Smartphone Saturation Shows In Sept Stats
Let’s end the week with a look at some new data on China’s cellphone market, which is quickly becoming saturated with cheap smartphones cranked out by a crowded field of domestic companies. The rush by Chinese firms into the smartphone market over the last 2 years is typical of the herd mentality one often sees in China, almost always leading to classic boom-bust cycles. The smartphone sector was already showing signs of overheating when media reported during the summer that inventory was building up at many smartphone makers. Now the latest figures are showing that sales are slowing sharply for many of those firms, hinting a bust could come soon for players that rely heavily on the domestic market.
The latest government figures for September show that China’s overall cellphone market contracted 16 percent from a year earlier, with 43.7 million handsets shipped for the month. (English article) Within that figure, smartphone sales managed to post 12 percent growth, rising to 32.5 million, or about three-quarters of the market. While the smartphone sales are still rising, the growth rates are slowing as the market becomes saturated with models often costing less than 1,000 yuan from names like Huawei, ZTE (HKEx: 763; Shenzhen: 000063), Lenovo (HKEx: 992) and Coolpad.
Among the latest monthly figures, one of the most interesting says sales of domestic brand handsets fell 23.5 percent in September to 33.85 million units, accounting for 77 percent of the market. The figure indicates that market saturation is starting to take a toll on these low-end domestic smartphone makers, many of which crank out products that all have a similar look and feel because they are all based on Google’s (Nasdaq: GOOG) free Android operating system (OS).
One of my good friends recently bought a Lenovo brand smartphone, and boasted to me how he only paid around 700 yuan for it, or just over $100. While that’s good for him, it’s hardly good for companies like Lenovo, as it shows that Chinese consumers are attracted to the low price tags and have little brand loyalty for these products. Consumers like my friend are also more likely to own their smartphones for many years and feel less urgency to regularly upgrade to the newest model. That contrasts sharply with buyers of higher end phones from Apple (Nasdaq: AAPL) and Samsung (Seoul: 005930), who are more likely to regularly want the newest model and therefore upgrade their smartphones more frequently.
The Chinese smartphone makers could also come under pressure soon due to new rules now taking effect from the telecoms regulator, the Ministry of Industry and Information Technology (MIIT). Those rules will force smartphone makers to stop installing unwanted and invasive third-party apps on new smartphones, depriving manufacturers of an important source of income from such app developers. (previous post)
All of these factors seem to point to difficulty in 2014 for domestic smartphone makers that rely heavily on China for their sales. That would include names like Coolpad, Huawei and Lenovo, which could all find their business getting squeezed as sales start to fall and revenue from third-party app developers declines. We saw a similar bust nearly a decade ago when the market became saturated by cheap new models from names like TCL and Ningbo Bird. I expect we’ll see a similar bust in the next 2 years, which could claim Coolpad as one of its biggest victims. Huawei, ZTE and Lenovo are likely to survive because of their bigger resources, though one or more of those may ultimately decide to abandon the low-end smartphone space.
Bottom line: The latest data shows China’s smartphone market is quickly becoming saturated, raising the likelihood of a bust among low-end manufacturers in 2014.
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