CELLPHONES – Sony Slumps, Moto Aims High
Bottom line: Sony’s stalling fortunes in China’s smartphone market are the prelude to its eventual pullout, while Lenovo’s high-end push with the Motorola brand is likely to fall flat.
The latest news bits from the overheated Chinese cellphone market show an increasingly grim battle that’s claiming a growing number of victims at the lower and even middle ends. The latest bad news comes from struggling Japanese giant Sony (Tokyo: 6753), which has announced a significant pullback in the market as part of a broader global retrenchment. That could bode poorly for the equally struggling mid-range Motorola, as media report the brand will also target the mid- to upper-range of the Chinese smartphone market under its new ownership by PC giant Lenovo (HKEx: 992).
The quieter story behind these 2 news bits is that the vicious price wars that began at the low end of the China smartphone market are rapidly spreading to the middle end. Signs of that happening first appeared about a month ago, when global leader Samsung (Seoul: 005930) announced some of its worst quarterly results in years due in part to the competition in China. Last week, the noise got louder when Smartisan, a newly launched domestic brand also aiming at the mid-range market, suddenly slashed its prices by about a third. (previous post)
Now comes word of the major pullback by Sony, which has cut its annual target for cellphone sales to 41 million units from a previous 43 million. Reports on the news specifically cite weak sales in China as a major reason for lowering the target. (English article) In another significant piece of news, Sony said it will also stop developing cellphone models specifically for the China market.
That sends a signal that China is no longer a major focus for Sony’s cellphone division. That marks a sharp reversal from a time not long ago when Sony and other multinational brands were rushing to make customized products for Chinese consumers because of the market’s huge size. Those days probably aren’t over just yet, but the signs certainly don’t look good for Sony, which doesn’t even rank in the top 10 brands for Chinese cellphones.
Next let’s look at Motorola, which last week was officially purchased by Lenovo for $2.9 billion from Google (Nasdaq: GOOG), in a deal that was first announced at the start of this year. (previous post) I previously said that Lenovo was unlikely to retire the Motorola name, and instead would try to position it as an upscale complement to its own-brand of smartphones that are distinctly low-end.
Now media are reporting that Lenovo indeed has such plans, and will aim for the middle to upper end of the Chinese smartphone market by pricing Moto-brand phones at around 3,000 yuan each and higher, or around $500. (Chinese article) The reports point out that Lenovo has been forging a sales strategy for Motorola since it first announced its plans to buy the company in January, and that it now has a dedicated sales team for the brand.
Media reported in September that workers from Lenovo’s own cellphone unit were already starting to move into Motorola’s China headquarters in Beijing. (previous post) Another new report shows just how rapidly Lenovo is moving following the purchase, with word that the company will move production for Motorola cellphones to its own facilities in the central Chinese city of Wuhan. (Chinese article)
I have probably underestimated Lenovo in the past, and should commend it now for taking the necessary steps to quickly integrate Motorola into its own operations following the closing of the merger. But if even a leading mid- to high-end name like Samsung is struggling due to the current price wars, it seems almost inevitable that Motorola will come under even bigger pressure once it starts trying to sell its Moto brand of phones to Chinese consumers.
The bigger question is how the current smartphone price wars will end, and which brands will ultimately survive and which will be forced out of China. Smaller mid-range names like Sony and Smartisan will probably be forced to withdraw after struggling under mounting losses. Lenovo will probably survive at the lower end due to its sheer size and determination. But it will face a much tougher time gaining traction at the mid- to upper-end with the Moto brand, which is unlikely to win major new share in China over the next 2 years.
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