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.

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.

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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.

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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.

Smartphone markets see calm before the storm as volume stagnates

Smartphone Nov16The 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.