CELLPHONES: Samsung In Crisis Mode, Huawei Copies Xiaomi

Bottom line: Huawei’s low-cost Honor brand is likely to gain global market share in 2015 at the expense of multinationals like Samsung, which is likely to lose its spot as China’s top smartphone seller in the new year.

Sales soar at Huawei’s Honor brand

Two of China’s leading smartphone sellers are in the headlines today moving in opposite directions, reflecting turbulent conditions in the world’s largest but also most competitive market. On the upside, media are reporting that sales are booming for domestic giant Huawei’s low-end Honor brand, as the company borrows a low-cost marketing strategy from domestic rival Xiaomi. Meantime, other reports say market leader and Korean giant Samsung (Seoul: 005930) is sending an emergency team of rescuers to China in a bid to reverse the company’s sudden slide in the market.

These 2 separate reports come as leading research firm IDC predicts that growth will slow sharply in China’s smartphone market next year, which will put even more pressure on brands that are already selling at razor-thin margins or even at losses. According to its latest forecast, IDC says China’s smartphone market will grow by just 7.8 percent in 2015, marking a sharp slowdown from this year’s 20 percent growth and even bigger growth in 2013. (English article)

All that said, let’s start with the news that Huawei saw global sales for its separately branded Honor smartphone line zoom to 20 million units from 1 million over the last year. (English article) Huawei is being just slightly deceptive in discussing the boom for Honor, since it only started aggressively marketing the brand late last year. Honor started as a trendy, mid-scale brand, but has moved rapidly downmarket since then and is now a decided low-cost name that has copied Xiaomi’s model of selling mostly online.

Media reports quote a Huawei official saying the decision to market the Honor brand mostly online allows for big savings, since marketing and distribution typically account for about 30 percent of a smartphone’s costs. The zoom in Honor sales means the brand now accounts for about a quarter of Huawei’s total smartphone sales target.

Huawei certainly has the resources to mount such an aggressive sales campaign, and is likely to continue to focus on the Honor brand in 2015 as it chases market share gains. But other companies with less resources may find it difficult to compete at the low end of the market, meaning we could see one or two mid-sized players forced to withdraw from the space next year.

Next let’s look at Samsung, which is reportedly preparing to dispatched a team of 120 experts to China next year in a bid to halt its rapidly falling market share. (English article) Samsung was the clear leader in China’s smartphone market last year, but has seen that position erode in 2014 as it loses share to aggressive domestic players like Huawei, Xiaomi and Lenovo (HKEx: 992). As a result, its share of the China market slipped to 16 percent in the third quarter of this year, down sharply from 25 percent a year earlier.

Given the current trends, the reports say Samsung now believes it’s only a matter of time before it loses its rank as China’s top smartphone seller. The most likely company to take the new crown would be Xiaomi, whose market share reached 10.2 percent in the third quarter, more than doubling from a year earlier, making it China’s second best-selling brand.

There’s no additional detail in the reports on Samsung’s latest move. But clearly the company is in crisis mode, and its rapid drop in market share looks quite similar to what happened 3 or 4 years ago for former giants Nokia and Motorola. We’ll have to wait and see how the Chinese smartphone market develops in 2015, but we’re almost certain to see some major changes. By this time next year, it’s quite possible that Xiaomi or even Lenovo may become the market leader and Samsung could drop to 2 or even 3; We could also see 2 or 3 domestic mid-sized players like Oppo or OnePlus decide to abandon the market.

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