Chinese Smartphones Surge, Apple Sinks
We’ve been reading all year about how China is set to overtake the US to become the world’s largest smartphone market in 2013, and now we’re seeing some numbers that tell the story more vividly. The latest figures on China’s smartphone market show Apple’s (Nasdaq: AAPL) position slumping in the second quarter, as sales have surged for a field of domestic players cranking out millions of cheap models, many selling for less than 1,000 yuan ($160 )each. Up-and-coming smartphone maker Xiaomi entered that part of the market just 2 weeks ago with its introduction of the Hongmi, which retails for just 799 yuan. (previous post)
I’ve said this before and I’ll say it again, namely that this Chinese smartphone explosion will culminate in a bloody round of price wars toward the end of the year as a flood of cheap new models vie for a limited field of customers. The latest figures show that smartphone makers shipped a hefty 88 million units in the second quarter alone, about double the figure from a year ago, which is probably already far more than the market can absorb. Look for the shipment figure to go up even more in the third quarter, even though many of those phones may go unsold on store shelves.
Let’s take a closer look at the actual figures from research firm Canalys, which show that Samsung (Seoul: 005930) remained the sector leader with 15.5 million smartphones shipped in China during the second quarter, accounting for 17.6 percent of the market. (English article) Samsung was followed by PC giant Lenovo (HKEx: 992), which shipped 10.8 million units for 12.3 percent of the market — quite a feat for a company that sold just 4.9 million smartphone worldwide in the second quarter of last year.
The remaining companies in the top 5 were all domestic Chinese firms, with the number-three position taken by Yulong, maker of Coolpad smartphones, with 12.2 percent of the market; followed by ZTE (HKEx: 763; Shenzhen: 000063) with 8.7 percent; and Huawei with 8.6 percent. Media are focusing on the fact that former sector leader Apple (Nasdaq: AAPL) didn’t finish in the top 5, placing at seventh largest player with just 4.8 percent of the market. It was even edged out by Xiaomi, which won 5 percent market share.
To be fair, Apple’s poor performance was probably closely tied to the fact that its latest iPhone launched in China late last year, and even then the iPhone 5 came to Chinese consumers several months after it became available in most other major markets. Global media have been buzzing these last few days with rumors about a new iPhone launch set for early next month. (English article) The timing of that launch, combined with Apple CEO Tim Cook’s trip to Beijing last month (previous post), lead me to suspect that perhaps China will finally be included in one of Apple’s global product launches.
But even if China finally makes it onto the next iPhone’s global launch schedule, Apple could find the market is far different from just a year earlier when the iPhone was still considered a premium name and a must-have for all gadget fans. A string of media attacks has hurt the company’s image somewhat, but far more damaging is the explosion of cheap, relatively high quality models into the market.
Look for that explosion to seriously dampen sales for the latest iPhone launch, further eroding Apple’s market share. But perhaps more importantly, the looming round of price wars is likely to lead to some major adjustments among the new field of domestic smartphone makers. While names like Huawei and Lenovo have the resources to endure though a long term battle, I wouldn’t be surprised to see 1 or 2 of the other big names like Yulong or even ZTE forced out of the field over the next 2 years.
Bottom line: The explosion of low-cost smartphones in China is likely to dampen demand for Apple’s new iPhone, and will lead to a round of fierce price wars by year end.
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