

But iPhone sales are actually falling, and will be down by a third to just 2 million this year.  Functional phones in the $150-$250 price segment are driving sales growth, via online sales.  Q4 is expected to see these grow 65% to reach 50 million, due to their 50%-60% discounts.


The smartphone market thus continues to confirm that the BabyBoomer-led SuperCycle is over. As the chart shows, this created a new and highly profitable mid-market from the mid-1980s:

  • Before then, companies had competed on the basis of price or perceived value
  • But from the mid-1980s onwards, the mid-market became the most profitable sector
  • Now, with the Boomers retiring and stimulus programmes ended, we are going back to basics again

Instead, the market is segmenting again on the basis of price or perceived value. Chinese players compete on price, while Apple focuses on profit and is moving up-market. this means that previously profitable market leaders such as Samsung are slowly disappearing along with the mid-market segment that they supplied.

These very different strategies highlight the new world ahead for consumer markets and those who supply them.

Chemical output signals trouble for global economy

A petrochemical plant on the outskirts of Shanghai. Chinese chemical industry production has been negative on a year-to-date basis since February

Falling output in China and slowing growth globally suggest difficult years ahead, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog

Chemicals are the best leading indicator for the global economy. Data for both Chinese and global chemical production, shown in the first chart, are warning that we may now be headed into recession.

China’s stimulus programme has been the key driver for the world’s post-2008 recovery, as we discussed here in May (“China’s lending bubble is history”).

It accounted for about half of the global $33tn in stimulus programmes and its decline is currently having a dual impact, as it reduces both demand for EM commodities and the availability of global credit.

In turn, this reversal is impacting the global economy — already battling headwinds from trade tariffs and higher oil prices.

Initially the impact was most noticeable in emerging markets but the scale of the downturn is now starting to hit the wider economy:

  • China’s demand has been the growth engine for the global economy since 2008, and its scale has been such that this lost demand cannot be compensated elsewhere
  • China’s shadow banking bubble has been a major source of speculative lending, helping to finance property bubbles in China and many global cities
  • It also financed a domestic construction boom in China on a scale never seen before, creating excess demand for a wide range of commodities

But now the lending bubble is bursting. The second chart shows the extent of the downturn this year. Shadow banking is down 84%  ($557bn) in the year to September, according to official People’s Bank of China data. Total Social Financing is down 12% ($188bn), despite an increase in official bank lending to support strategic companies.

It seems highly likely that the property bubble has begun to burst, with China Daily reporting that new home loans in Shanghai were down 77% in the first half. In turn, auto sales fell in each month during the third quarter, as buyers can no longer count on windfall gains from property speculation to finance their purchases.

The absence of speculative Chinese buyers, anxious to move their cash offshore, is also having a significant impact on demand outside China in former property hotspots in New York, London and elsewhere.

The chemical industry has been flagging this decline with increasing urgency since February, when Chinese production went negative on a year-to-date basis. The initial decline was certainly linked to the government’s campaign to reduce pollution by shutting down many older and more polluting factories.

But there has been no recovery over the summer, with both August and September showing 3.1% declines according to American Chemistry Council data. Inevitably, Asian production has also now started to decline, due to its dependence on exports to China. In turn, like a stone thrown into a pond, the wider ripples are starting to reach western economies.

President Trump’s trade wars aren’t helping, of course, as they have already begun to increase prices for US consumers. Ford, for example, has reported that its costs have increased by $1bn as a result of steel and aluminium tariffs. Trump’s withdrawal from the Iran nuclear deal has also caused oil prices as a percentage of GDP to rise to levels typically associated with recession in the past.

The rationale is simply that consumers only have so much cash to spend, and money they spend on rising gasoline and heating costs can’t be spent on the discretionary items that drive GDP growth.

It seems unlikely, however, that Trump’s trade war with China will lead to his expected “quick win”. China has faced far more severe hardships in recent decades, and there are few signs that it is preparing to change core policies. The trade war will inevitably have at least a short-term negative economic impact but, paradoxically, it also supports the government’s strategy to escape the “middle income trap” by ending China’s role as the “low-skilled factory of the world”, and moving up the ladder to more value-added operations and services.

The trade war therefore offers an opportunity to accelerate the Belt and Road Initiative (BRI), initially by moving unsophisticated and often polluting factories offshore. It also emphasises the priority given to the services sector:

  • Already companies, both private and state-owned, are focusing their international acquisitions in BRI countries. According to EY, 12 per cent of overall Chinese (non-financial) outbound investment was in BRI countries in 2017, versus 9 per cent in 2016, and 2018 is likely to be considerably higher. Apart from south-east Asia, we expect eastern and central Europe to be beneficiaries, given the new BRI infrastructure links, as the map highlights
  • Data from the Caixin/Markit services purchasing managers’ index for September suggests the sector remains in growth mode. And government statistics suggest the services sector was slightly over half of the economy in the first half, with its official growth reported at 7.6 per cent versus overall GDP growth of 6.8 per cent

We expect China to come through the pain caused by the unwinding of the stimulus bubbles, and ultimately be strengthened by the need to refocus on sustainable rather than speculative growth. But it will not be an easy few years for China and the global economy.

The rising tide of stimulus has led many investors and chief executives to look like geniuses. Now the downturn will probably lead to the appearance of winners and losers, with the latter likely to be in the majority.

Paul Hodges and Daniël de Blocq van Scheltinga publish The pH Report.

Budgeting for the end of “Business as Usual”

Companies and investors are starting to finalise their plans for the coming year.  Many are assuming that the global economy will grow by 3% – 3.5%, and are setting targets on the basis of “business as usual”.  This has been a reasonable assumption for the past 25 years, as the chart confirms for the US economy:

  • US GDP has been recorded since 1929, and the pink shading shows periods of recession
  • Until the early 1980’s, recessions used to occur about once every 4 – 5 years
  • But then the BabyBoomer-led economic SuperCycle began in 1983, as the average Western Boomer moved into the Wealth Creator 25 – 54 age group that drives economic growth
  • Between 1983 – 2000, there was one, very short, recession of 8 months.  And that was only due to the first Gulf War, when Iraq invaded Kuwait.

Since then, the central banks have taken over from the Boomers as the engine of growth.  They cut interest rates after the 2001 recession, deliberately pumping up the housing and auto markets to stimulate growth.  And since the 2008 financial crisis, they have focused on supporting stock markets, believing this will return the economy to stable growth:

  • The above chart of the S&P 500 highlights the extraordinary nature of its post-2008 rally
  • Every time it has looked like falling, the Federal Reserve has rushed to its support
  • First there was co-ordinated G20 support in the form of low interest rates and easy credit
  • This initial Quantitative Easing (QE) was followed by QE2 and Operation Twist
  • Then there was QE3, otherwise known as QE Infinity, followed by President Trump’s tax cuts

In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.  As a result, debt has soared and credit quality collapsed.  One statistic tells the story:

“83% of U.S. companies going public in the first nine months of this year lost money in the 12 months leading up to the IPO, according to data compiled by University of Florida finance professor Jay Ritter. Ritter, whose data goes back to 1980, said this is the highest proportion on record.  The previous highest rate of money-losing companies going public had been 81% in 2000, at the height of the dot-com bubble.

And more than 10% of all US/EU companies are “zombies” according to the Bank of International Settlements (the central banks’ bank), as they:

“Rely on rolling over loans as their interest bill exceeds their EBIT (Earnings before Interest and Taxes). They are most likely to fail as liquidity starts to dry up”.

2019 – 2021 BUDGETS NEED TO FOCUS ON KEY RISKS TO THE BUSINESS
For the past 25 years, the Budget process has tended to assume that the external environment will be stable.  2008 was a shock at the time, of course, but time has blunted memories of the near-collapse that occurred.  The issue, however, as I noted here in September 2008 is that:

“A long period of stability, such as that experienced over the past decade, eventually leads to major instability.

“This is because investors forget that higher reward equals higher risk. Instead, they believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.

This is the great Hyman Minsky’s explanation for financial crises and panics. Essentially, it describes how confidence eventually leads to complacency in the face of mounting risks.  And it is clear that today, most of the lessons from 2008 have been forgotten.  Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.

So prudent companies will prepare for it now, whilst there is still time.  You will not be able to avoid all the risks, but at least you won’t suddenly wake up one morning to find panic all around you.

The chart gives my version of the key risks – you may well have your own list:

  • Global auto and housing markets already seem to be in decline; world trade rose just 0.2% in August
  • Global liquidity is clearly declining, and Western political debate is ever-more polarised
  • Uncertainty means that the US$ is rising, and geopolitical risks are becoming more obvious
  • Stock markets have seen sudden and “unexpected” falls, causing investors to worry about “return of capital”
  • The risks of a major recession are therefore rising, along with the potential for a rise in bankruptcies

Of course, wise and far-sighted leaders may decide to implement policies that will mitigate these risks, and steer the global economy into calmer waters.  Then again, maybe our leaders will decide they are “fake news” and ignore them.

Either way, prudent companies and investors may want to face up to these potential risks ahead of time.  That is why I have titled this year’s Outlook, ‘Budgeting for the end of “Business as Usual“.  As always, please contact me at phodges@thephreport.com if you would like to discuss these issues in more depth.

Please click here to download a copy of all my Budget Outlooks 2007 – 2018.

Budgeting for the end of “Business as Usual”

Companies and investors are starting to finalise their plans for the coming year.  Many are assuming that the global economy will grow by 3% – 3.5%, and are setting targets on the basis of “business as usual”.  This has been a reasonable assumption for the past 25 years, as the chart confirms for the US economy:

  • US GDP has been recorded since 1929, and the pink shading shows periods of recession
  • Until the early 1980’s, recessions used to occur about once every 4 – 5 years
  • But then the BabyBoomer-led economic SuperCycle began in 1983, as the average Western Boomer moved into the Wealth Creator 25 – 54 age group that drives economic growth
  • Between 1983 – 2000, there was one, very short, recession of 8 months.  And that was only due to the first Gulf War, when Iraq invaded Kuwait.

Since then, the central banks have taken over from the Boomers as the engine of growth.  They cut interest rates after the 2001 recession, deliberately pumping up the housing and auto markets to stimulate growth.  And since the 2008 financial crisis, they have focused on supporting stock markets, believing this will return the economy to stable growth:

  • The above chart of the S&P 500 highlights the extraordinary nature of its post-2008 rally
  • Every time it has looked like falling, the Federal Reserve has rushed to its support
  • First there was co-ordinated G20 support in the form of low interest rates and easy credit
  • This initial Quantitative Easing (QE) was followed by QE2 and Operation Twist
  • Then there was QE3, otherwise known as QE Infinity, followed by President Trump’s tax cuts

In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.  As a result, debt has soared and credit quality collapsed.  One statistic tells the story:

“83% of U.S. companies going public in the first nine months of this year lost money in the 12 months leading up to the IPO, according to data compiled by University of Florida finance professor Jay Ritter. Ritter, whose data goes back to 1980, said this is the highest proportion on record.  The previous highest rate of money-losing companies going public had been 81% in 2000, at the height of the dot-com bubble.

And more than 10% of all US/EU companies are “zombies” according to the Bank of International Settlements (the central banks’ bank), as they:

“Rely on rolling over loans as their interest bill exceeds their EBIT (Earnings before Interest and Taxes). They are most likely to fail as liquidity starts to dry up”.

2019 – 2021 BUDGETS NEED TO FOCUS ON KEY RISKS TO THE BUSINESS
For the past 25 years, the Budget process has tended to assume that the external environment will be stable.  2008 was a shock at the time, of course, but time has blunted memories of the near-collapse that occurred.  The issue, however, as I noted here in September 2008 is that:

“A long period of stability, such as that experienced over the past decade, eventually leads to major instability.

“This is because investors forget that higher reward equals higher risk. Instead, they believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.

This is the great Hyman Minsky’s explanation for financial crises and panics. Essentially, it describes how confidence eventually leads to complacency in the face of mounting risks.  And it is clear that today, most of the lessons from 2008 have been forgotten.  Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.

So prudent companies will prepare for it now, whilst there is still time.  You will not be able to avoid all the risks, but at least you won’t suddenly wake up one morning to find panic all around you.

The chart gives my version of the key risks – you may well have your own list:

  • Global auto and housing markets already seem to be in decline; world trade rose just 0.2% in August
  • Global liquidity is clearly declining, and Western political debate is ever-more polarised
  • Uncertainty means that the US$ is rising, and geopolitical risks are becoming more obvious
  • Stock markets have seen sudden and “unexpected” falls, causing investors to worry about “return of capital”
  • The risks of a major recession are therefore rising, along with the potential for a rise in bankruptcies

Of course, wise and far-sighted leaders may decide to implement policies that will mitigate these risks, and steer the global economy into calmer waters.  Then again, maybe our leaders will decide they are “fake news” and ignore them.

Either way, prudent companies and investors may want to face up to these potential risks ahead of time.  That is why I have titled this year’s Outlook, ‘Budgeting for the end of “Business as Usual“.  As always, please contact me at phodges@thephreport.com if you would like to discuss these issues in more depth.

Please click here to download a copy of all my Budget Outlooks 2007 – 2018.

Budgeting for the end of “Business as Usual”

Companies and investors are starting to finalise their plans for the coming year.  Many are assuming that the global economy will grow by 3% – 3.5%, and are setting targets on the basis of “business as usual”.  This has been a reasonable assumption for the past 25 years, as the chart confirms for the US economy:

  • US GDP has been recorded since 1929, and the pink shading shows periods of recession
  • Until the early 1980’s, recessions used to occur about once every 4 – 5 years
  • But then the BabyBoomer-led economic SuperCycle began in 1983, as the average Western Boomer moved into the Wealth Creator 25 – 54 age group that drives economic growth
  • Between 1983 – 2000, there was one, very short, recession of 8 months.  And that was only due to the first Gulf War, when Iraq invaded Kuwait

Since then, the central banks have taken over from the Boomers as the engine of growth.  They cut interest rates after the 2001 recession, deliberately pumping up the housing and auto markets to stimulate growth.  And since the 2008 financial crisis, they have focused on supporting stock markets, believing this will return the economy to stable growth:

  • The above chart of the S&P 500 highlights the extraordinary nature of its post-2008 rally
  • Every time it has looked like falling, the Federal Reserve has rushed to its support
  • First there was co-ordinated G20 support in the form of low interest rates and easy credit
  • This initial Quantitative Easing (QE) was followed by QE2 and Operation Twist
  • Then there was QE3, otherwise known as QE Infinity, followed by President Trump’s tax cuts

In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.  As a result, debt has soared and credit quality collapsed.  One statistic tells the story:

“83% of U.S. companies going public in the first nine months of this year lost money in the 12 months leading up to the IPO, according to data compiled by University of Florida finance professor Jay Ritter. Ritter, whose data goes back to 1980, said this is the highest proportion on record.  The previous highest rate of money-losing companies going public had been 81% in 2000, at the height of the dot-com bubble.

And more than 10% of all US/EU companies are “zombies” according to the Bank of International Settlements (the central banks’ bank), as they:

“Rely on rolling over loans as their interest bill exceeds their EBIT (Earnings before Interest and Taxes). They are most likely to fail as liquidity starts to dry up”.

2019 – 2021 BUDGETS NEED TO FOCUS ON KEY RISKS TO THE BUSINESS
For the past 25 years, the Budget process has tended to assume that the external environment will be stable.  2008 was a shock at the time, of course, but time has blunted memories of the near-collapse that occurred.  The issue, however, as I noted here in September 2008 is that:

“A long period of stability, such as that experienced over the past decade, eventually leads to major instability.

“This is because investors forget that higher reward equals higher risk. Instead, they believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.

This is the great Hyman Minsky’s explanation for financial crises and panics. Essentially, it describes how confidence eventually leads to complacency in the face of mounting risks.  And it is clear that today, most of the lessons from 2008 have been forgotten.  Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.

So prudent companies will prepare for it now, whilst there is still time.  You will not be able to avoid all the risks, but at least you won’t suddenly wake up one morning to find panic all around you.

The chart gives my version of the key risks – you may well have your own list:

  • Global auto and housing markets already seem to be in decline; world trade rose just 0.2% in August
  • Global liquidity is clearly declining, and Western political debate is ever-more polarised
  • Uncertainty means that the US$ is rising, and geopolitical risks are becoming more obvious
  • Stock markets have seen sudden and “unexpected” falls, causing investors to worry about “return of capital”
  • The risks of a major recession are therefore rising, along with the potential for a rise in bankruptcies

Of course, wise and far-sighted leaders may decide to implement policies that will mitigate these risks, and steer the global economy into calmer waters.  Then again, maybe our leaders will decide they are “fake news” and ignore them.

Either way, prudent companies and investors may want to face up to these potential risks ahead of time.  That is why I have titled this year’s Outlook, ‘Budgeting for the end of “Business as Usual“.  As always, please contact me at phodges@thephreport.com if you would like to discuss these issues in more depth.

Please click here to download a copy of all my Budget Outlooks 2007 – 2018.

 

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