The outlook is becoming clearer for the global smartphone market, and it confirms my judgement in November, when reviewing Q3 sales:
“It seems likely that a focus on price and affordability will come to dominate. In turn, pricing pressures on suppliers will intensify. The key challenge facing the market is that it has gone ex-growth.”
As the two charts show:
□ 2016 sales rose just 3% versus 2015, well down on the 12% growth in 2015 and 30% growth in 2014
□ Both Samsung and Apple saw their market share decline – since 2013, Samsung has fallen from 32% to 21%; Apple has slipped from 15.5% to 14.5%
□ The 3 main Chinese suppliers had a record year – Huawei with 9.3%, and Vivo and OPPO each with 4.8%
□ In the crucial Q4 period, their combined market share was higher than either Samsung or Apple at 22.7% – the highest ever seen
Chinese manufacturers are therefore likely to be the major winners in the future. Their individual positions have changed over the years, as fierce competition took its toll on companies such as Lenovo and Xiaomi. But as the second chart highlights, Q4 suggests the Top 3 Chinese players are now starting to collectively outsell both Samsung and Apple.
The issue is that 3.1bn people now own smartphones, and the other 4.2bn can’t afford them. So inevitably, the market is going to focus more and more on price. Of course, millions of people will still want to own an iPhone or Galaxy. But especially as the world moves into recession, price will become the deciding feature for many people.
Regional sales volumes also suggest that we have reached a turning point:
□ China accounts for around a third of global smartphone sales, and Apple’s Q4 revenue was down 12% in the Greater China region. This highlights once again its failure to introduce a more competitively priced model to compete with local suppliers.
□ Apple’s position in India, the other key emerging market, is even worse. As recently as 3 years ago, Apple had planned to be selling 10 million iPhones in India by now. But as in China, its insistence on maintaining Western pricing models means its growth has stalled. Apple sold just 800k-900k iPhones in Q4, and like other manufacturers has been badly hit by premier Modi’s demonetisation programme. Most Indian phones are bought with cash, and Apple’s sales have since collapsed by 30% – 35%. This is also a major issue for the entire industry, which had been expecting to profit from the launch of Reliance’s new Jio service. This offers free 4G data service until the end of March and has already gained 72 million users.
□ Sales in other major markets have clearly plateaued. W Europe was down 3% in Q4, with Germany and France down 10%. The US only managed a 3% rise, after a fall in Q3, despite high levels of promotional activity. Russia stood out with a 10% rise in demand in 2016 as the currency stabilised with the oil price. But sales in Latin America were down 1%, and the Middle East/Africa was up just 1%.
Essentially the market has now become saturated, with price likely to become the main competitive weapon.
Samsung and Apple may hope for some gains as 4G and 5G networks are rolled out, but 2017 is likely to see profit margins under pressure from Chinese competition everywhere – for manufacturers and their suppliers.
The global smartphone market reached a fork in the road in Q3, and that was before Samsung’s disaster with the enforced recall of the Galaxy 7 model. What happens next is not yet clear, but it is likely that a focus on price and affordability will come to dominate. In turn, pricing pressures on suppliers will intensify.
The key challenge facing the market is that it has gone ex-growth, as the chart shows:
Sales in Q1 – Q3 were just 1% higher than in 2015 at 1.05bn
Apple continues to see its market share decline, down to 12.1% in Q3 from 19.7% in Q2 2015
Samsung remains the market leader, but its share has fallen to 20% from 35% in Q3 2013
The winners have been Chinese manufacturers – Huawei at 9%, OPPO at 6% and Vivo at 5%
The problem, as I noted last quarter, is that:
The market has become saturated, and the range of new features has been relatively small. Globally, the smartphone market has peaked, as the 4.1bn people without phones cannot afford the internet”.
Now, of course, the pressures of too much capacity chasing too little demand are becoming more and more obvious. And instead of China being a key market for importers, it is now becoming a major exporter with companies such as Huawei, OPPO, Vivo and Xiaomi leading the way, as analysts IDC note:
“Upcoming players have delivered value-packed devices that offer consumers top-shelf features at a fraction of the cost compared to the market leaders. Phones like the OPPO R9 and the Vivo X7 have become serious competitors in China and are also witnessing mild success in Western Europe thanks to new athletic sponsorships across various countries.”
Even more interesting, is that competition is intensifying from the bottom end of the market, as Strategy Analytics note. The top 100 Microvendors saw their combined share rise by 27% in Q3 to take a 15% share of the global market. Over the same period, the share of the Top 30 manufacturers rose by just 3%.
This is good news for consumers, who benefit from new features and increasingly cut-throat competition. But it is not good news for suppliers to the industry, particularly those supplying more standard parts. As Reuters reports, they are suffering from “unprecedented pricing pressure”, with even Apple pressuring suppliers for lower prices as its volume growth slows.
The market is set to get even more competitive as companies fight to profit from Samsung’s problems. Affordability will clearly be the key factor. But companies such as Huawei are also adding new features to lure consumers – such as a memory facility, that enables the phone to automatically put most-used apps within easy reach. This will challenge Apple as well, whose users currently have to reorder apps manually to suit their needs.
This quarter may provide some relief from the battle as consumers order for Christmas, and market share pressures reduce with Samsung’s loss of the Galaxy 7. But this is likely to be the calm before the storm,
2017 may very well see a bloodbath develop as Samsung tries to regain its market share. And who knows what will happen once President-elect Trump’s protectionist agenda starts to be implemented.
Its been a great run for the smartphone industry, but the party is now coming to an end. As the chart shows, global sales in H1 fell 1% versus 2016, based on Strategy Analytics data:
Samsung and Apple have both seen a major decline in their market share since 2014
Samsung have fallen from a peak of 31% in Q1 2014 to 23% in Q2 this year
Apple has fallen from 20% in Q4 2014 to 12% in Q2
Chinese players have been the main winners, with the Top 3′s share rising from 13% in Q1 2014 to 20%
Apple’s major problem is in China, where it refused to offer a cheaper version of the iPhone to tap into the mass market. Even the 4-inch iPhone SE went on sale in March at $630 for the 64GB version. And Chinese manufacturers have been quicker to add new features such as dual-lens cameras and LED screens. As I noted over a year ago:
“It is only a mater of time before its highly profitable niche marketing strategy comes under full-frontal attack from Korea and China.”
Its Q2 sales fell by a third versus last year in value terms, with local Chinese manufacturers turning up the heat in terms of price and features as China Daily notes:
“Due to the limited upgrades on the existing flagship—iPhone 6s/6s Plus compared with the previous generations and the low demand of the newly launched small-sized iPhone SE, the company has faced a fierce competition with local smartphone vendors in the medium range market priced between 2,500 yuan ($375) to 3,500 yuan per unit.”
This pattern suggests that the smartphone market is moving into the right-hand side of the Business lifecycle, as shown above:
We can all remember the early Enthusiasts for its phones, who camped out overnight to get their chosen model
The Early Adopters were also keen on the iPhone’s features and the status that it gave, as the market grew
But in the last 2 years, the market has become saturated, and the range of new features has been relatively small
Globally, the smartphone market has peaked, as the 4.1bn people without phones cannot afford the internet
As a result, market drivers have changed from “the excitement of the new” to “affordability and price competitiveness”, particularly since the cost of making a smartphone fell to just $20 in China a year ago.
China’s Xiaomi was the first to offer low-cost and well-featured phones via the internet. But they became distracted with overseas launches and widening their product range beyond phones. As a result, newcomer Oppo now leads the China market with 23% market share, followed by Huawei with 17% and Vivo with 12%. Apple was 4th with just 9%.
Of course, this doesn’t necessarily mean the end of the road for Apple. It has long recognised that the market will become commoditised, and has been moving its focus to services and applications. The Apple watch has clearly the potential to build a totally new market in healthcare, if the right value proposition can be developed.
But the message for anyone supplying the smartphone market is obvious. If you can’t provide better and better features at lower and lower costs, and in time to catch the market opportunity, you will be out of business very quickly.
We all now carry around a mini-computer in our pockets – one with more power than those which controlled Apollo 11 when Neil Amstrong first walked on the moon in 1969. In certain parts of the world, there are now more smartphones than toilets, according to Time magazine.
This is raising the spectre of market saturation in the world’s largest market:
- In China, for example, there were 1.3bn users last year – virtually everyone now owns a smartphone
- The length of the upgrade cycle there is rising from the previous 13 months, and sales actually fell 4% in Q4
- Apple’s share price has fallen by a quarter in just 2 weeks, since reporting “signs of economic softness there”
- ARM, the smartphone chip supplier, has seen its share dive 15% in the past 3 days
The chart above, based on Strategy Analytics data, highlights the problems ahead. The market had a record year in 2015, selling 1.44bn handsets. But growth rates have collapsed from 41% at the end of 2013 to 31% in 2014 and just 6% in Q4 2015. It seems almost inevitable that global growth will now follow China and go negative.
This will impact all the major suppliers. Apple has claimed 90%+ of total smartphone income in recent years, and it has a devoted fan base. But even the late Steve Jobs would probably now struggle to come up with “the next new thing” that would excite consumers to rush out and upgrade.
The problem is that the market has run out of potential demand. As I noted in November, there are 4.1bn people in the world who can’t afford a smartphone today. They are the people who have incomes of less than $5/day:
- 1.4bn earn $3-$5/day; 1.6bn earn $1-$3/day and 1bn earn less than $1/day
- Most of the other 3.1bn people in the world already own a smartphone
But the world’s 1000 smartphone suppliers won’t give up easily. Almost inevitably, therefore, we are heading for a major price war, as it is already possible to assemble smartphones for as little as $20.
As the chart shows, the 3 major Chinese players – Huawei, Lenovo and Xiaomi – now have had a global market share of 17.5%. And Samsung with its 20% share (down from 35% in Q3 2013), is clearly in their line of fire. But Apple is bound to be hit as well.
The smartphone market is also probably acting as a leading indicator for many other industries. It highlights how China’s slowdown means there is a vast amount of spare capacity in the world, which won’t ever be needed again.
This also means that deflation is inevitable as price wars intensify.
The smartphone market has been one of the ‘jewels in the crown” of the consumer electronics market. Yet today, it is rushing headlong into the world of the New Normal. We can all learn a lot about the outlook for the global economy from watching its development.
Until recently, the history was of astonishing growth, with the market growing 39% in 2013, for example:
- Samsung was the unquestioned market leader, as the chart shows, with 1/3rd of the market (blue line)
- Apple was a strong No 2, and highly profitable, with its niche market strategy (green)
- China was in 3rd position, with no clear value proposition and several players all struggling for scale (red)
But then in 2014, things began to change quite dramatically. Samsung suddenly found its middle market position being squeezed from both ends. From the top end it was hit by Apple, who finally entered the Chinese market in a major way and pushed its global market share to 20%. And it was hit from the bottom end by companies such as Xiaomi, Lenovo and Huawei selling very similar phones at much lower prices.
Suddenly, Samsung’s value proposition of having a larger screen than Apple, combined with ‘affordable luxury’ pricing, didn’t work so well. Major internal debate is now underway over future strategy. And it seems unlikely the current concept of offering different models for every minor segment, supported by a vast advertising budget, can continue.
In turn, the Korean, Taiwanese and Japanese companies who supply it with components are facing harder times. Sharp of Japan, for example, last week announced a $1.9bn loss and plans to sack one-tenth of its workforce. Korean companies have suffered too, with touchscreen panel manufacturer Iljin Dispay seeing profits fall 62%.
One might have thought that low-end Chinese companies would still be doing well. But they are being hit by the slowdown in their home market, where sales fell by 6% in Q1. In turn, this is forcing a major shift in their strategy.
Lenovo seems to be playing the role of industry consolidator, with the acquisition of Motorola its latest move. But its profits rose just 1% last year, despite a 20% increase in revenue, causing it to cut costs further by moving more sales online – mirroring Xiaomi’s successful strategy.
In turn, Xiaomi is targeting growth outside China, launching a $205 phone for the Indian market and building sales across SEA. In an interesting move, it is also going up-market to compete with Apple with the $483 Mi Note model. It also aims to offer smart wristbands as well as air purifiers via a new online US store later this year.
It is keeping its low price strategy, however, which has given it market leadership in China with a 14% share, ahead of Huawei and Apple at 11%. As the head of Xiaomi Technology said recently:
“We’ve continued to revise our pricing strategy, which is now closest to our production cost“.
These dynamics, of course, are the New Normal in action. Slowing growth, falling prices, intense competition – all played out on a global stage as the impact of China’s new economic policies spreads around the world. In Korea, for example, the Korea Development Institute warned in February:
“Korea faces a similar predicament to Japan in the early 1990s, due in large part to the catch-up of latecomers like China“.
Apple, of course, is still riding high today. But clearly it is only a mater of time before its highly profitable niche marketing strategy comes under full-frontal attack from Korea and China. Its future lies in making a successful shift to applications and services, as I noted when reviewing 2014 results in March.
It is not the hardware of the Apple Watch that will secure Apple’s future, or even its sleek design. Instead, it is aiming to use this and similar products as a pathway to a wholly new business model. It has to hope it can create profitable new application-based markets, based on collecting health and fitness data and connecting to smart home devices.
And, of course, the smartphone market is not alone is facing this New Normal challenge. They are coming to the online and High Street stores near all of us, if they haven’t already arrived.