Bottom line: New comments from OnePlus are the latest sign of a shakeout set to hit China’s smartphone sector in 2016, with at least 3-4 small to mid-sized brands likely to close up shop by the end of next year.
The latest signs of trouble in the overheated smartphone space are coming from newcomer OnePlus, which is detailing its own missteps and predicting a much-needed industry shakeout will intensify soon. The comments from OnePlus co-founder Carl Pei are some of the most direct I’ve seen so far about the industry’s current woes, though he’s careful to avoid any implication that OnePlus itself might fall victim of the shakeout he’s predicting.
The fact of the matter is that OnePlus is exactly the kind of player that’s likely to go belly up in the looming shakedown, and Pei’s description of his current situation paints a rather bleak picture for his company. Equally intriguing is Pei’s prediction that one or more major players may also withdraw from the space in the coming consolidation.
That seems less likely, in my view, since most of those larger companies have much deeper resources and won’t easily concede what’s quickly becoming a key space for anyone in the computing and portable gadget sectors. The most likely candidates could be struggling PC giant Lenovo (HKEx: 992) and fading smartphone sensation Xiaomi. But withdrawals of either of those 2 would be huge news, and would only come as acts of desperation if either sees its financial situation become dire.
The new interview with OnePlus’ Pei quotes him saying that “pure plays” are the most vulnerable in the coming shakeout. (English article) That would include companies like OnePlus itself, as well as other recently launched brands like Smartisan, and older names like Coolpad (HKEx: 2369) and Oppo that now count smartphones as a major part of their business.
The picture Pei paints for his own company certainly doesn’t sound too positive. He said global giant Apple (Nasdaq: AAPL) now accounts for 90 percent of the profits being made by smartphone companies worldwide, implying companies like OnePlus are losing money. He reinforces that latter view by saying OnePlus made a profit last year on $300 million in sales, but then declining to give revenue or profit forecasts for this year. He also adds that his company expanded too fast into too many products and countries.
His comments are just the latest signs of trouble for China’s overcrowded smartphone sector, where several dozen players are competing for a market where growth is rapidly slowing. Total smartphone shipments grew just 6.8 percent to 355 million in the third quarter of this year, according to data tracking firm IDC, marking a huge slowdown from recent years when growth was typically solidly in the double-digit range.
We have yet to see any of the many recently launched brands announce their departure from the space, though we’ve seen at least 3 major closures in the last 2 months among their component suppliers. (previous post) All of those were in southern Guangdong province, which is where much of the production takes place, reflecting the intense cost-cutting pressure that the brands are putting on their suppliers.
OnePlus’ Pei says his company is still “trying to figure out our story”, which doesn’t sound like a good sign for such a big business in such a competitive market. He added that despite its efforts to cultivate an image for quality products, recent online surveys found that only around 6 percent of consumers were even aware of the OnePlus name.
Perhaps one of Pei’s most revealing comments is that his company has cut a lot of its products following its overeager early expansion, a move that many will see as designed to conserve cash. I expect many other companies are making similar cost-cutting moves, and that their sales are either stagnating or even falling as Huawei and Apple start to emerge as China’s leaders. At the end of the day there’s obviously room for several players in the space, but it does seem likely that at least 3 or 4 smaller names like OnePlus might be forced to close up shop by this time next year.
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