CELLPHONES: Chinese Become More Selective Buyers

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Bottom line: China’s smartphone market will contract through the middle of next year in terms of unit sales, but will grow by sales value as consumers upgrade to higher-end models for their second and third purchases.

Smartphone sales drop in Q2

The newest quarterly data for China’s smartphone market reveal a divergence taking place, with the actual number of phones sold down sharply even as total sales value posted healthy growth. That divergence reflects the fact that after buying their first smartphones over the last 2 years, often at very low prices, many Chinese consumers are becoming more selective for their newer purchases.

When they buy their second and third phones, many are no longer only looking at price, and instead are considering other factors like a phone’s attractiveness, reliability and functionality. That bodes well for names like Apple (Nasdaq: AAPL), Samsung (Seoul: 005930) and Huawei, which excel at higher-end models that are both attractive and well designed. But it looks more ominous for names like Lenovo (HKEx: 992) and the many smaller homegrown brands that are churning out cheap, more generic models.

China’s smartphone sales zoomed over the last 2 years, as many people traded in their older feature phones for newer models with big touch screens suited to functions like game playing, web surfing and online reading. That propelled China to the world’s largest smartphone market, fueling the rapid rise of a new generation of homegrown players with names like Xiaomi, Oppo and Coolpad (HKEx: 2369).

But sales have been contracting this year, at least in terms of number of units sold, as the market became saturated and most Chinese consumers now own smartphones. According to the latest data from GfK, Chinese smartphone shipments totaled just 88.7 million units in the second quarter of this year, down 10 percent from the 98.6 million shipped a year earlier when the market was at its peak. (Chinese article)  It’s quite noteworthy that of all the major global regions tracked by GfK, China was the only one that posted negative sales growth in terms of units sold.

But the story was completely different when looking at total value of smartphones sold during the quarter. When measured that way, China sales actually rose 17 percent to $26.8 billion. By comparison, several major regions posted declines in sales value terms, with Latin America, Eastern Europe and Western Europe all posting such drops.

None of this should come as a big surprise, since these macro trends have already been reflected in the latest quarterly results from high-end smartphone leader Apple and low-end king Lenovo. Last month Apple reported that China sales for its iPhones surged 87 percent in its latest quarter (previous post), while Lenovo reported disappointing results that included a sharp drop for its recently acquired Motorola brand. (previous post)

High-end Surge

GfK pointed out in its latest report that high-end phones took 17 percent of the market in China in the second quarter, up sharply from just 10 percent a year earlier, which reflects the big gains for Apple. It also noted that middle-range smartphone makers are getting squeezed in the current climate, which is seeing consumers increasingly opt for very expensive high-end phones or very cheap low-end models.

So what does all of this mean for China and its overheated market? The trends certainly look positive for Apple, and Samsung could also regain some of its lost momentum following the recent roll-out of several new high-end models. There will always be a market for low-end phones as well, especially in a price sensitive place like China.

But I do sense that consumers are growing increasingly frustrated with some of these lower-end models, which may be cheap but are also less versatile and often break after just a year or less. In the case of China, I see overall unit sales continuing to contract through the end of this year, though we could see some return to growth by the middle of 2016. In the meantime, consumers will continue to abandon cheap models when they buy their second and third smartphones, providing a good opportunity for makers of models costing 2,000 yuan ($310) and higher.

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