Price Wars Coming For Low-End Smartphones

Price wars coming for low-end smartphones

The inevitable price wars may finally be coming to China’s smartphone market, in an all-too-common pattern seen time and again for popular new products. Media have been so busy reporting about how China will become the world’s biggest smartphone market this year that no one has really stepped back to examine the phenomenon and why it’s happening. At least one media is finally doing that, and reporting that inventories are suddenly building up to dangerous levels at the homegrown smartphone makers that are the main force behind China’s recent smartphone boom.

China’s smartphone boom has been a very Chinese affair, fueled by a busy field of homegrown players who have flooded the market with low-cost models selling for as little as $100 each. A friend recently showed me one such model over dinner, a smartphone from PC leader Lenovo (HKEx: 992), and boasted that it cost him only around 650 yuan, or just over $100.

Lenovo certainly isn’t alone in providing such low-end smartphones. Others that have aggressively entered the arena include the telecoms equipment duo of Huawei and ZTE (HKEx: 763; Shenzhen: 000063), as well as older smartphone maker TCL Communications (HKEx2618: ), and newer arrival Coolpad. Further heating up the mix is Xiaomi, an up-and-coming maker of trendy higher performance smartphones that sell for mid-range prices. This sudden build up in the low-end smartphone space by domestic players is the main factor that is suddenly propelling China to the spot as the world’s biggest smartphone market this year. (previous post)

This kind of piling into a promising new sector by domestic firms is all too typical for China, and often leads to major supply gluts. China has seen similar boom-bust cycles for a wide range of other consumer electronics, ranging from older more basic cellphones to PCs. Now one media is citing industry insiders as saying that inventories at Huawei, ZTE, Coolpad and Lenovo have piled up to more than 1 million units each. (English article)

The report says the build-up is particularly acute for models with smaller 4-inch screens, which comes just as consumer preferences are shifting towards models with bigger screens. This kind of build-up wouldn’t surprise me at all, as Chinese companies are famous for their ability to copy old trends rather than set new ones. Thus the Chinese firms appear to have arrived late to these smaller screen models, and then rapidly built up their capacity and inventories in the usual scramble to gain market share.

So, what’s likely to happen next? A price war does seem quite likely as these domestic smartphone makers suddenly find themselves with piles of unsold smaller screen models that nobody wants except for bargain hunters. That could be bad news for all of these manufacturers, who may already be losing money on these products and could lose even more if a price war erupts.

The biggest victims are likely to be companies like TCL Communications and Coolpad, which don’t have a lot of other profitable products to support their bottom line if and when a price war breaks out. Huawei and Lenovo, by comparison, can count on their other more stable product lines to help offset widening losses created by a smartphone glut.

While a price war does seem inevitable later this year, I honestly don’t expect this to be the last such battle we’ll see among these domestic smartphone makers. All of the companies have invested big money to build up their smartphone capacity, and most are betting heavily on the future of the product. Accordingly, we can probably look forward to repeated cycles of similar price wars for these low-end products over the next couple of years until 1 or 2 of the big players is finally forced to abandon the market.

Bottom line: A price war among low-end Chinese smartphone makers is likely to break out this year, establishing a pattern likely to continue for the next 2 years.

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