Smartphone sales plateaued in Q3, down 9% since Q3 2017’s peak of 1.55bn, as the chart shows. But the bigger threat from smart feature phones – now retailing for as little as $11 – continues to grow as Reliance and Vodacom launch new models in India and Africa.
Smartphone sales are also seeing important shifts in market shares:
- Samsung has never recovered its 32% share in 2013 and is now around 21%
- Apple’s share has slid gently downwards from 18% in Q4 2016 to 12% today
- Low-cost Chinese companies, particularly Huawei, have been the big winners
The Top 3 Chinese companies’ share has nearly trebled from 12% in 2013 to 34% today. And Huawei has gone from just 5% in 2013 to 18% in the same period.
This has important consequences, and not just for the smartphone market. President Trump has been attacking Huawei on grounds of national security, but consumers outside the USA – where Huawei has only a small presence – clearly like their phones. And it is hard for European or other governments to ban Huawei from major telecoms contracts, if their citizens are happily using Huawei phones.
This may, of course, change if Huawei continues to lose access to the latest Google versions of Android. But for the moment, at least, the US pressure has fired up nationalist support in China itself, where its market share reached 42% in Q3. Apple, meanwhile, saw its Chinese market share fall to just 5% in Q3 – a far cry from the days when it was the No 1 aspirational buy.
Apple’s issue remains its decision to focus only on the high end of the market. This worked well when it was perceived as having the “best phones”. But today, aside from Apple aficionados, it is hard to find many consumers who believe Apple offers features that other phones lack. And on that basis, it makes little sense to pay the vast premium being demanded for the brand image.
The writing has been on the wall for smartphone pricing for some time, as the Statista chart confirms. The average global price peaked as long ago as 2011 at nearly $350 ($400 in $2019). Since then, it has almost halved in inflation-adjusted terms to $215 today.
As I noted back in 2015, when Apple was riding high, it was inevitably going to have to introduce cheaper models to maintain market share. But instead it chose to “double up” on the luxury end of the market, putting profit ahead of volume. Last year’s decision to stop reporting unit sales for its key products was therefore no great surprise, given that no company wants to be always reporting bad news.
In turn, of course, this has driven a growing disconnect between the stock price and Apple’s revenue growth, as the chart shows. Between 2016-2018, they moved in line in terms of percentage change. Revenue has flatlined since Q3 2018’s peak of $266bn, whilst profit has fallen 3% due to declining iPhone sales.
But investors continue to bid up the stock price from its low of $142 at the start of the year to $260 today. Technical indicators confirm it as a ‘strong buy’, but as common sense would suggest, also warn that the stock is highly over-bought:
- Of course, Apple might be able to repeat its iPhone success in its new target areas of wearables and services
- But its decision to undercut the $1099 iPhone 11 Pro Max with a $699 version suggests volume is still important after all
One day, as I noted back in August, investors may start to realise that low cost smart feature phones with a 4G connection are the new growth area. Reliance’s Jio service is now offering them in India for just Rs 800 ($11), half the original 2017 launch price, whilst Vodacom South Africa is also offering them att Zar 299 ( $20).
The next billion users are more likely to be buying these than iPhones. Suppliers to the industry might want to rethink their current strategies. At some point, perhaps not too far away, consumers in western countries might also start to realise these can provide most – if not all – of the features that they really need.
Global smartphone sales have now been falling for 8 consecutive quarters, since Q3 2017. They are now down 9% from their peak, as the chart shows, based on Strategy Analytics data. As always in a falling market, Winners and Losers are staring to appear:
- Apple’s market share fell to its lowest level for 10 years at just 11%; revenue and profit are falling
- Samsung’s Q2 profits fell 56%, hit by Galaxy Fold problems plus Japan-Korea and US-China trade wars
- Smartphones themselves are losing ground to smart feature phones that retail for just $25
- China’s Huawei, Xiaomi and OPPO now have a combined 35% market share, double their Q2 2014 share
- Huawei’s Operating System is being readied to compete with Android, as the US-China trade war continues
- 85 million smart feature phones, developed for Reliance’s Jio telecom company will likely be sold this year
As discussed here before, the Western majors have failed to recognise this paradigm shift in the market. Cash-strapped consumers are no longer prepared to pay $1000+ for the prestige of an up-market brand, as analysts IDC note:
“A key driver in Q2 was the availability of vastly improved mid-tier devices that offer premium designs and features while significantly undercutting the ultra-high-end in price”.
President Trump’s new China tariffs will, of course, create further problems for Apple and Google as these will:
- Push up prices in the US domestic market and hit consumer demand in the critical Thanksgiving/Christmas period
- Galvanise Huawei’s development of its new Operating System – helping it to become a major competitor in the global market
COMPANIES ARE FOCUSING ON THE WRONG MARKETS
But the really critical issue for most smartphone sellers is their continued focus on the Wealth Creator 25 – 54 age group. This was a great strategy during the Boomer-led SuperCycle, as there were vast numbers of Western Boomers with money to spend and a liking for innovative products. But not today, as the chart above confirms:
- Increasing life expectancy means the Perennials 55+ generation is now the fastest growing segment
- There were 500m Perennials in the Top 10 economies in 2000, and their numbers will double by 2030
- And they represent an entirely different market opportunity
Perennials don’t need ever-more complicated “bells and whistles” on their phones. They just want the basic features, clearly laid out. And they need their phones to be affordable, as their incomes decline as they move into retirement.
Equally important is the other major untapped market for growth – the 3.4bn people in the world who currently don’t own a smartphone and can’t afford one. As the Wall Street Journal has reported:
“Smart feature phones aren’t only inexpensive, but they also have physical keypads that are less intimidating than touch screens for those new to the technology. Meanwhile, their batteries last for days, a bonus in places where electricity is unreliable”.
These phones represent a major threat to smartphone sellers, and their supply chains around the world:
- As Reliance’s Jio network found after launching in 2016, millions of Indians could afford its ultra-cheap data plan, but couldn’t afford a smartphone
- Many people in the developed world, old and young, would happily swap an over-complicated smartphone selling for an average $300+ for a more basic feature phone selling for $25
Already apps such as Facebook and WhatsApp have been modified to work on feature phones, further extending their appeal. Google has also invested in Hong Kong’s KaiOS, which makes the operating system most widely used in feature phones.
The Orange network is also starting to realise the potential. It is rolling out cheap data services on the Jio model in the Ivory Coast, and plans to extend service elsewhere in Africa and the Middle East. Meanwhile Indonesia’s WizPhone is about to offer a phone for $7, and is planning a launch in Brazil.
As the world moves into recession, losing companies will stick their heads in the sand. They will hope central banks somehow find a way out of the debt mess they have created. Winning companies, however, will go back to first base and focus on unmet market needs, such as for smart feature phones, and figure out a way to supply them profitably.
The bad news continues for the world’s smartphone manufacturers and their suppliers. And President Trump’s decision to add a 25% tariff on smartphone component imports from China from June 25 is unlikely to help. Morgan Stanley estimate it will add $160 to the current US iPhone XS price of $999, whilst a state-backed Chinese consumer boycott of Apple phones may well develop in retaliation for US sanctions on Huawei.
Chances are that a perfect storm is developing around the industry as its phenomenal run since 2011 comes to an end:
- Global sales fell 4% in Q1 as the chart shows, with volume of 330m the lowest since Q3 2014
- China’s market fell 3% to 88m, whilst US volume fell 18% to 36m
- Apple has been badly hit, with US sales down 19% in Q1 and China sales down 25% in the past 6 months
- Foldables have also failed to make a breakthrough, with Gartner estimating just 30m sales by 2023
This downbeat news highlights the fact that replacement cycles are no longer every year/18 months, but have already pushed out to 2.6 years. Consumers see no need to rush to buy the latest model, given that today’s phones already cater very well for their needs.
Apple’s volumes confirm the secular nature of the downturn, as its volume continued the decline seen in 2018 as the iPhone comes to the end of its lifecycle. Its market share also fell back to 13%, allowing Huawei to take second place behind Samsung with a 17.9% share. This decline came about despite Apple making major price cuts for the XS and XR series, as well as introducing a trade-in programme. Meanwhile, Samsung saw its profits fall 60%, the lowest since its battery problems in 2017.
The President’s tariffs are also set to impact sales, as manufacturers have to assume that today’s supply chains will need to be restructured. Manufacturing of low-end components can perhaps be easily relocated to countries such as Vietnam and other SE Asian countries. But moving factories, like moving house, is a very disruptive process, and it is certainly not easy to find the technical skills required to make high-end components – which represent the core value proposition for consumers.
This highlights how second-order impacts are often overlooked when big announcements are made around tariffs and similar protectionist measures. Not only do prices go up, as someone has to pay the extra costs involved. But companies along the supply chain see their margins squeezed as well – Apple suppliers Foxconn and Pegatron saw their gross margins fall to 5.5% and 2.3%, the lowest level since 2012, for example. So they will have less to spend on future innovations.
We can, of course, all hope that the current trade war proves only temporary. But President Trump’s decision to embargo Huawei from US telecom equipment markets suggests he is digging in for a long battle. Ironically, however, Huawei was one of the few winners in Q1, with its volume surging 50% despite its planned 2018 US entry being cancelled due to congressional pressure. And other governments seem notable reluctant to follow the US lead.
The bigger risk, of course, for investors is that the profit downturn caused by protectionism cannot be “solved” by central bank stimulus. Since 2009, as the chart of the S&P 500 shows, they have rushed to support the market whenever it appeared poised for a return to more normal valuations. But it is hard to see how even their fall-back position of “helicopter money” can counter the impact of a fully-fledged trade war between the world’s 2 largest economies.
Last November, I wrote one of my “most-read posts”, titled Global smartphone recession confirms consumer downturn. The only strange thing was that most people read it several weeks later on 3 January, after Apple announced its China sales had fallen due to the economic downturn.
Why did Apple and financial markets only then discover that smartphone sales were in a downturn led by China? Our November pH Report “Smartphone sales recession highlights economic slowdown‘, had already given detailed insight into the key issues, noting that:
“It also confirms the early warning over weakening end-user demand given by developments in the global chemical industry since the start of the year. Capacity Utilisation was down again in September as end-user demand slowed. And this pattern has continued into early November, as shown by our own Volume Proxy.”
The same phenomenon had occurred before the 2008 Crisis, of course, as described in The Crystal Blog. I wrote regularly here, in the Financial Times and elsewhere about the near-certainty that we were heading for a major financial crisis. Yet very few people took any notice.
And even after the crash, the consensus chose to ignore the demographic explanation for it that John Richardson and I gave in ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’.
Nothing seems to change. So here we are again, with the chart showing full-year 2018 smartphone sales, and it is clear that the consumer downturn is continuing:
- 2018 sales at 1.43bn were down 5% versus 2017, with Q4 volume down 6% versus Q4 2017
- Strikingly, low-cost Huawei’s volume was equal to high-priced Apple’s at 206m
- Since 2015, its volume has almost doubled whilst Apple’s has fallen 11%
And this time the financial outlook is potentially worse than in 2008. The tide of global debt built up since 2008 means that the “World faces wave of epic debt defaults” according to the only central banker to forecast the Crisis.
“WALL STREET, WE HAVE A PROBLEM”
So why did Apple shares suddenly crash 10% on 3 January, as the chart shows? Everything that Apple reported was already known. After all, when I wrote in November, I was using published data from Strategy Analytics which was available to anyone on their website.
The answer, unfortunately, is that markets have lost their key role of price discovery. Central banks have deliberately destroyed it with their stimulus programmes, in the belief that a strong stock market will lead to a strong economy. And this has been going on for a long time, as newly released Federal Reserve minutes confirmed last week:
- Back in January 2013, then Fed Governor Jay Powell warned that policies “risked driving securities above fundamental values“
- He went on to warn that the result would be “there is every reason to expect a sharp and painful correction“
- Yet 6 years later, and now Fed Chairman, Powell again rushed to support the stock market last week
- He took the prospect of interest rate rises off the table, despite US unemployment dropping for a record 100 straight months
The result is that few investors now bother to analyse what is happening in the real world.
They believe they don’t need to, as the Fed will always be there, watching their backs. So “Bad News is Good News”, because it means the Fed and other Western central banks will immediately print more money to support stock markets.
And there is even a new concept, ‘Modern Monetary Theory’ (MMT), to justify what they are doing.
THE MAGIC MONEY TREE PROVIDES ALL THE MONEY WE NEED
There are 3 key points that are relevant to the Modern Monetary Theory:
- The Federal government can print its own money, and does this all the time
- The Federal government can always roll over the debt that this money-printing creates
- The Federal government can’t ever go bankrupt, because of the above 2 points
The scholars only differ on one point. One set believes that pumping up the stock market is therefore a legitimate role for the central bank. As then Fed Chairman Ben Bernanke argued in November 2010:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
The other set believes instead that government can and should spend as much as they like on social and other programmes:
“MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.”
The result is that almost nobody talks about debt any more, and the need to repay it. Whenever I talk about this, I am told – as in 2006-8 – that “I don’t understand”. This may be true. But it may instead be true that, as I noted last month:
“Whilst Apple won’t go bankrupt any time soon, weaker companies in its supply chain certainly face this risk – as do other companies dependent on sales in China. And as their sales volumes and profits start to fall, investors similarly risk finding that large numbers of companies with “Triple B” ratings have suddenly been re-rated as “Junk”:
- Bianco Research suggest that 14% of companies in the S&P 1500 are zombies, with their earnings unable to cover interest expenses
- The Bank of International Settlements has already warned that Western central banks stimulus lending means that >10% of US/EU firms currently “rely on rolling over loans as their interest bill exceeds their EBIT. They are most likely to fail as liquidity starts to dry up”.
I fear the coming global recession will expose the wishful thinking behind the magic of the central banks’ money trees.
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.
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 shows Q1 sales for Samsung, Apple, the 3 top Chinese brands and Others (Strategy Analytics data)
- The 3 Chinese brands (Huawei, OPPO, Xiaomi) have collectively taken top position with 27% of the market
- Samsung has slipped into 2nd place with 23%, whilst Apple is at 15%
- Total volume at 345m was down 2% versus 2017 and back at 2015 levels, as Strategy Analytics note:
“Samsung is holding steady in its core markets of North America, Western Europe and South Korea, but the company is facing intense competitive pressure in China and India from rivals such as Xiaomi. Apple volume grew 3%.
“Huawei grew 14% despite headwinds in North America (whilst) Xiaomi doubled marketshare versus 2017 as its growth soared 125%. Xiaomi is expanding like wildfire across Asia, particularly in India. OPPO has been hit hard by Xiaomi’s rapid retail expansion and Huawei’s much-improved Android device portfolio.”
CHINA’S PREVIOUSLY HOT MARKET HAS GONE COLD
The key to Q1’s decline was the collapse in China’s market, where sales fell 19% to 91m, and were back at 2013 levels according to Canalys data. And as the chart shows, the 4 main players are consolidating their position:
- Huawei grew market share to 24% from 18%; OPPO grew from 17% to 19%
- Vivo grew from 15% to 17%, whilst Xiaomi jumped 8% to 13%. And as Canalys note:
“There is a sense of fatigue in the market. The level of competition has forced every vendor to imitate the others’ product portfolios and go-to-market strategies. But the costs of marketing and channel management in a country as big as China are huge, and only vendors that have reached a certain size can cope.”
Xiaomi’s growth is due to its focus on the sub-RMB1000 level ($160). Its recent launch of cheap up-market phones will put more pressure on competitors and further drive consolidation in the market.
SMARTPHONE MARKET’S POLARISATION CONFIRMS THE GLOBAL TREND
It is, of course, no accident that China’s downturn has ended global market growth. Its vast stimulus programme after 2008’s financial crisis meant that it became the growth engine for the global economy. But now President Xi’s resolve to make “deleveraging” one of his “3 tough challenges” is changing the rules of the game, again:
- As the chart shows, the Boomer-led SuperCycle created a new and highly profitable mid-market
- 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
- The vastly different strategies of Apple and Xiaomi highlight the new world ahead
Apple CEO, Tim Cook, has deliberately turned his back on the mid-market, positioning the new iPhone X at the $1000 price point, where it has consistently outsold the cheaper iPhone 8 and iPhone 8Plus. In turn, this led profits to jump 25%. As a result, Apple is the clear leader in the high-end sector with its relatively niche products and high margins. As the Financial Times reports:
“iPhone unit sales of 52m were up only 3% by volume but the product’s revenues jumped 14%, as the iPhone X drove its average selling price up by $73 compared with a year ago, to $728.”
Apple’s performance highlighted the new strategy:
- Its China revenues rose 21% and the iPhone X was the top selling smartphone
- It also benefits from the growth of the used-phone market, now around 10% of the total
- Around a quarter of US consumers sold their old smartphone when upgrading last year
- iPhones will likely hold their value well, making them more valuable when resold
Similarly, Xiaomi’s success in China highlighted the opportunity in the mass-market. Its market share jumped to 13% as it aimed to make a net profit margin of just 5% on its $100 – $160 phones.
INVESTORS NEED TO WATCH FOR BANKRUPTCIES AS CONSOLIDATION REVS UP
The free money provided by the central banks since 2008 has had two key effects:
- It has prolonged the reign of the mid-market as consumers have been able to borrow cheaply
- It has allowed mid-market companies to borrow heavily and build up major debt
Now, both of these trends are reversing. Consumer spending is increasingly being driven by income, rather than borrowing. Companies are seeing interest rates rise on their debt: even worse, those who borrowed to take advantage of low US rates are seeing repayments rise as the US$ rises again.
Investors need to be very careful about where they place their bets for the future. And companies need to check out their business partners’ strategies. Falling volumes and higher interest/debt costs will lead to a wave of bankruptcies.
Most analysts are ignoring the changes underway in China. As with subprime, they will soon argue that “nobody could have seen this coming”. But in reality, there are always warning signs. The global smartphone market has been the great success story of the stimulus era. Its paradigm shift is highlighting the likely “surprises” that lie ahead.
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