Global smartphone sales have seen major growth until recently as consumers fell in love with going mobile, as the chart shows:
- In the critical Q4 period they jumped from 290m in 2013 to 380m in 2014, 405m in 2015 and 439m in 2016
- But they then fell 9% in Q4 last year, according to Strategy Analytics data. They note that:
“It was the biggest annual fall in smartphone history (and) …. was caused by a collapse in the huge China market, where demand fell 16% annually due to longer replacement rates, fewer operator subsidies and a general lack of wow models.”
Even more revealing was that only Xiaomi of the Top 5 vendors increased their volume. Apple lost 1m sales, Samsung lost 3m, Huawei lost 4m, whilst even OPPO only managed to maintain its volume. And Xiaomi only did well because they were recovering from their 2016 collapse, when their share crashed to just 3.35% from 5% in Q4 2015.
Chinese companies were, however, the real winners during 2017 as the price war intensified, as the second chart confirms:
- China’s top 3 vendors now supply a quarter of the global market – compared to less than a tenth in 2013
- Samsung have been the main loser, with their share falling from over a third of the market to less than a fifth
- They did well to recover from the Galaxy Note 7 problems, but seem unlikely ever to reclaim their dominance
The rise of the Chinese vendors is great news for consumers, but very bad news for their competitors, as the third chart confirms. It highlights how revenues are now being squeezed for most vendors as the Chinese ramp up their volume. Only Apple has avoided the carnage by heading defiantly up-market, with its average handset price now close to $800.
The issue is the very different nature of the smartphone market in the major emerging economies, where incomes are much lower than in the West and it is very rare for carriers to subsidise handset sales over the life of the contract. In India, for example, the typical smartphone sells for less than $200, whilst Apple has less than 2% of the market.
2017 therefore marked a crucial turning point in the market, as I forecasted when reviewing 2016 data a year ago:
“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 price will become the deciding feature for many people.”
2018 seems likely to see pricing pressure intensify, now that the Chinese market has gone ex-growth. India is likely to be a critical battleground after Xiaomi’s success there in 2017, which was key to its nearly doubling global sales. As analysts IDC noted:
“Brands outside the Top 5 struggled to maintain momentum as value brands such as Honor, Vivo, Xiaomi, and OPPO offered incredible competition at the low end.”
OPPO is likely to be particularly aggressive as it saw no growth in 2017 after doubling its sales in 2016, whilst Xiaomi is unlikely to risk a second slip-up on volume. In turn, this makes it likely that Samsung’s mid-market positioning will come under major pressure from Chinese competition in key markets such as China and India.
Apple must now intensify its efforts to move into application-based markets such as healthcare and other services. It has been building its position over the past 3 years, and has a vast cash-pile from its smartphone profits to fund the necessary shift away from hardware sales. Samsung’s future looks less rosy, however, given that Chinese vendors have been able to produce smartphones for as little as $20 for the past 2 years.
And as I noted back in May 2015:
“The smartphone market is not alone is facing these New Normal challenges. They are coming to the online and High Street stores near all of us, if they haven’t already arrived.“
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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.
There was no great surprise in the news that global smartphone sales fell for the first time ever in Q1. As I suggested in February, when reviewing Q4 data:
“It seems almost inevitable that global growth will now follow China and go negative”.
As the chart shows, Strategy Analytics data suggests that sales fell 3% in Q1, making it the first time that smartphone sales have shrunk on an annualised basis since sales began in 1996. Equally important is that competitive pressures are rising, particularly in the world’s largest market, China. As Bloomberg note:
“Smartphones are no longer novelties in China, and most domestic brands target the mid- and low-price ranges, where buyers don’t upgrade as frequently as those for high-end Apple and Samsung phones.”
Apple was worst hit by the downturn, particularly in China. This used to be its fastest-growing market, but sales plunged 26% in Q1, as China Daily reported:
“Full-fledged local brands such as Huawei and Xiaomi are pushing high-end smartphones, targeting customers seeking quality products that are priced a few hundred bucks cheaper.”
What puzzles me is the behaviour of financial markets over the past 3 months, given that the downturn was almost inevitable as the headlines from my last 3 quarterly posts suggest:
Why then, one wonders, did Apple’s share price rally by 17%, from $94 to $110, between 12 February and 1 April against this background? Apple’s shares have, of course, since collapsed back to $93 last night.
Clearly nobody really cared about the fundamentals of supply/demand. Instead, just as in China with its commodities rally over the same period, prices were pushed higher by another sudden surge in liquidity.
One factor was the US Federal Reserve’s sudden realisation that the US economy was far weaker that it had realised. Another was the Q1 lending bubble set off by China’s provinces as they battled to retain jobs by rescuing zombie companies. But now, there are growing signs that reality is breaking through again, as I suggested last month:
“Q1 saw a short-lived ‘Triumph of Illusion’, which may well now be followed in Q2 by a painful ‘Return to Reality’. This will confirm that the likely key lesson of the Illusion years is that ‘it is better to travel in hope, than to arrive’.”
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.
China has the highest smartphone penetration in the world at 62%. It had 632m mobile subscribers, with 70% of new connections based on 4G connections. But sales actually fell in Q2 by 4%. This was the first time they have ever fallen and is further confirmation of the major change taking place in China under its New Normal economic policies. Its market has reached saturation point, according to analysts Gartner:
“China has reached saturation — its phone market is essentially driven by replacement, with fewer first-time buyers”
In turn, of course, this has major implications for the global market, as China has around 30% of world sales. As the chart shows:
- Industry leader Samsung continues to struggle, with Q2 global share at 22% versus 25% a year ago (blue line)
- Apple’s share has also been sliding, falling to 14% from its peak at 20% in Q4 (green)
- Sales by Chinese manufacturers continue to rise steadily, up to 19% from 17% a year ago (red)
Of course, Apple remains the most profitable company in the market. Around 1000 companies make smartphones, but Apple made 92% of total income in Q1, up from 65% in Q1 2014. Almost everyone else either broke-even or lost money, as 3 key trends are developing:
- At the moment, Samsung is the target for the low-cost Chinese producers such as Xiaomi, Huawei and Lenovo
- But soon they will move on to attack Apple’s currently very successful niche marketing strategy
- And at the bottom end of the market, competition is intensifying
Chinese companies such as Shenzhen Zuoer Technology are now selling standard parts that enable a smartphone to be built for as little as $20. These phones use the free Android operating system, and offer touch-screen technology that doesn’t need complicated and expensive physical keyboards.
The pace of change is also increasing. Samsung has its back against the wall, with its profits falling as it seeks to protect its market share. HTC actually lost money, and Microsoft has written down 80% of the value of Nokia’s business – which used to be the global market leader.
The issue for Apple’s iPhone business is that the view from the top of the mountain is always the best. Apple’s iPhone day next month will no doubt boost sales as the iPhone 6S is launched. But analysts Morgan Stanley suggest iPhone sales will grow just 3% in 2016, well down on last quarter’s 35% growth.
As I noted in May, Apple knows that the iPhone represents the past. Instead, its future success depends on using iPhone revenue to make the transition to selling application-based products, based on collecting health and fitness data and connecting to smart home devices.
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.