Questioning China and India’s Smartphone Growth

There is an interesting narrative forming regarding certain markets, ones nowhere near saturated with smartphones, that they are slowing down in YoY shipments. Fresh off Q1 2015 numbers, the Wall St. Journal published an article on how China’s smartphone market growth is slowing. There was a particular statement that caught my attention:

Experts say the slowdown is largely driven by the disappearance of China’s first-time buyers. About three-quarters of China’s mobile phones in use are smartphones, and they make up 90% of cellphone sales, said Tom Kang, research director with market-research firm Counterpoint, meaning just about everybody in China who wants a smartphone already has one. “China is now a replacement market,” Mr. Kang said.

China (greater PRC) is not 90% saturated with smartphones. The actual smartphone penetration in PRC is 46-48% approximately. I discussed this stat with the Counterpoint folks and they said that they were misquoted. What their statistics state is 90% of quarterly sales in urban China are smartphones. Now, while this is a simplified understanding of urban sales in China, we typically break China out into tiers. Tiers 1-3 are more developed areas like Beijing, Guangdong, Shanghai, etc. Other regions make up the less developed and more rural parts of China. What Counterpoint is saying is the areas of Tier 1-3 are saturated with smartphones and 90% of sales in those regions are a replacement market. This is likely true. But their view, as well as IDC’s, that expectations are for smartphone growth to be flat in 2015 is an interesting narrative.

Significantly, reports are that overall in 2014 China smartphone shipments actually declined. It may have been close to decline or slightly positive but the main viewpoint stands out — China is not adding new smartphone users at the rate it once was.

Another observation is the same thing is happening in India. India is similarly nowhere near saturated; however, the more developed parts of India are rapidly saturating.

To view this, I use this chart:

Screen Shot 2015-05-11 at 10.51.35 AM

As you can see, there is significant headroom for growth in China and India, both areas I spend considerable time studying the local market with the same focus I study the US market. What is interesting is why markets with such headroom for smartphone growth are slowing. As I described earlier, when we segment China into developed and undeveloped tiers, we do the same in India. The tier 1-3 segments of India are cities like Delhi, Bangalore, and Mumbai. The difference between the developed parts of China and the developed parts of India are there are significantly more people in developed China than in developed India. If we just use the current computer installed base to measure this, we see it in a few numbers. In China, PC penetration is nearly 40%. In India, it is less than 10% as a percent of total population. Similarly, smartphone penetration is 46-48% in China. In India, it is closer to 20% penetration of total population. The key observation is in developed China (consumers with more disposable income, higher wages, etc.), penetration is more than two times what it is in India.

Here is another way to look at this from an economic/GDP standpoint:

screen shot 2015-02-25 at 12.20.47 pm

Many of our readers know I break out the mobile market into two segments. The approximately two billion existing smartphone owners and the next billion plus. My friend Benedict Evans, a VC at a16z is fond of saying, “The next billion are not anything like the first”. I fully agree.

The next two billion smartphone owners have needs that are very different. They have distinctive underlying economics in terms of how much money they can spend on a phone, a data plan, and even the cost to charge their phone. This last point gets misunderstood. In very rural and village parts of developing areas, people buy car batteries to power their homes. While it is true power is not free in the US, it is a small part of many people’s budget. Whereas, in these markets, the cost of power could often be more than half their disposable income.

As I observe the notion that smartphone sales are slowing in very large markets like China and India, it seems it has more to do with infrastructure issues like cost of data, and even power, than it does desire. Just to help our readers see this from a different perspective, a company called Digicel is doing some interesting things in heavily rural and village areas. I encourage you to read this article on what they are doing in Papa New Guinea to solve some problems many of us take for granted.

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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

30 thoughts on “Questioning China and India’s Smartphone Growth”

  1. Last I checked LTE served only about 19% of China’s cell network. A quick look at China’s coverage map shows that even 3G has large gaps between urban areas. In a country that’s still 47% rural those large gaps aren’t devoid of population density. At least with China this is an infrastructure limitation, not saturated demand.

  2. Probably because I live in Japan, I’m always uncomfortable with the implicit assumption that feature phone users are missing out on all the fun. M-pesa for example, as I understand it, should work perfectly on a feature phone.

    What if the next billion are already more or less satisfied with their feature phones? In the Papa New Guinea article that you link to, it seems that all the fishermen need to do is to ring ahead or text ahead to the market, something that a feature phone is fully capable of doing.

    If this is the case, then the metric that you should be looking at is not necessarily smartphone penetration but maybe mobile phone penetration.

    In Japan, half of the population is still on feature phones, and we have also observed a decline in smartphone sales. This isn’t because we’re poor or we lack power infrastructure. It’s because feature phones are good enough for the essential stuff which is basically voice and text. In fact, just this week, Docomo announced a flip-style feature phone (no touch screen) that runs on Android which runs on the same cheap data plan as feature phones. The only reason it runs Android is because it makes no more sense to develop the old i-mode OS when you can use Android for free, and because you can run a better version of the LINE messaging app.

    My prediction is that to address the next billion, there will need to be a cheaper phone that has to have much better battery life than current smartphones (which will probably mean smaller screens). It may also have strict restrictions on features because users won’t want data-guzzling features anyway. Maybe voice, text, and a little bit extra. It will in fact resemble the Japanese Android feature phones. I predict that these phones, in addition to addressing the needs of emerging nations, will also be quite popular in some developed countries.

    1. What’s the state of Japanese web services? I’ve always gotten the impression that part of why mobile web hasn’t taken off in Japan like it has in a lot of other places is that swaths of the service industry hasn’t switched or isn’t developing the web?

        1. I got that impression from how feature phones are still a huge part of that market. Unless there are services built into feature phones in a way that’s different from a smartphone? Perhaps what that feature phone observation is really pointing out is how web services are configured and delivered differently in Japan, and perhaps areas where app economies take off and become a selling point for smartphones have more specifically to do with app related business models (including investment capital) than with web services?

          1. First let’s look at the stats. The link below shows just how strong Japan’s mobile app ecosystem is. Only half of Japan’s cell phone users are in smartphones, but these users are super active. Clearly, they are enjoying their smartphones.

            However, half of the population are not interested in playing games on their smartphones. They don’t need LINE to communicate when mobile email (which is emoji capable in Japan) will do just fine. They aren’t interested in posting photos to Facebook or Instagram. They don’t need online maps because offline maps are pretty good too. And owning a feature phone will save you more that 300 USD on an annual basis.

            Which brings me to the question, why aren’t global smartphone users as active as the Japanese? My tentative answer is that probably most cheap Android users are only using their smartphones in the same way as most Japanese feature phone users; for voice, simple text and photos.

            Therefore, I find the distinction between smartphone and feature phones in the statistics to be arbitrary and potentially misleading. Not all smartphone users are equal, and many users are probably using smartphone in mostly the same way that they used feature phones.


          2. I wonder if appannie is the right resource to use for this discussion, in part because there are other app stores outside of iOS and Android, and because side loading apps is very common in developing countries (in China’s case how many services get bundled into singular apps may also be a factor). I take your point about the perils of using smartphone sales to interpret degree of web services penetration though (the reason I used impression was because I wasn’t sure of it myself :)), when you’re absolutely right that to measure the penetration of web services we should instead be looking at usage. Nonetheless, it still seems to me that mobile web hasn’t gotten as much traction in Japan relative to its state of economic development as its peers.

          3. I agree that App Annie data is not the definitive piece of evidence, so I’ll add some more.

            The following chart is from Mixi’s (the largest SNS in Japan before Facebook ate their lunch) 2008 annual earnings report (data is from 2006 to 2008). They show where their page views come from. Dark orange is from mobile phones (Japanese feature phones). Light orange is from PCs. As indicated on the graph, in August 2007, mobile phone page views overtook PCs. Remember, the first iPhone was released on June 2007.

            Therefore, if you include i-mode era web into your definition of the mobile web, Japan has had huge traction on the mobile web even before iPhone-like smartphones existed.

            If for some reason you wish to exclude the i-mode era web from your definition of the mobile web, then I don’t have any data on hand. However, anecdotally, I feel that we have plenty of mobile web sites and services.

          4. At this point you’ve already convinced me that Japan seems to have a pretty robust mobile web, but that still leaves two questions. How does it compare to other countries with the same state of economic development, and if it’s comparable, why is smartphone penetration lower?

          5. I think that your point is where things really get interesting because we’re no longer talking about Japan, but about smartphone usage in other countries, especially emerging nations.

            First, I don’t know how the mobile web in Japan compares to other countries. I don’t know of any direct data. I can only say anecdotally that our mobile web seems pretty good.

            Second, why is smartphone penetration lower? I would flip the question around. Why is smartphone penetration so high in other countries? The reason for flipping the question is because usage statistics have always suggested that Android users do much less with their devices than iOS users. They browse less, and they purchase less. They pay much less for apps. My interpretation has been that a large number of Android users are not using their smartphones as “smartphones”. Instead, they are using them as feature phones in that they are mostly using them for voice, text messaging and photos. I expect this to be particularly true for users on pre-paid plans or who are charged on a data-consumption basis (which will make up the majority of users in emerging nations).

            Therefore, my conclusion is that smartphone penetration is not a good indicator of how active the mobile web or the mobile app ecosystem is. Instead, if we want to know how mobile is making an impact on emerging markets, we should be trying to found out the transaction volume of online payment systems like M-PESA (which I think can be used with SMS alone) and things like that. Smartphone penetration per se is a poor proxy of this.

          6. You hinted at that point earlier when you were describing why feature phones were still prominent, but that’s just plain fascinating. Makes me wish we had data on exactly how the half of the US market that’s using Android is using their smartphones.

            I have one counterpoint for why smartphone penetration should absolutely matter in developing markets though, even though you’ve turned me on how we should interpret smartphone penetration in developed markets.

            I think smartphone penetration profoundly matters in developing markets because of the differences in what products are capable of and what can be built around them. You’re onto something about lower tier (Android) smartphones being treated as feature phones, but in developing markets those who may be picking up Android due to price sensitivity may have very different needs. The nature of being in a developing economy is that your needs can change quite rapidly, and the flexibility of a smartphone towards that change will have a significant impact in terms of how the mobile web and its services get built.

          7. I agree that in general, people (myself included) fall into the trap of thinking that technology in emerging countries will follow the same evolutionary curve of developed nations. In this case, the trap is to assume that emerging countries will start off with feature phones and end up using smartphones with the features that we currently associate with mid- to high-end phones.

            In fact, as you mention, the evolution of mobile phones in emerging countries could very well follow something quite unique, shaped by the quickly changing demands of an economy that is very different.

            I predicted that the smartphones for the next billion might actually resemble the feature phones that we are seeing in Japan. I may have fallen into this trap myself. We might actually see something very different. On the other hand, it could also be very different from current Android smartphones.

            You mention the flexibility of smartphones. I would take that one step further and focus on the flexibility that open-source Android provides. I am predicting that the flexibility will manifest itself not only on the application layer, but also on the device layer, and that we will see much more variation in Android devices (not only rectangles of glass).

            As an aside, I am quite alarmed that the Apple Watch seems to completely lack WebKit and any HTML rendering capability. As a result, a lot of the information is in plain text. This strongly resembles the mobile web pages and email newsletters of the i-mode era, which often relied on emoji to add small images to websites and were otherwise just text. This might be one direction that we might see more of in the future.

          8. Comports well with personal anecdote. Had the opportunity to watch people use android and apple devices in Shanghai 2009. Other interesting behaviors included using wifi to front load content.

      1. Yes.

        As some point, it could become cheaper to develop and manufacture Android-based devices than to build an Asha which runs on its own OS. This is what is happening this year in Japan where the carriers are starting to sell feature phones that run customised Android.

        These two issues suggest that it is quickly becoming nonsensical to separate non-smartphone and smartphone statistics, especially when we are talking about the “next billion”.

        1. Indeed. I’m currently looking for my elderly mom’s next phone, after an elderly-targeted 40€ Doro dumbphone, and then an elderly-tailored 200€ Wiko Android w/ Big Launcher… She deosn’t really use apps (she’s got a tablet for that), but likes a big keyboard, big screen, and nice contact list.

          I couldn’t find anything worthwhile inbetween dumbphone and Android, it seems 80€ Asha especially is not customizable at all, and tailored at the youth (the homescreen is full of confusing icons, text/keyboard size is not changeable…).
          I’m leaning to 130€/180€ Moto E or G, with Big Launcher again.

  3. I recall a report recently about the Chinese government cracking down on extravagant consumer spending (my paraphrase, I can’t remember exactly how the report framed it), no doubt particularly on Western goods. Could that have an impact, if true?


    1. Phones aren’t considered extravagant.

      Concierge Mercedez services, Ferraris, 1000 dollar bottles of liquor, expensive European handbags, dinners that cost 100 USD per person (way more when you consider what 100 USD is for China in purchasing power parity terms), luxury watches…those are considered extravagant!

      Besides, there aren’t enough corrupt government officials showering in money to greatly impact a smartphone market that’s 600 million strong.

      1. Thanks for responding. I vaguely recall that being the target. I do wonder, though, if there couldn’t be some trickle down affect. Just speculating, though.


        1. The crackdown itself wouldn’t impact general consumer behavior. It’s well known by the public to be targeted only at government officials, not the broader public. Broader economic impacts from spending slowdowns would have been captured in a growth rate slowdown, but luxury goods aren’t a big enough market to drive macroeconomic effects like that. There is a slowdown (not a recession) in China currently as the government shuffles bad debt around, but that’s been going on for a year now, and I think we would have expected that to show up in phone shipments much earlier if it had an effect. Wage inflation is still up and unemployment is down, so we know the slowdown isn’t having a negative impact on buying power. Given the particulars of the telecoms industry in China and how dependent smartphones are to that infrastructural need, I’d say it’s pretty much in the bag that a slowdown in shipments can only mean market saturation or a network imposed cap.

          1. It’s great that we have an active commenter who really knows what’s happening in probably what is now the most exciting and impactful market for technology. I can’t express how grateful I am for this.

            Thank you!

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