Apple, Samsung Face Smartphone Price Pressure
I’ve been reporting on China’s cellphone market long enough to know that change can come suddenly and without much warning, and that a superstar one day might be struggling for survival just a year or two later. Such transformations often come in waves, and it appears the newest shake-up could be coming as consumers start to shun prestigious high-end smartphones in favor of booming lower-end models that perform many of the same functions for a fraction of the price. China’s slowing economy could cause the trend to accelerate, since many consumers are now looking for ways to cut back their spending due to uncertainty about the future.
The pages of cellphone history in China are filled with stories of companies that led the field one day, only to rapidly disappear when they failed to keep up with market trends. A field of domestic players with names like TCL (HKEx: 2618), Ningbo Bird and Kelon rose to prominence about a decade ago on their trendy, low-cost cellphones just as China’s mobile market was entering some of its fastest growth. But just as quickly as they rose, all of those companies quickly fell and are now non-players in the market.
More recently, former cellphone giants Motorola and Nokia (Helsinki: NOK1V) have suffered a similar fate, not only in China but also globally. Nokia dominated the China market for years with its low-cost, dependable cellphones, but has rapidly fallen in the last 2 years due to its failure to aggressively enter the smartphone space. Motorola was also China’s second largest cellphone seller for years, but rapidly tumbled from favor for similar reasons.
Now media are reporting that a nascent global slowdown for high-end smartphone sales is starting to accelerate, in a trend that could bode poorly for market leaders Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL). (Chinese article) The reports cite data from research house IDC, saying average smartphone prices have fallen to $375 from $450 in 2012, indicating the market for the highest-end phones is becoming saturated as more lower priced options become available.
The reports don’t look specifically at China, but I would expect that these global trends would be similar and most likely even magnified in the world’s largest cellphone market. That’s because China is home to some of the biggest low-end smartphones manufacturers, including fast-rising names like Huawei, ZTE (HKEx: 763; Shenzhen: 000063), Lenovo (HKEx: 992) and Coolpad. Those names have been flooding China with a wide array of cheap new models as they fight for market share.
Reports earlier this month already indicated that a bloody price war could be shaping up among those lower-end smartphone makers, as their inventories accumulated to dangerous levels. (previous post) The first victims of those price wars will be the low-end manufacturers themselves, which will have to sell their products at a loss or risk seeing their inventories grow bigger still.
The price wars will inevitably spread to middle and even high-end products, as consumers start to take a closer look at these cheaper models that may end up selling for well under 1,000 yuan each. As I’ve said above, China’s slowing economy is likely to make this trend accelerate. In a sign of what could be coming, media are reporting that the Beijing arm of Unicom (HKEx: 762; NYSE: CHU), China’s second biggest mobile carrier, has recently dropped the cost of its Apple iPhones by as much as 800 yuan each, with an iPhone 4 now selling for as little as 2,500 yuan. (Chinese article)
While it’s probably exaggeration to predict that Apple or Samsung will follow in the footsteps of TCL or Motorola anytime soon, it’s also quite likely that both will see their China smartphone sales peak in the next 6-12 months. After that happens, look for sales of their highest-end models to start to decline, forcing them to develop cheaper phones that can compete with the crowded field of low-end players.
Bottom line: Apple and Samsung are likely to see their smartphone sales peak in China in the next 6-12 months, as consumers opt for lower-cost models.
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