Painting a Clearer Picture of the Global Smartphone Market

Oftentimes, our peers in the analyst community put out press releases on category and vendor market share numbers and the true insight of the market gets lots in a set of very generic statistics. I understand why they do this. They make them fuzzy on purpose so people inquire about their data and pay them for the broader cuts. My frustration with this approach is it almost always leads the press astray with a headline because the media rarely understands how to ask the deeper questions. So a headline like “Nobody is buying an Apple Watch” gets published when it is total nonsense. I cleared this up in this piece where I outlined why we are revising some parts of our model for wearables going forward. That was just one example (of many) that happens when market share numbers get reported. In an ever increasing effort to more thoroughly educate our readers, I’ll make this point. Statistics are not insights. The insight comes from how those statistics are interpreted and the deep truths of what is happening in the market and why are communicated. Prepare yourself for a flood of similar headlines around the smartphone market.

I’d like to make a few generic smartphone market points then focus the rest of the article on what is happening in China, since that is where I foresee most of the disingenuous data will come from.

Globally, there are only six brand names worth keeping an eye on right now. They are, in no particular order: Samsung, Apple, Huawei, Xiaomi, Oppo, and Vivo (I am leaving LeEco out for the moment until I see where they are in six months). Oppo and Vivo are subsidiaries of a larger Chinese company called BBK, who also has a financial interest in OnePlus. Only Samsung, Apple, and Huawei sell more than 100m smartphones per year and it remains to be seen if any other brand can cross the 100m annual threshold.

This chart, which I have adapted from Morgan Stanley research, paints what I think is the best look at understanding a critical point about the smartphone market — pricing.

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As you can see, the chart paints a picture of who makes money and who barely does, even if they ship large volumes of smartphones each quarter. This also tells you where their focus on the market is and thus, where their growth can come from.

Apple sells annually more than any other brand in the premium tier of the market. They have a near monopoly on the high-end and that is extremely unlikely to change anytime soon, if ever. Only Samsung should even be considered in the conversation for high-end smartphone sales. For them, that equates to around 60-70 million high-end phones each year (potentially declining) to Apple’s 180-190m high-end phones sold annually (potentially increasing). For Apple, in nearly all the big markets where they compete, they have nearly saturated the number of customers who can afford north of $500. So, their cycles are now largely replacement driven or driven by switchers. Either way, it’s a slower growth curve than when they were adding tons of new users. This is why analyzing Apple’s growth prospects now largely depends on understanding replcement cycles, payment plans, and other dynamics of replacement markets.

Interestingly, it appears global smartphone shipments may be up in 2016 which is contra to what most were forecasting early on. I attribute this to a much more predictable upgrade cycle in the developed markets than what was anticipated in early 2016. This, however, is leading many to believe 2017 may be more of a down year and most consensus data we see has people shifting the dynamics that were leading to negativity toward 2016 to 2017. Then again, look for accelerated growth overall for the category in 2018.

When it comes to a big key market like the US, we are seeing what looks like a bigger upgrade cycle this fall than originally thought. Which means it is possible next year’s cycle is not as strong. For Apple, the idea of a 2017 super cycle may be more myth than reality. Right now, China is the most interesting market to talk about as some new developments are starting to take shape.

What will get missed in a lot of the China market share forecasts is the biggest factor changing the shape of market share is tier 3-6 (the lower income tiers of China) are starting to contribute to the growth of China as a whole. When you look at brands I mentioned before like Oppo and Vivo, which look to having impressive gains, they are acquiring those gains given their strategy to attack the tier 3-6 parts of China with offline stores and nicely designed phones and specs in the $200-$300 range which is largely considered mid-range nowadays.

The rise of Oppo and Vivo are showcase examples of a major theme about how developing a strategy for the next 1-2 billion consumers who are yet to get smartphones in the least developed parts of the world is a completely different strategy than how you go after the current most profitable billion plus consumers with more mature and refined interests and greater disposable income. Only a handful of companies can do this and globally I think Huawei is building this strategy as they look to Africa and other continents with hundreds of millions of people yet to get a smartphone. This dynamic will likely boost the market share of certain vendors but it will be important to know what price point they are shipping in volume as it will be in the lower tier. Apple is clearly not going after this audience and it is unknown how Samsung will go after them. Both of these companies seem to be hunkering down to go after customers who don’t want to compromise and that self-identification only comes with time as consumers themselves learn what they want.

An interesting example of this is in India where it is clear Apple is not the favorite (due to their high prices) to see a big share gain any time soon. However, in a recent study my firm conducted in India, we asked which brand consumers felt was the market leader. Overwhelmingly, 61% of consumers in India said Apple was the clear market leader citing a range of reasons, mostly around software quality, design, etc. They acknowledge Apple is the best and said Apple is the phone they WANT to buy. Yet, they still are not going to, for a variety of reasons our research indicates Apple can solve.

This is a prime example of my thesis that, as portions of consumers in immature markets mature, they will slowly gravitate toward Apple. Even if the growth happens incrementally, I’m convinced Apple will still grow their unique consumer base, which could hit a billion users in the not too distant future.

There will always be tiers of smartphones but I maintain the strongest fuel for growth is brand. We can bet on those who have strong global brands. Companies like Xiaomi, Oppo, and Vivo are attempting to make a global brand but they will live or die on their success to become a brand consumers trust and love.

There is no question China is a very big market where we will see many companies attempt to create a global brand. Right now, Samsung, Apple, and Huawei remain the most fundamentally sustainable global brands, with a variety of different market nuances helping each independently. The main story to watch is if Vivo, Oppo, Xiaomi, and perhaps LeEco can break free from the cutthroat China market and become global brands. This is the hill they have to climb and it is going to be more costly than I believe they anticipate.

One last point on pricing. I maintain that, if you start in the low-end/low mid-range, it will become nearly impossible to ever go upstream too far. Once you sell a cheap phone, I think a “cheap” stigma will always be on the minds of consumers and will be very hard for those brands to compete in segments with Apple and Samsung. This is still a thesis but we have yet to see evidence it is not true in computing segments. I’m happy to be proven wrong and will point it out as a key case study if it happens.

I leave you with my estimates for Q4. While the line looks bad for Samsung, our research indicates it is likely they can recover from this as most of their customers will remain loyal. It could impact their growth prospects, however, which is a key dynamic to keep an eye on.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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