China’s smartphone market goes ex-growth as costs fall to $20

Smartphone Aug15China 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.

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