Every so often for subscribers I do a deep dive on the China smartphone market. I’ll do another one on India in the upcoming weeks. We have some recent data on the China smartphone market I think paints a fascinating picture of what is happening as it relates to several players, and Apple in particular.
China is like no other market I study when it comes to not just mobile but the mobile internet. While we may be able to glean insights from the mobile internet trends in China and apply them to other areas, I’m not convinced we can apply the hardware trends — namely, the size of the market for customers willing to pay extreme premiums to own iPhones.
Overall View of the Market
I track global sales of smartphones by vendor, but also break them out by region. Here is a view of the market share paths of the major vendors since early 2013.
As you can see, the story of China’s smartphone growth was largely about Android, but also being driven by local manufacturers. In a market which grew from an average of 60 million units a quarter to over 100m units a quarter, there was plenty of share to go around. China was cutting their teeth on mobile and local vendors and low-cost handsets were driving the growth. All along, those of us who study the market knew Apple had a high aspirational brand but had yet to see the masses move. One thing these vendor share charts don’t show is the secondary market or the grey market. The market where iPhones are bought, not through official channels, but through unofficial ones. Remarkably, amidst the rapid smartphone growth of local vendors, Chinese consumers were buying iPhones in such significant numbers where, for a period of time in 2012, illegitimate iPhone sales made up 9-10% of all smartphones sold per quarter in China including through legitimate channels. Which, if legitimate plus grey market shipments were counted, would have put Apple in the top 5 of smartphone vendors by sales volume in China going back to 2012. Our research revealed that, during the time period, grey market iPhones sales were nearly double the number of iPhones sold through legitimate channels. This is why the device usage data from Baidu/Umeng had such high usage rates of iPhone 4 and 4s during that time frame. Such high penetration can only make sense when we add both grey market and legitimate market sales.
As you see from the chart over time, the huge base of iPhone 4 and 4s owners began to diversify and Apple began bringing new customers into their ecosystem as they cut more deals with local carriers with China Mobile being the driver of Apple’s growth push in China.
Android remains the dominant OS in China’s market of now over 600 million smartphone users. It wasn’t until the launch of the iPhone 6 and 6 Plus that Apple began to pull ahead as the majority leader in market share for the premium smartphone market in China. By vendor, Samsung and Apple were the two primary drivers of the premium smartphone market with Huawei and a few offerings from Xiaomi in the mix. Thanks to the iPhone 6 and 6 Plus, Apple’s share of the premium market is now over 60%. Furthermore, for the past two quarters, the iPhone has been the best selling smartphone brand in mainland China.
With the premium market sealed up by Apple, the real battle moves to the middle-income parts of the market. Tim Cook made an interesting statement last quarterly earnings call when he stated the iPhone was beginning to penetrate the mid-tier parts of the Chinese smartphone market. This correlates with some recent survey work we did in China where over 50% of those considered in the middle-income bracket expected to spend more money on their next smartphone. This is where the battle will lie for vendors in China. With the most developed parts of China already at 90% smartphone penetration, any meaningful growth by any vendor in mainland China will come from taking customers away from someone else. For the time being, this favors Apple but there are over 50 smartphone brands who sell into mainland China. However, only four brands rank among the most owned across all income classes–Apple, Samsung, Huawei, and Xiaomi.
Consolidation is likely coming in the China smartphone market as it will be difficult for all 50+ brands to continue to do well in the mid and premium price tiers. Any smartphone vendors looking for pure growth must look below the $100 device range and many are not positioned well to succeed there. While Apple is among those well positioned to grab new users from Android brands, Meizu and Oppo are brands to watch as well. Xiaomi was hot for a while but has now seen two quarters of back to back declines and we will see how 2015 pans out for Xiaomi in their home country.
Lastly, another data point that makes China interesting from a growth standpoint for well-positioned brands/vendors is that Chinese consumers replace their smartphones on faster cycles than any other market. The average US consumer refreshes their smartphone every 26 months while the average Chinese consumer refreshes every 22 months.
This is a picture of the market as it is today, but there are new dynamics coming to the Chinese smartphone market which may shake things up in an interesting way. In a similar vein as the US, the Chinese government is mandating all credit cards and retail store point of sale kiosks move to dual-purpose cards. These are cards not unlike the chip and pin cards coming to the US market but using different technology and including the secure element. These kiosks coming to point of sale will include both the RFID dual-purpose chip and an NFC chip which means there will be significant infrastructure for contactless mobile payments in many developed areas and the larger Chinese retailers by the end of 2015. I hear nearly every Android OEM is going full steam with NFC in China as well as OEMs and mobile payment companies starting to put the pieces together to compete for mobile wallets and mobile payments. Of course, if Apple can secure the right deals with UnionPay and others, they will also be right in the mix as the Chinese market ripens for mobile contactless payments via smartphones. Everyone I talk to at the component and hardware level who focuses on China believes another competitive cycle is coming from OEMs to capitalize on this new dynamic of mobile payments.
What’s perhaps most interesting about the smartphone hardware market in China is how it is moving more toward a premium market. Thanks to Apple, ASPs in China are actually growing not declining. Remember most believed the way to be successful in China was to make low-cost/cheaper handsets, but the market is actually moving up and this is true across income brackets. I’ve plotted estimates for ASP in China compared to that of the US to show this.
All these dynamics make China quite unique. It is becoming the largest premium smartphone market and I don’t see that changing anytime soon. It is the largest smartphone market with over 600m smartphones in active use, and the vast majority of those 600m smartphone users are looking to spend more on their next handset and simultaneously are investing more in the Chinese mobile internet and contributing to local economy. You can see why this market is so important to many competitors due to its size but for Apple it’s crucial to their growth. This is why we are seeing and will continue to see significant investments and customizations with Apple’s hardware, software, and services specific to the China market. To compete in China, hardware, software and services core competencies are becoming essential. Which is why my sense is there are only a handful you can tough it out.
Soon I’ll do a deep dive on the Indian smartphone market. India in terms of potential user size will rival China, but as you will see dramatically different market dynamics exist.