Smartphone sales set to tumble as China’s lockdowns continue

328 million people are currently locked down in China, the world’s biggest smartphone market.  Sales were already tumbling in Q1, when they were down 14%. Now the CEO of a top Chinese chipmaker has told investors that demand has dropped “like a rock” and shows no sign of recovering.

This is going to come as a major shock to investors in the West, who have wanted to believe sales will always be growing at double-digit rates:

  • Apple, for example, was the world’s most valuable company for several years until Saudi Aramco replaced it last month
  • But it is still priced as if its earnings could grow at 8%/year for the next decade (using the Ben Graham formula)

Clearly, that isn’t going to happen. But don’t mention it to investors on Wall Street.

They have finally given up on the meme stocks popular during the US lockdowns like Robinhood (down 85% since August). But they are still in love with the FAANG+ stocks, even though these have also started to tumble.

The issue is that central banks have finally had to refocus on their true role, dealing with inflation. It was 8.3% in the USA last month, and likely to keep rising as the dramatic rises in fertiliser prices (up from $200/t in Q3 2020 to $1600/t) feed through into food prices.

In turn, they have given up on the so-called ‘Greenspan put’ and ‘Bernanke Theory’ that effectively claimed:

What is good for financial assets is good for the economy”

Investors stopped worrying about company performance. Instead, they became momentum traders, following the crowd into the most popular stocks:

  • If they wanted outsize returns, all they had to do was to wait for markets to slow
  • They could then happily ‘buy on the dips’ as the Fed pumped in more stimulus to support prices

But now those days are over. Fed Chair Jay Powell had to ‘take the pledge’  to focus on inflation in order to get re-appointed last week. And so investors are going to have to relearn the fundamental skills of company analysis, if they want to make money in stock markets.

As the chart shows, the smartphone market is unlikely to provide a happy hunting ground. It actually peaked in 2017 with annual sales of 1.55bn. And it was down 12% by Q1 this year, even before the warnings that sales would likely drop 200m by the end of the year.

MARKETS ARE POLARISING BETWEEN HIGH VALUE AND LOW COST

The second chart shows the problem that investors face. Apple’s sales have been fairly steady over the past decade, averaging around 15% of the market. And its position was protected until recently by Samsung as the market leader. It produced lower-quality phones at a mid-market price, allowing Apple to focus on the premium market.

But now Samsung’s market share has fallen from 1/3rd of the market to around 20%. And the quality of the low-cost producers in China such as Xiaomi, OPPO and Vivo has been improving all the time. This means the market has become much more competitive.

Already Apple has had to start cannibalising its own market by selling older iPhones at mid-market prices. And it faces increasing threats to its highly lucrative App Store commissions as regulators probe whether it violates competition rules.

The market downturn couldn’t have come at a worse time for Apple. It was already facing major supply chain chaos in Q2. And now it has to face a major decline in the smartphone market itself. Inevitably this will lead to a brutal battle for market share as companies struggle to survive.