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.
China’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.”
The 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.
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.