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.

Trump’s auto trade war adds to US demographic and debt headwinds

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:

  • It shows H1 sales in the 7 major markets, which account for 87% of global volume
  • Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
  • Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007

Formerly high-flying growth markets such as Russia and Brazil have disappointed.  Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.

Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.

Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.

Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly.  And as the New York Times reports:

“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”

The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions.  Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.

THE AVERAGE AMERICAN IS NO LONGER DRIVING MORE MILES EACH YEAR

The second chart highlights the key longer-term issue, that Americans are driving less each year:

  • It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
  • Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
  • Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
  • The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
  • Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it

But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth.  Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level.  Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.

The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children.  And car ownership is no longer a key “rite of passage” for younger Millennials.  New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.

USED CAR SALES ARE SET TO GAIN, WITH AUTO DEBT AT NEAR-RECORD LEVELS AND INTEREST RATES RISING

The third chart confirms how US auto sales have become dependent on rising levels of debt:

  • It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
  • The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
  • But the Fed’s subprime and QE bubbles have caused it to accelerate
  • In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k
  • The QE bubble was great news for US auto sales at the time, as was subprime.  But now. interest rates are rising again.

Unsurprisingly, used-car sales are now increasing.  They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars.  As the PureCars CEO noted:

“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.”

TRUMP’S AUTO TRADE WAR WON’T SOLVE THE DEMOGRAPHIC AND DEBT ISSUES
President Trump’s trade wars confirm his transactional approach to complex issues.  As he told Fox News last month:

“You know, the cars are the big one.  We can talk steel, we talk everything. The big thing is cars.”

But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:

  • The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”.  Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
  • Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise

As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.

The post Trump’s auto trade war adds to US demographic and debt headwinds appeared first on Chemicals & The Economy.

Trump’s auto trade war adds to US demographic and debt headwinds

President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:

  • It shows H1 sales in the 7 major markets, which account for 87% of global volume
  • Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
  • Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007

Formerly high-flying growth markets such as Russia and Brazil have disappointed.  Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.

Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.

Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.

Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly.  And as the New York Times reports:

“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”

The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions.  Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.

 

THE AVERAGE AMERICAN IS NO LONGER DRIVING MORE MILES EACH YEAR

The second chart highlights the key longer-term issue, that Americans are driving less each year:

  • It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
  • Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
  • Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
  • The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
  • Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it

But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth.  Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level.  Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.

The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children.  And car ownership is no longer a key “rite of passage” for younger Millennials.  New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.

 

USED CAR SALES ARE SET TO GAIN, WITH AUTO DEBT AT NEAR-RECORD LEVELS AND INTEREST RATES RISING

The third chart confirms how US auto sales have become dependent on rising levels of debt:

  • It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
  • The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
  • But the Fed’s subprime and QE bubbles have caused it to accelerate
  • In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k

The QE bubble was great news for US auto sales at the time, as was subprime.  But now. interest rates are rising again.

Unsurprisingly, used-car sales are now increasing.  They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars.  As the PureCars CEO noted:

“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.

 

TRUMP’S AUTO TRADE WAR WON’T SOLVE THE DEMOGRAPHIC AND DEBT ISSUES
President Trump’s trade wars confirm his transactional approach to complex issues.  As he told Fox News last month:

“You know, the cars are the big one.  We can talk steel, we talk everything. The big thing is cars.

But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:

  • The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”.  Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
  • Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise

As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.

 

Plastics recycling paradigm shift will create Winners and Losers

My new analysis for iCIS Chemical Business highlights the paradigm shift now underway in the plastics industry.

A paradigm shift is underway in the plastics industry as public concern mounts over the impact of plastic waste on the oceans and the environment.

For 30 years, plastics producers have primarily focused upstream on securing cost-competitive feedstock supply. Now, almost overnight, they find themselves being forced by consumers, legislators and brand owners to refocus downstream on the sustainability agenda. It is a dramatic shift, and one which is likely to create Winners and Losers over a relatively short space of time.

The pace of change is startling. In January, 11 major brands, including Coca Cola, Unilever, Wal-Mart and Pepsi (and since joined by Nestlé) announced they were committed to working towards using “100% reusable, recyclable or compostable packaging by 2025“. Then in April, a UK government-led initiative saw 42 companies, responsible for over 80% of the plastics packaging sold in UK supermarkets, promise to “transform the plastic packaging system and keep plastic in the economy and out of the ocean”.

Tesco, the UK’s largest retailer, added to the pressure by beginning the move to a “closed loop system”. Clearly seeing the issue as a source of potential competitive advantage, they announced plans to remove all “hard to recycle” plastics – such as polystyrene, PVC and water-soluble bio-plastics – by the end of next year. Then last month, the EU Commission adopted new rules that will mean a minimum of 50% of all plastic packaging waste will be recycled by 2025. In addition, it has proposed drastic action, including bans, to reduce the use of the top 10 single-use plastic items found on EU beaches by 2021.

Understandably, many companies and CEOs have failed to keep up with these developments. Others have simply ignored them on the assumption they will prove to be all talk and no action. But nobody who attended the Circular Economy Forum at the recent ICIS World Polyolefins Conference could have come away believing that “business as usual” was a viable option for the future. As Borealis, Europe’s second largest polyolefin producer, explained, their vision is instead to “establish plastic waste as just another standard feedstock as the new normal” for the industry.

As the second chart shows, major plastics including polyethylene and polypropylene are now under major threat.

More than 50% of PE demand, and nearly a third of PP demand goes into single use packaging. Following the World Economic Forum’s ‘New Plastic Economy’ report in 2016, and Sir David Attenborough’s ‘Blue Planet 2’ series for the BBC, it is clear that this application is under major threat.

PARADIGM SHIFTS CREATE WINNERS AND LOSERS
The third chart highlights how business models are already starting to change. The current model was highly successful during the BabyBoomer-led economic supercycle, when demand grew on a constant basis. Companies could choose to compete via cost leadership or value-added strategies, or via a focus on premium products or service-orientation. But now the middle ground is starting to disappear: as demand growth is slowing and profits will be squeezed as competition intensifies. We are instead going back to the polarised model that existed before the 1980s:

  • Upstream-integrated companies can choose to adopt a Feedstock Focus and roll-through their margins to the well-head (in the case of ethane) or refinery (in the case of naphtha) as margins come under pressure
  • Those without this ability, however, need to instead adopt a Market Focus, as intensifying competition will squeeze non-integrated companies without the safety net of an upstream margin
  • Market Focused companies have the opportunity to respond to brand-owner and legislative pressure by basing their feedstock needs on recycled plastic rather than naphtha, ethane and other virgin feedstocks
  • They will need to develop new metrics to measure their progress as they start to build their capability to use recycled feedstocks and create long-term relationships with brand-owners and other stakeholders

Paradigm shifts generally produce winners and losers. In this case, the winners will be those plastics producers who adapt to the new opportunity created by the need to produce recycled plastic. This will clearly require investment in recycling facilities, but the sums involved are small compared to the cost of building new olefin crackers or refinery capacity. And in many countries, producers can even expect to be paid to take the recycled plastic as a feedstock, when the alternative is the cost of sending it to landfill.

The losers, of course, will be existing feedstock suppliers:

  • Many oil majors have assumed that rising demand for petrochemicals will help to compensate for demand lost to electrification in the transport sector
  • OPEC’s World Oil Outlook 2040 saw petrochemicals as providing “significant growth” for the future
  • The International Energy Agency will also need to revisit its assumptions about future demand growth as the impact of the new paradigm becomes more apparent.

As National Geographic has reported, the world has produced around 8.3 billion tonnes of plastic over the past 60 years, and only 9 per cent of this has been recycled. This is a shocking waste of a valuable resource. The paradigm shift now underway is well overdue and should prove very profitable for those companies prepared to seize the opportunities it creates.

Please click here if you would like to download the article.

The post Plastics recycling paradigm shift will create Winners and Losers appeared first on Chemicals & The Economy.

Apple, Xiaomi squeeze smartphone mid-market as sales plateau

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.

The post Apple, Xiaomi squeeze smartphone mid-market as sales plateau appeared first on Chemicals & The Economy.

2018 will see Winners and Losers appear in plastics markets

Two major challenges face petrochemical and polymer producers and consumers in 2018:

  • The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US
  • The growth of the circular economy and the need to dramatically increase recycling capacity

My new interview with Will Beacham, deputy editor of ICIS Chemical Business, focuses on both these key issues and suggests they will create Winners and Losers.

The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold.  It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:

  • US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes
  • President Trump’s apparent wish to start a trade war with China will make that market difficult to access
  • It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war

We have seen price wars before, and the “Winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.

The economics of this are relatively simple.  In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker.  Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.

As the chart shows, this development will be good news for ethylene consumers.  As Huntsman CEO, Peter Huntsman noted a year ago:

“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”

In turn, of course, this will pressure other plastics via inter-polymer competition

Non-integrated producers clearly face more difficult times.  And like the integrated producers, they share the challenge being posed by the rise of sustainability concerns, particularly over the 8 million tonnes of plastic that currently finds its way into the oceans every year.

This issue has been building for years, and clearly consumers are now starting to demand action from brand owners and governments.

In turn, this opens up major new opportunities for companies who are prepared to realign their business models with the New Plastics Economy concepts set out by the Ellen MacArthur Foundation and the World Economic Forum.

The New Plastics Economy is a collaborative initiative involving leading participants from across the global plastic packaging value chain, as the second chart illustrates.  It has already prompted action from the European Union, which has now set out its EU Strategy for Plastics in the Circular Economy.  This aims to:

“Transform the way plastics and plastics products are designed, produced, used and recycled. By 2030, all plastics packaging should be recyclable. The Strategy also highlights the need for specific measures, possibly a legislative instrument, to reduce the impact of single-use plastics, particularly in our seas and oceans.”

Clearly this represents a paradigm shift for the industry, both producers and consumers.

It may seem easier to do nothing, and to hope the whole problem will go ahead.  But the coincidence of the arrival of all the new US shale gas capacity makes this an unlikely outcome.  Companies who do nothing are likely instead to become Losers in this rapidly changing environment.

But as I discuss in the interview, companies who are prepared to rethink their business models, and to adapt to changing consumer needs, have a potentially very bright future ahead of them.  Please click here to view it.

The post 2018 will see Winners and Losers appear in plastics markets appeared first on Chemicals & The Economy.