Price war hits smartphone market as China’s growth goes negative

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The smartphone market has been one of the ‘jewels in the crown” of the consumer electronics market.  Yet today, it is rushing headlong into the world of the New Normal.  We can all learn a lot about the outlook for the global economy from watching its development.

Until recently, the history was of astonishing growth, with the market growing 39% in 2013, for example:

  • Samsung was the unquestioned market leader, as the chart shows, with 1/3rd of the market (blue line)
  • Apple was a strong No 2, and highly profitable, with its niche market strategy (green)
  • China was in 3rd position, with no clear value proposition and several players all struggling for scale (red)

But then in 2014, things began to change quite dramatically.  Samsung suddenly found its middle market position being squeezed from both ends.  From the top end it was hit by Apple, who finally entered the Chinese market in a major way and pushed its global market share to 20%.  And it was hit from the bottom end by companies such as Xiaomi, Lenovo and Huawei selling very similar phones at much lower prices.

Suddenly, Samsung’s value proposition of having a larger screen than Apple, combined with ‘affordable luxury’ pricing, didn’t work so well.  Major internal debate is now underway over future strategy.  And it seems unlikely the current concept of offering different models for every minor segment, supported by a vast advertising budget, can continue.

In turn, the Korean, Taiwanese and Japanese companies who supply it with components are facing harder times.  Sharp of Japan, for example, last week announced a $1.9bn loss and plans to sack one-tenth of its workforce.  Korean companies have suffered too, with touchscreen panel manufacturer Iljin Dispay seeing profits fall 62%.

One might have thought that low-end Chinese companies would still be doing well.  But they are being hit by the slowdown in their home market, where sales fell by 6% in Q1.  In turn, this is forcing a major shift in their strategy.

Lenovo seems to be playing the role of industry consolidator, with the acquisition of Motorola its latest move.  But its profits rose just 1% last year, despite a 20% increase in revenue, causing it to cut costs further by moving more sales online – mirroring Xiaomi’s successful strategy.

In turn, Xiaomi is targeting growth outside China, launching a $205 phone for the Indian market and building sales across SEA.  In an interesting move, it is also going up-market to compete with Apple with the $483 Mi Note model.  It also aims to offer smart wristbands as well as air purifiers via a new online US store later this year.

It is keeping its low price strategy, however, which has given it market leadership in China with a 14% share, ahead of Huawei and Apple at 11%.  As the head of Xiaomi Technology said recently:

We’ve continued to revise our pricing strategy, which is now closest to our production cost“.

These dynamics, of course, are the New Normal in action.  Slowing growth, falling prices, intense competition – all played out on a global stage as the impact of China’s new economic policies spreads around the world.  In Korea, for example, the Korea Development Institute warned in February:

Korea faces a similar predicament to Japan in the early 1990s, due in large part to the catch-up of latecomers like China“.

Apple, of course, is still riding high today.  But clearly it is only a mater of time before its highly profitable niche marketing strategy comes under full-frontal attack from Korea and China.  Its future lies in making a successful shift to applications and services, as I noted when reviewing 2014 results in March.

It is not the hardware of the Apple Watch that will secure Apple’s future, or even its sleek design.  Instead, it is aiming to use this and similar products as a pathway to a wholly new business model.  It has to hope it can create profitable new application-based markets, based on collecting health and fitness data and connecting to smart home devices.

And, of course, the smartphone market is not alone is facing this New Normal challenge.  They are coming to the online and High Street stores near all of us, if they haven’t already arrived.

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