Smartphone Stress In Coolpad Cuts, China Mobile ‘Naked’ Policy

Coolpad cuts 10 pct of workforce

Several news bits are casting a spotlight on growing stress in the low-end smartphone market, where a crowded field of Chinese companies have been engaged in a cut-throat series of price wars for the past year. Leading the headlines is word that Coolpad, a leading homegrown brand, is cutting 10 percent of its workforce as it explores a new joint venture with some of its distributors. At the same time, other reports say that China Mobile (HKEx: 941; NYSE: CHL) won’t be coming to the rescue of these struggling companies by selling their smartphones to its subscribers at subsidized prices, as the leading Chinese carrier embarks on its own cost-cutting campaign to bolster its sagging profits.

I’ve been writing about these bloody smartphone price wars for much of the last year, even though we have yet to see any real victims. Instead, the main story up until now has been constantly falling prices from most vendors. A revealing exchange last month on the microblogs of several industry executives showed just how bad the situation has become. It began when Xiaomi announced price cuts that would see its low-end model sell for just 699 yuan, or about $113. (previous post) Rival Huawei fired back almost immediately by announcing a price reduction for a model from its recently relaunched Honor brand to just 599 yuan, formally pushing prices below the $100 mark.

Against that kind of backdrop where many companies are almost certainly losing money from their smartphone business, it was really just a matter of time before something had to change. That first sign of change may have just come with the Coolpad layoffs. (Chinese article) The same reports also say that Coolpad is in talks to form a new joint venture, which will see it invest up to 1 billion yuan with some of its leading sales partners to better integrate manufacturing with distribution. (English article)

I’m not privy to any insider information, but this combination of news bits looks like signs of major trouble brewing inside Coolpad. The company may be trying to disguise the layoffs as part of a broader package that includes the new joint venture. But any such job cuts are almost always a sign of distress. What’s more, the joint venture could easily be a hidden play for cash by the company to continue funding its money-losing operations. Thus I suspect this so-called joint venture is really just Coolpad’s way to raise some money by selling part of itself to its distribution partners.

Meantime, separate media reports are saying that China Mobile is preparing to roll out a “naked device” strategy that will see it sell cheap smartphones to its customers to promote its new 4G service. Rather than subsidizing the price of those phones with its own funds, China Mobile will instead squeeze the smartphone manufacturers to sell their products for rock-bottom prices, and then offer those same low prices to its own customers. (English article) Under the program, China Mobile said it will offer 4G smartphones costing as little as 600 yuan, and expects to sell 70 percent of its 4G models for 1,000 yuan or less by the end of this year.

Companies like Coolpad could always simply say “no” to China Mobile, since they really can’t afford to sell their smartphones at a loss over the long term. But in this case, none of the manufacturers will dare to refuse an order from China Mobile or the nation’s other 2 big telcos, since that trio are so powerful in the market. All this means that Coolpad and its peers will continue to feel the squeeze, until one or more companies is finally forced to withdraw from the market. I suspect Coolpad or a similar player like Oppo could be one of the first to withdraw, and several more recently launched players like OnePlus and Smartisan could also be forced out of the market by this time next year.

Bottom line: Coolpad’s job cuts and joint venture formation mark some of the first fallout from China’s low-end smartphone price wars, with more pressure to come as the nation’s 3 telcos cut handset subsidies.

Related posts:

(Visited 98 times, 1 visits today)