Smartphone Market Pain, Throw Recovery Assumptions Out the Window

Smartphone Market Pain
I have been following the smartphone market as it relates to COVID-19 impact since if smartphones get hit bad, other categories could be worse. Basically, the smartphone market is the canary in the coal mine.

Looking at the smartphone market the past few months a few things stand out as micro and macro observations. The first one being the whole market is off, likely around 50%. China was hit the hardest as the country was ground zero for the virus and went into lock-down relatively quickly. Country data on smartphone sales show most vendors having their historical monthly sales halved, Apple included.

All investor notes I’ve read on the subject have cut estimates for vendor sales anywhere between 2-5m units. For Apple, most are cutting roughly 2-3 million off their sales numbers for iPhones, which could put Apple into the 38-39m iPhones sales figure, a number that has not been this low in quite some time. If you recall, there was a time Apple sold north of 60m iPhones in the March quarter. Yes, those days have been gone for a while but mid to high 40m units was where iPhone sales normalized in the March quarter. I share that number to highlight how impactful COVID-19 has been to Apple in terms of iPhone sales in March.

Apple is not alone, and again I use them as an indicator to gauge how hard Apple is hit because other smartphone vendors will be hit even harder. Apple, Samsung, and Huawei all are impacted but these three companies are in the best position to absorb the hit. Where companies like Vivo and Oppo (all owned by BBK) are not in as strong of a position, despite being owned by a larger company, and the impact to these brands could be greater. Outside of those five, most other smartphone brands could be hit even worse with potentially devastating financial impact.

The broader point here is the smartphone is arguable the most important piece of technology most humans on the planet own. If this market is hit and seeing potential declines of 50% or more in certain regions, then what about other hardware categories like PCs, TVs, even accessories, etc? My gut is these other categories are seeing even greater impact and may be off even more than 50% for the foreseeable future.

Throw Recovery Assumptions Out the Window
I personally do not believe demand has gone away. I don’t think any smart folks actually believe that. However, demand will be delayed is the right perspective. The problem is most assumptions believe the virus will be contained around summer and that the second half of the year, even going into 2021 should see recovery. That is a fine theory but I don’t think we can make any bets on it at this point in time.

Obviously, if we do not contain this virus globally by at least July then I think there is a chance the whole of 2020 is shot. Even if we do contain this virus by July, and that is probably optimistic from what I’ve read, we may see a recession follow as countries recover and how long a post virus recession could last is entirely unknown. In many ways, we are in uncharted territory and do not have much historical information to compare. We are literally learning in real-time about how humans are behaving and will behave when it comes to a global epidemic.

The main point about recovery, for smartphones, in particular, is the last big recession we had in the smartphone market, and Apple specifically did quite well. But those were different times. The smartphone market was just starting to scale and masses of consumers were still getting their first smartphones. Their realization of how important and central to their life a smartphone was caused them to prioritize it as a purchase even in the midst of economic hard times. That is not the market where are in today where most consumers are not buying the first time but are replacing older smartphones. During this period of economic hard times, it is extremely likely consumers put off replacing their smartphone even longer than they may have intended.

What 2020 becomes is manage through the hard-times situation for tech companies executives. Managing demand with your supply chain is going to be extremely hard, and my gut is most companies will be conservative in their build estimates for the quarter. Which in turn, could make supply more scarce.

Should the market pain, and situation worsen, and lead to a deeper recession, you can also expect then a less than ideal launch for fall device, and what could have been a strong 5G launch this fall. Which brings me to an interesting point to watch.

It was rumored Apple was going to release an updated iPhone SE, and some new accessories this Spring perhaps in March. I’d argue it is likely Apple will, or should, delay this launch because any new product launch this Spring is launching into nearly zero demand due to the uncertainty of both the virus and potential economic hard times. Regardless of people’s overall concern about the situation, their money is being held tightly for more critical basic needs than a new smartphone. It is simply unwise to launch anything new at the moment by any company.

We do believe a recovery will come. Whether it comes quickly or is drawn out and gradually ramps is the central question no one knows the answer to or has any good historical comparatives to build a defendable thesis. From a macro view, I think we have a lot of important market observations and learnings happening right now at every level from human behavior, government protocol, science, and society at large.