China’s low-cost smartphones start to dominate global market

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China’s exports are growing again.  But not because SuperCycle levels of demand have returned in the West.

Instead, its companies are using their low-cost manufacturing model to take on and beat Asian and Western giants.  Developments in the global smartphone market highlight the rapidity of the change underway

They confirm China’s economy is moving in exactly the direction set out in the blog’s February Research Note:

“Export Demand.  China’s main export focus will no longer be the cheap textiles and plastic products of the past.  Instead it will create jobs via an aggressive drive to sell affordable carssmartphones and relatively high-value chemicals into emerging and Western markets, based on the major new capacity installed in recent years”

Q2 data for global smartphone sales from Strategy Analytics highlights the change now underway:

  • Total market share for China’s Huawei, Lenovo and Xiaomi has jumped to 17% from 11% in Q2 2013
  • Xiaomi has more than doubled its share to 5% from 2%, and become the world’s 5th largest supplier
  • The big loser is Samsung, down to 25% from 33%
  • Even Apple is slipping, down to 11% from 12%

Smartphones are big business, of course, with handset sales rising 27% to reach 295m in Q2.  But the Chinese suppliers, particularly Xiaomi, appear to have a clear strategy to dominate the market.

Xiaomi only launched its first smartphone in China 3 years ago, in August 2011.  But it now has 21% market share, versus only 16% for Apple, and just behind Samsung’s 23%.  The reason is price – its new RedMi model sells for Rmb 799 ($125) versus Rmb 5000 for the iPhone 5S.

Their main focus today is on Samsung.  Its problem, like many companies, is that it has been focused on the middle market, where people were prepared to pay extra for cool features.  But now, as with the auto market, “design to cost” is the key parameter for today’s more cash-strapped consumers.

Thus Samsung’s new Galaxy 5S is aiming at the wrong market by adding pricey features—such as an improved camera, a fingerprint scanner and a heartrate sensor.  As the Wall Street Journal notes, this strategy is causing its margins to be squeezed as its costs increase.

Xiaomi’s performance couldn’t be more different, as Strategy Analytics describe:

“Xiaomi was the star performer in the quarter, capturing a record 5% marketshare and rising into 5th place in the global smartphone rankings for the first time ever. Xiaomi’s Android smartphone models are wildly popular in the Chinese market and it shifts millions of them every quarter through its extensive online and operator channels. Xiaomi’s next step is to target the international market in Asia and Europe.”

Bloomberg report that Xiaomi is now the leading smartphone vendor in China, giving it an excellent springboard for overseas expansion.  In India, local supplier Micromax is following the same low-cost strategy and is now the leading mobile phone supplier:

Earnings and shipments at Samsung are shrinking as consumers increasingly look past its Galaxy devices to local makers selling inexpensive phones. Xiaomi keeps prices down by selling through its website and tapping social media to create Apple Inc.-like buzz, while Micromax offers models with longer battery life and dual-SIM capacity in a market where wireless carriers don’t subsidize phones.”

Thus Xiaomi is targeting sales of 100m next year, up from 15m in Q2 this year.  This seems very possible, with its Mi3 device selling for a starting price of $230.  And as Bloomberg add:

“Similarly, Micromax aims to sell feature-filled phones cheaper than comparable models from rivals. In April, it introduced its Canvas Doodle3 with a 6-inch screen, magnetic flip-cover, 1.3GHz dual-core MediaTek processor, Android 4.2.2 Jelly Bean operating system, 5-megapixel camera, and six-month movie subscription — all for 8,500 rupees ($140).”

The problem for established companies, as Samsung is finding, is that they are now following, rather than leading the market.  And this creates a vicious circle, as Samsung’s SVP for mobile strategic planning confirmed last week:

We will more aggressively respond to the low- to mid-end smartphone market in China, which is growing rapidly now. There is a concern that it may put further margin pressure on the profitability in the short-term, but we will expand our shipment to secure profit.”

The middle market, able to pay for cool features, is disappearing before our eyes.  The successful companies of the future in smartphones, autos and other major industries will be those able to offer low-cost products. 

 

 

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