SMARTPHONES: Xiaomi Shrivels in China, Huawei Gets Assertive

Bottom line: Xiaomi’s rapid slide in China is unlikely to ease soon and it’s likely to fall out of the top 5 brands before year end, while Huawei’s lawsuit against Samsung reflects a new confidence with its recent rapid rise.

Xiaomi rapidly losing steam in China

New headlines are shining a spotlight on 2 of China’s best-known domestic smartphone brands, even though the fast-rising Huawei and rapidly sinking Xiaomi are moving in opposite directions. New data shows just how badly Xiaomi has slipped over the last year at home, where the former market leader is now in danger of dropping out of the top 5 following a huge decline in first quarter sales. Meantime, the same data show a continued surge for Huawei, which is showing its growing confidence by a filing a new patent lawsuit against global smartphone leader Samsung (Seoul: 005930).

These 2 news items nicely illustrate the rapid changes ripping through China’s cluttered smartphone market, where earlier this week rumors grew that former high-flyer Coolpad (HKEx: 2369) could become the first big victim of a coming consolidation. (previous post) It’s far too early to predict the same fate for Xiaomi, though the company could quickly become a consolidation target if it doesn’t quickly stem its recent free-fall.

The first big-picture numbers came out earlier this month, when data tracking firms said Xiaomi’s first-quarter sales were roughly flat at about 15 million units worldwide in the first quarter. I said at the time that data looked ominous for Xiaomi’s home China market, since the flat global performance included sales for many markets like India and Brazil where the company has expanded aggressively over the last year. (previous post)

Now we’re getting some China-specific numbers that show just how badly Xiaomi has stumbled at home, with the company’s sales plunging 32 percent to just 9.2 million units, according to new data from IDC. (press release) The plunge dropped Xiaomi to fifth place in China with 9 percent market share, down from the 13.4 percent at this time last year.

The first-quarter plunge at home is particularly noteworthy because Xiaomi should have gotten a boost from the long-delayed launch of its latest flagship model, the Mi 5, in March. That would imply that Mi 5 sales haven’t been too good, and indeed Xiaomi has yet to announce any figures like it would have during its headier days.

Inflated Expectations

Xiaomi is suffering from numerous problems, including huge expectations it created for itself during its rapid rise to become the world’s third largest smartphone maker just a few years after its founding. An equally big problem has been its so-so product designs that couldn’t match overhyped expectations, and chief Lei Jun is now stepping in to directly oversee R&D to try and fix that part of the equation.

Next there’s Huawei, which was traditionally more used to getting sued for patent infringement rather than filing its own lawsuits. But the company’s rapid rise over the past year, which included a 48 percent jump in first-quarter China sales, has imbued Huawei with new confidence.

That confidence is probably at least partly behind the company’s decision to sue global smartphone leader Samsung in the US and China over technology infringement claims. (English article; Chinese article) Huawei says that Samsung’s phones use technology that violates at least 13 Huawei patents, and is demanding compensation. Samsung previously was at the center of a much higher-profile patent dispute with global giant Apple (Nasdaq: AAPL) involving the Android smartphone operating system, and this kind of lawsuit is actually quite common in the fiercely competitive industry.

In this instance I expect that Huawei and Samsung will quickly settle the matter with a new agreement, and the reports do say they were in discussions but failed to reach a deal before the lawsuit was filed. But more significant is the new boldness this lawsuit represents, and we can probably expect to see Huawei become more assertive with its products and patent protection efforts going forward.

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