SMARTPHONES: Dakele Becomes First Smartphone Victim

Bottom line: The closure of small smartphone maker Dakele marks the latest distress signal from the sector, with one or more larger, more familiar brands likely to close shop within the next 6 months.

The inevitable has finally happened in China’s 2-year-old smartphone wars, with word that a smaller player named Dakele has officially closed shop after running out of money. It’s not completely true to call Dakele the first victim of China’s smartphone price wars, since we saw a steady stream of bankruptcies among component makers that supply the actual brands toward the end of last year.

But Dakele’s closure does mark a major milestone, since it’s the first case I’ve seen of a sizable brand going bankrupt and probably signals more closures in the year ahead. Some of the most likely candidates for such closure, or perhaps purchase by another larger player, include mid-size brands like OnePlus and Smartisan, which have failed to find an audience and are probably losing big money.

According to Chinese media reports, Dakele founder Ding Xiuhong announced the closure in a microblog post, citing money problems. (Chinese article) The message cited in the reports actually appears to come from an unverified microblog account, and is a public announcement regarding the “temporary cessation” of Dakele’s operations. (microblog post)

A visit to Dakele’s own website also shows no mention of the closure, which would normally make me a little suspicious of the reports. But the source of the reports, web portal Sina, is usually quite reputable. And this is also a small, distressed company we’re talking about, meaning it may not follow all the usual procedures one might expect in this kind of situation.

The public announcement on the microblog is slightly melodramatic, citing “cruel competition” and a shuffling of monetary backing for smartphone companies as the two main factors behind Dakele’s sudden closure. Thus it’s probably safe to assume that if the posting is authentic, Dakele was losing money, and its financial backers finally decided to stop providing it with funds to keep operating.

This particular development is just the latest in a series of boom-bust cycles that are quite typical for China. They usually see companies pile into new business areas with little or no experience, resulting in intense competition as everyone battles for market share. The final result is the ultimate closure of most players.

History Repeats

One of the latest such cycles came around 5 years ago, when numerous start-ups and a few major Internet companies piled into the group buying space. The inevitable shake-out took about 2 years to happen, with smaller names folding first and even most larger players being forced out. Ultimately the sector consolidated around 2 players, Dianping and Meituan, which themselves merged late last year.

Media were quick to report the string of bankruptcies that occurred at the end of last year among smartphone suppliers, many of those in the Pearl River Delta area of Guangdong province near Hong Kong. (previous post) I’ve also written about other distress signals coming from some of the major smartphone brands, including a major fund-raising by fading giant Coolpad (HKEx: 2369) and layoffs at mid-sized player OnePlus.(previous post)

The intense competition has also taken a toll on a few major brands, with Lenovo (HKEx: 992) and ZTE (HKEx: 763; Shenzhen: 000063) both making big retreats in the market over the last 2 years. Even former superstar Xiaomi has struggled, as breakneck growth in its home market growth slowed sharply at the end of last year due to the competition.

I doubt too many people will miss Dakele due to its relatively small size, and I’ll admit I had never even heard of the company before today. Still, the company does seem to be the proverbial canary in the coal mine, and I would predict we’ll probably see the closure of one or more better-known names within the next 6 months.

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