Smartphone sales continue their decline, whilst $25 smart feature phones open up new markets

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:

LOSERS

  • 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

WINNERS

  • 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.

 

Smartphone sales decline begins to impact global stock markets

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.

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.

Global smartphone sales slide 9% in Q4, as China tumbles 16%

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.

The post Global smartphone sales slide 9% in Q4, as China tumbles 16% appeared first on Chemicals & The Economy.

Top 3 Chinese smartphone brands capture global lead

Smartphone May17China’s Top 3 manufacturers – Huawei, OPPO and Vivo – captured top position in global smartphone sales for the first time in Q1.  As the chart shows:

□  They took 22.9% of the market compared to 22.7% for Samsung and 14.4% for Apple
□  In terms of individual smartphone sales, OPPO’s R9s smartphone reached the No. 3 position worldwide
□  It was still behind Apple’s iPhone 7 and iPhone 7Plus, but ahead of Samsung’s aging Galaxy J3 and J5 models

As Strategy Analytics noted:

“OPPO is largely unknown in the Western world, but its brand is wildly popular in China and growing rapidly across India. The R9s is OPPO’s flagship 4G device with key features such as dual-SIM connectivity and fingerprint security.

This confirms the trend that developed during 2016 as I noted when reviewing 2016 data, ‘Smartphone profits under threat as market goes ex-growth‘:

“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.”

Smartphones May17aThe impact can be seen throughout the smartphone eco-system.  Consolidation is the normal response when market growth begins to slow.  As the second chart confirms, Q1 sales at 353m were only up 2% versus Q1 2015, when the global market began to plateau.  The low-cost Chinese players are now gaining share in the mass-market versus Apple and Samsung as premium pricing disappears, and the micro-vendors are also being squeeezed:

□  This price pressure led to Apple losing out in China to cheaper models with similar features
□  The “Top 100+” micro-vendors were also squeezed, and were collectively down 8% versus Q1 2016
□  The success of low-cost larger producers meant the “Top 30+” gained 8% versus Q1 2016

Samsung are most at risk at the moment, as they recover from the Galaxy Note 7 problems.  Their sales fell around 60% in China – the world’s largest market.  They are now launching the new Galaxy S8 model to rebuild their position, but will also face strong competition in H2 with Apple’s 10th anniversary iPhone.

The same process of consolidation has, of course, already played out in the smartphone software market, where Google’s Android system is now the dominant player.  It has 86% of the market, with only Apple’s iOS system (14%) still competing against it.  Apple therefore has to get everything right with the 10th anniversary iPhone – if it fails to excite, then Apple’s entire business model of combining hardware with software will be at risk.

Smartphone profits under threat as market goes ex-growth

Smartphones Feb17a

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

Smartphones Feb17Chinese 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.