As I said in Apple, ARM and Tales from SamsungLand, I’ve been in Hong Kong for the last week with my family. I wrote about my last visit to China in Hotviews in Oct 2008 (see Dalian, China). Much has changed. Not least that I marvelled then at a population of 1.3b. Now it is nearly 1.4b. China has some seriously rich people as we found in Hong Kong. The top end ‘designer shops’ are driving rents up and pushing out old established businesses. We saw a gold and diamond encrusted iPhone 5 for sale for $25,000!
The ‘middle class’ now exceeds 300m and, of course, they all want smartphones. You just don’t see dumbphones here anymore. Last year, in China, there has been a 50% surge in the sales of smartphones with a 44% rise – to 300m units – forecast for 2014. According to IDC, Samsung has a 17% market share with Lenovo in #2 position with an 11% share. But China Wireless is expected to overtake Lenovo in 2013 and ship 40m units. Just a minute. China Wireless #2 in smartphones? They only entered the market last year!
Which brings me on to Samsung and Apple. On Friday Samsung reported its 6th consecutive quarter of profits growth – up 42% YOY – on revenues up 17%. Samsung, of course, makes much other than smartphones. It is the world’s largest manufacturer of memory chips, TVs, handsets and LCD panels. But smartphones are increasingly the driver of its growth. Strategy Analytics reckons Samsung shipped 69.4m smartphones in Q1 – up 56%. That makes Apple’s 6.6% growth to 37.4m smartphones look decidedly pedestrian.
On top of that, and again as I said before, Samsung has regained the ‘cool’ mantle once the preserve of Apple. The eagerly awaited S4 goes on sale this weekend and Samsung has admitted that high demand will out-strip supply.
So, here we have a world increasing dominated by demand in BRICs like China, where everyone wants (and most can now afford) a smartphone. But, increasingly, smartphones are a ‘commodity’ item and prices are plunging. Even Samsung might not be able to keep up its growth if it has to face surging competition from ‘cheap’ smartphones from the likes of China Wireless. Indeed, despite these excellent results, Samsung shares dived 6% on exactly these fears as they warned of “stiffer competition in the mobile business due to [the] expansion of the mid- to low-end smartphone market”.
This realisation also affected Qualcomm. Sure Qualcomm makes money from also every smartphone sold due to its LTE patent. But its licence revenues are based on a % of the unit price. As these decline, so does Qualcomm’s revenues. Analysts are forecasting Qualcomm growth of just 6% in 2015 for exactly this reason.
So, although smartphones are set to be ubiquitous – particularly in the biggest volume markets like China - the most profitable phase is already over; for Apple, for Samsung. The smartphone future lies with the low cost/low margin manufacturers. Of course we have been here before with PCs, with dumbphones, with mp3 players etc.
What we need is another new product category…