China is an incredibly important market for the global technology industry. It is also a fascinating one to study because, more often than not, the market as a whole is an anomaly. So we often see things that happen and work in China that do not provide applicable lessons for the broader technology market as a whole. One continual example of this reality is the smartphone market in China. Brands can seemingly come out of nowhere, sell tens of millions of phones in a year, then fizzle out. The technology battle that happens in China is very often one centered around brands. Chinese consumers are some of the most brand conscious in the world. It’s a fundamental idea to understand why Apple has had continued success in the region.
I decided it would be interesting to make a few observations on the Chinese market and the story of a few specific smartphone brands.
Take a look at this chart. I’ve shown the percentage of a few name brands in China and their presence by accessing a mix of Chinese apps and cellular network activity.
The data is collected from hundreds of millions of devices accessing developer tool kits provided by companies like Baidu (one of the standards for app development and analytics for Chinese developers). I see the analytics reports for all three major developer toolkits and have triangulated between them to make sure the above chart is consistent. The other point to note is this includes tablet traffic so, in the case of Apple’s share, it is what total iOS share makes about the analytics.
On the point of Apple, what you notice is the fairly consistent 30% device share using these metrics. The analytics data breaks down this data by device model for developers. They know what screen sizes, resolution, network capabilities, etc., have the majority share so they can is use their resources wisely. This is one reason so many developers in China continue to focus on iOS. Not only are Apple devices ~30% share of the market opportunity for them but Apple provides both better economic incentives for these developers (since they can make more money on iOS) but Apple also offers them far fewer hardware variables than the open ocean of Android devices that exist in China. A simple look at this data by any developer and it’s clear where your best software opportunity lies. Interestingly, the ~30% presence of iOS devices is pretty consistent with actual installed base estimates of iOS in China which we are confident is in the 30-35% range or about 280m iOS devices in total in use in China.
Samsung’s Decline
Perhaps the biggest storyline to me is Samsung’s decline in China. Before the smartphone era, and even into the beginning of it, Samsung was a dominant brand in China. Local brands becoming dominant in China is a relatively new phenomenon because, for a long time, Chinese consumers felt Chinese brands were not up to the quality of foreign brands and no one wanted to risk spending their hard earned money on a brand that could be lower quality. For this reason, Chinese consumers tended to purchase brands they were familiar with and knew were quality. Samsung was in that class. The other point to note here on Samsung is while their brand was viewed as reliable and high quality, it was also not playing in the high-end in China but competed with much more affordable, somewhat low-end devices on the price spectrum. This, I believe is the singular reason for their decline.
Apple has never competed on price in China. It kept them in a class unto themselves from a brand standpoint. Samsung’s strategy to compete on price and be affordable for a majority of Chinese consumers left them vulnerable once Chinese brands gained in recognition and were the same price or lower than Samsung. Perhaps a law of consumer electronics has emerged. Start by competing on price, and you will always compete on price. This is why we do not see brands that start in the low-end affordable market succeed in the high-end premium market.
Huawei’s Steady Climb
What impresses me most about Huawei’s growth in China is how remarkably steady their line is compared to other Android brands. This, I would argue, is the sign of a stable strategy in China and one that suggests to me they are not a “flash in the pan” story that grows fast and falls like other brands in the region.
The vast majority of data points we see on Huawei shows a continued rise in loyalty of buyers to repurchase a Huawei phone, not something we see of other Android brands in China. We also see the Huawei brand being one consumer are expressing a sentiment that they believe Huawei is innovative and, in some cases, Chinese consumers say as innovative as Apple. Also something that was not true a few years ago.
Huawei remains the brand to keep an eye on and, as I’ve said before, they are likely going to take over Samsung in many markets. I would not be surprised if, some day, Huawei takes Samsung’s place as the leader in smartphones sales worldwide.
Shooting Stars
Lastly, I want to point out the swap in places of Oppo and Xiaomi. Xiaomi was the solid number three brand in China, receiving all kinds of press, attention, and local love for their flare. Now, their trendline is in decline with no signs of recovery and Oppo is emerging as the clear number three brand with Vivo hard on its heels. It is notable Vivo and Oppo are a part of the same larger electronics company in China called BBK. If you look closely at the chart, BBK used to be a smartphone brand with Vivo as a sub-brand. Somewhere around the end of 2015, they decided to shift focus from the BBK brand to Vivo. Knowing this, if we add up the brand share of Oppo and Vivo, it comes out to 17.44% which means BBK devices as a whole would be the number two share leader in China above Huawei. This dual brand strategy of BBK is one to watch and the dynamic between these two brands, which can focus and compete in different areas independently, could cause Huawei some troubles they have not yet anticipated.
That being said, shooting stars in China can rise and fall quickly. It is important to not just look at who has the most sales share or a flashy sales data point and look at who is developing sustainable growth strategies that have worked over time, not just for one quarter. That is the broader story this chart tells.
Good perspective Ben.
I recently spent 3 months in China and the most dominant brands I saw there were Apple and Huawei. I didn’t see a single Xiaomi phone the whole time I was there and it didn’t make anyone’s wish list in the informal surveys I took of the people I met there.
One thing I did notice though was I asked many non-iPhone users if they wanted to buy an iPhone or any Apple product. The answers were universally yes. I didn’t get one person saying that they didn’t wish they could buy an Apple product. I think that’s incredibly telling when it comes to the Chinese market. There’s still an enormous upside for Apple there with vast numbers of people not owning iPhones that wish they could.
I would be very interested to know whether Samsung’s decline in China is very specific to that region, or something that is also seen elsewhere. We have seen that even the Note 7 debacle did not significantly affect Samsung’s brand in most markets, and so China does seem to be an outlier.
Is it that the Chinese brands are strong only in China, leaving Samsung untouched in other parts of the world? Or I s it that Samsung made a grave error in their marketing? I lean towards the former being more likely.
In various markets within Japan, the Samsung-ish position is typically dominated by multiple Japanese companies, that often have little presence abroad. That is, the non-aspirational, feature-rich and value-conscious segment. In smartphones, that would be Sony, Sharp, Kyocera and Fujitsu. In laptops, that would be NEC, Fujitsu and Toshiba.
I am wondering whether what we are seeing in China is less about Samsung dropping the ball, and more about what happens in any nation with a strong domestic manufacturing sector.