Smartphone Sales Dip In Q4, Competition To Linger

ZTE slips from China top 5 smartphone list in Q4

New data is showing that the inevitable slowdown in China’s smartphone sales may have begun at the end of last year, following a boom that saw the country overtake the US to become the world’s largest market. Another noteworthy data point includes the slippage of ZTE (HKEx: 763; Shenzhen: 000063) from the top 5 smartphone sellers, as it loses momentum to more aggressive rivals like Huawei, Lenovo (HKEx: 992) and Coolpad. Meantime, fast-rising Xiaomi still has yet to make it into the top 5 sellers, but achieved a major milestone by breaking into the top 5 list for the nearby Taiwan market.

All of these trends hint that the fierce competition in China’s smartphone market is likely to continue into 2014, resulting in intensifying price wars as players vie with one another for slowing sales in the saturated market. Premium product makers Samsung (Seoul: 005930) and Apple (Nasdaq: AAPL) are less likely to feel the pricing pressure, since the market for their products is smaller and tends to be more stable and less price-sensitive. But the lower-end Chinese names like Huawei, ZTE, Lenovo and Coolpad are all likely to see their margins come under intense pressure, and some or all could see their smartphone operations dip into the red if they aren’t losing money already.

The latest trends are based on newly released data from IDC, which show that China’s smartphone market contracted for the first time in more than 2 years on a quarter-to-quarter basis at the end of 2013. The data show 90.8 million smartphones were shipped in China during the quarter, down 4.3 percent from the 94.8 million units shipped in the previous 3 months. (English article) An IDC analyst pointed out that the market is slowing as many people have already purchased their first smartphone, and sellers are now having to convince people to upgrade to newer models.

Among individual companies, Samsung continued to lead the pack with 19 percent share of the Greater China market, which also includes Taiwan and Hong Kong. (Chinese article) It was followed by Lenovo with 13 percent, and Coolpad with 11 percent. Huawei and Apple rounded out the top 5, with the latter helped by sales of its new iPhone 5S and 5C models that launched in September. ZTE was noteworthy for falling out of top 5, while Xiaomi did the opposite by climbing into the Taiwan top 5 following a strong reception for its Hongmi low-end smartphone in that market during the quarter.

So, what does all this say about what lies ahead for the market in 2014? I do expect we’ll see intensifying price wars among all the lower-end producers at least in the first half of the year, as they work to clear out big inventories that accumulated during the market’s boom last year. Those price wars could start to ease in the second half, especially as many of the big names focus on expanding into other global markets. Still, I do expect that competition in China will remain intense.

As to Apple’s ascendancy to the top 5 and ZTE’s disappearance, both could just be short-term phenomena tied to Apple’s iPhone 5 launch. The same could also be true for Xiaomi in Taiwan, since it aggressively priced its Hongmi in a bid to show the world it could succeed outside its home China market. I do suspect we could see ZTE return to the top 5 for China later this year, but whether or not it and its peers can continue to make profits for their smartphone business in the market is a completely different matter.

Bottom line: Competition in China’s smartphone market is likely to continue through the first half of this year as growth slows, squeezing margins and forcing some players into the red.

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