Smartphones head for price war as China sales fall 4% in Q4

Consumer demand

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Smartphone Feb16We all now carry around a mini-computer in our pockets – one with more power than those which controlled Apollo 11 when Neil Amstrong first walked on the moon in 1969.  In certain parts of the world, there are now more smartphones than toilets, according to Time magazine.

This is raising the spectre of market saturation in the world’s largest market:

  • In China, for example, there were 1.3bn users last year – virtually everyone now owns a smartphone
  • The length of the upgrade cycle there is rising from the previous 13 months, and sales actually fell 4% in Q4
  • Apple’s share price has fallen by a quarter in just 2 weeks, since reporting “signs of economic softness there”
  • ARM, the smartphone chip supplier, has seen its share dive 15% in the past 3 days

The chart above, based on Strategy Analytics data, highlights the problems ahead.  The market had a record year in 2015, selling 1.44bn handsets.  But growth rates have collapsed from 41% at the end of 2013 to 31% in 2014 and just 6% in Q4 2015.  It seems almost inevitable that global growth will now follow China and go negative.

This will impact all the major suppliers.  Apple has claimed 90%+ of total smartphone income in recent years, and it has a devoted fan base.  But even the late Steve Jobs would probably now struggle to come up with “the next new thing” that would excite consumers to rush out and upgrade.

The problem is that the market has run out of potential demand.  As I noted in November, there are 4.1bn people in the world who can’t afford a smartphone today.  They are the people who have incomes of less than $5/day:

  • 1.4bn earn $3-$5/day; 1.6bn earn $1-$3/day and 1bn earn less than $1/day
  • Most of the other 3.1bn people in the world already own a smartphone

But the world’s 1000 smartphone suppliers won’t give up easily.  Almost inevitably, therefore, we are heading for a major price war, as it is already possible to assemble smartphones for as little as $20.

As the chart shows, the 3 major Chinese players – Huawei, Lenovo and Xiaomi – now have had a global market share of 17.5%.  And Samsung with its 20% share (down from 35% in Q3 2013), is clearly in their line of fire.  But Apple is bound to be hit as well.

The smartphone market is also probably acting as a leading indicator for many other industries.  It highlights how China’s slowdown means there is a vast amount of spare capacity in the world, which won’t ever be needed again.

This also means that deflation is inevitable as price wars intensify.

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