SMARTPHONES: Price Wars Topple Huawei, ZTE Supplier

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Bottom line: The bankruptcy of a major component supplier to ZTE and Huawei is the latest sign of stress in the overheated smartphone sector, and at least 1-2 small to mid-sized brands are likely to leave the market by mid-2016.

Smartphone price wars undermine parts maker Fosunny

Fresh new cracks are appearing in China’s smartphone making machinery, with reports that a major component supplier to Huawei and ZTE (HKEx: 763; Shenzhen: 000063) has gone bankrupt. At the same time, another report is citing bad weather for a supplier’s delivery delays that are causing Alibaba-backed (NYSE: BABA) smartphone maker Meizu to postpone the launch of a new high-end model.

The most worrisome of these 2 stories is the bankruptcy of Fosunny, a maker of metal casings used for smartphones. The company lists US wireless carrier AT&T (NYSE: T) and Europe’s Vodafone (London: VOD) among its customers on its website, but I suspect that both of those relationships come via third-parties like Huawei and ZTE  that supply smartphones to those telcos.

The bigger picture is that companies like Fosunny are getting squeezed as their customers like Huawei and ZTE fight a bloody war for share in both the domestic and increasingly the global smartphone marketplaces. It’s not immediately clear how reliant ZTE and Huawei are on Fosunny. But it does seem inevitable that this bankruptcy and others that might be looming could crimp their ability to manufacture and deliver their newest smartphones in timely fashion.

According to the latest reports, Fosunny issued a statement saying it is insolvent, and is quitting its business. (Chinese article) The company leaves behind 270 million yuan ($42 million) in debt to its own suppliers, and 400 million yuan in total debt to its creditors. The closure affects all of its 3,800 employees. A separate report attributes the failure to the high demands of Fosunny’s customers, which have resulted in razor-thin profit margins. (Chinese article)

The reports point out that the number of suppliers of such metal casings is shrinking due to high costs. They also point out that Fosunny isn’t the only supplier facing a cash crunch, and that many other suppliers are seeing similar problems. I expect that Huawei and ZTE could both face some short-term shortages due to the closure, though they will probably be able to quickly find other suppliers.

Launch Delay for Meizu

Meantime, separate reports are saying the launch of Meizu’s new PRO 5 model, which is aiming at the high end of the market, will be delayed by as much as a month due to its own supply issues. (Chinese article) Meizu announced the new phone last month and was planning a launch this week, as part of a broader move by Chinese smartphone brands to diversify beyond the overheated low end of the market.

In this case the reports say the delays are purely weather-related, and were caused when a storage facility used by one of the PRO 5 suppliers was flooded during a recent typhoon. In this case there’s no reason to doubt the explanation, since we’re currently in the midst of typhoon season and a number of major storms have struck in both China and nearby Taiwan over the last few weeks.

Still, both stories point to the stresses that are being passed on to smartphone component suppliers by the actual brands due to the overheated state of competition. Such competition will almost inevitably affect the brands’ ability to compete, since growing bankruptcies could affect not only product development cycles but also product quality.

The smaller brands are likely to feel the biggest impact at first, since many are a low priority for their suppliers due to their low business volume. Many of the smaller brands may also use smaller suppliers that have less financial resources if they run into trouble. We have yet to see any major casualties among the actual brands, though I still expect we could see 1 or 2 small- to mid-sized names withdraw from the market by mid-2016.

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