SMARTPHONES: China Smartphone Contraction Chokes FIH, Xiaomi

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Bottom line: The 5 percent drop in China smartphone sales during the first quarter reflects the market’s current state of saturation, which will lead to more bankruptcies this year for suppliers and second-tier brands.

Xiaomi slips to third in China smartphone market

New data from China are shining a spotlight on the sudden slipping of global giant Apple (Nasdaq: AAPL) in the world’s largest smartphone market, as well as the slower decline of homegrown challenger Xiaomi. At the same time, the 5 percent decline in first-quarter shipments in the huge but intensely competitive China market bodes poorly for everyone. That includes a growing number of suppliers to the big brands like contract manufacturing giant FIH Mobile (HKEx: 2038), which has just warned that its profits are coming under intense pressure.

Much has been written about the effects that intense competition are having on Chinese smartphone brands, many of which are either barely profitable or are even losing money. But the toll has been even bigger on many of their suppliers like FIH, which makes phones for the likes of Xioami and Sony (Tokyo: 6758) and are coming under even bigger pressure due to slowing orders and cries from their customers for lower prices.

Let’s begin with the latest big-picture numbers that show China’s smartphone market contracted by 5 percent in the first quarter of the year, reversing several years of breakneck growth. (Chinese article) This latest data point comes from Strategy Analytics, and compares with 8 percent growth in the China smartphone market in last year’s fourth quarter, according to rival market research firm IDC. (previous post)

This particular contraction doesn’t come as a huge surprise, and has been predicted by many for the past year as China’s market becomes flooded with cheap, lookalike smartphones made by a large field of domestic companies. The flood of companies into the space has created an intense battle for market share, and the field of winners and losers seems to be constantly shifting.

The clearest first-quarter winner was local high-flyer Huawei, which posted 48 percent growth to consolidate its position as the market’s biggest brand with nearly 16 percent share. The other big winner was homegrown rival Oppo, whose even faster 67 percent growth allowed it to leapfrog past Apple and Xiaomi to become the market’s second biggest brand with 13 percent share.

Xiaomi and Apple were the big losers, each posting sales declines of about 10 percent to finish third and fifth, respectively. Xiaomi’s slippage continues a prolonged slide dating back to the middle of last year, and looks particularly worrisome because it finally launched its long-delayed new mid-range model, the Mi 5, in March. (previous post) Apple’s sliding fortunes were also chronicled in the company’s own latest earnings report, which saw its overall Greater China sales tumble 26 percent. (previous post)

Struggling Suppliers

Next let’s look at the less-visible world of smartphone suppliers, where FIH has warned that it expects its profit to tumble 92 percent in the first half of this year. (company announcement; English article) FIH said it now expects to post a first-half profit of just $10-$20 million, down from nearly $129 million in the same period of last year.

FIH attributed the steep drop to slackening demand from some of its clients, many of whom are cutting back their orders as they try to clear out unsold inventory and also to save money. FIH shares have tumbled more than 20 percent since the announcement, and are down nearly 30 percent since the start of April as bearish sentiment towards the sector builds.

FIH should be happy that at least it’s still profitable, since many other smartphone suppliers are now losing money. That reality has forced several major manufacturers to go bankrupt since last fall, most in the Pearl Delta area of southern Guangdong province. (previous post) Things probably won’t start to improve for most of these companies anytime soon, and I expect we’ll see more suppliers and also some of the smaller brands continue to close up shop as the year progresses.

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