The Smartphone Market’s Tough Year

IDC’s preliminary data on fourth-quarter shipments prove out what we already knew to be true: The smartphone market had a down year, with total annual volumes declining 4.1% year over year to 1.4 billion units. Looking ahead, our conversations with the supply side—combined with what we know about device lifetimes continuing to extend—suggests that at a worldwide level things are likely to get worse before they get better. That said, there are still some bright spots in the market that are important to discuss, including continued growth in a few key markets.

Top Five Vendors
A look at the top five smartphone vendors shows two distinct trends: Declines from the top two vendors, and continued growth from the remaining top five. IDC estimates that for the full year Samsung shipped 292.3 million units for a market-leading share of 20.8%. That’s down 8% year over year. In second place, Apple shipped 208.8 million units for a 14.9% share and a decline of 3.2% YoY. Meanwhile, Huawei shipped 206 million units (growing 33.6% year over year), Xiaomi reached 122.6 million units (up 32.2%), and OPPO topped out at 113.1 million (up 1.3%). The rest of the market combined saw volumes decrease by 19.4% to 462 million units.

As others have noted, as the smartphone market reaches maturity it’s instructive to look back at what happened in the PC market when it peaked and then declined years ago before finally (hopefully) stabilizing today. One of the key things that happened there (and continues to happen) is market consolidation among a handful of top vendors. As you can see from the numbers, that’s happening even more rapidly in the smartphone market, where the top five commanded greater than 67% of the worldwide volumes in 2018, up from 63% a year ago. We expect this consolidation to continue in 2019.
Based on the 2019 unit volume targets we’ve seen from the supply side, we expect the bottom three vendors (or four, including number six Vivo) to continue to aggressively fight to capture more share this year. Watch for Huawei to be especially bold as it nears its goal to become the number two volume player in the world.

The China Problem and Emerging-Market Opportunities
As has been noted in a numerous earnings calls to date, the slowdown in China had a dramatically negative impact on worldwide smartphone volumes. A slowing economy, complicated by the trade war with the U.S., has only heightened the existing challenges in the smartphone market. The result was a 10% decline year over year in total smartphone volumes. Moreover, there’s little reason to believe this trend will dramatically improve in 2019, so the country is likely to be a drag on the worldwide market for the foreseeable future.

While the China market has been challenging, the top Chinese vendors have weathered the storm by increasing their domestic volumes (Huawei, OPPO, Vivo, and Xiaomi represented 78% of 2018 China volumes) and by aggressively moving into emerging markets. Many in the industry were extremely skeptical of these Chinese companies’ ability to compete and succeed against local vendors as well as an entrenched Samsung in markets such as India, Indonesia, and Vietnam. However, many have managed to thrive through brute force marketing and fast adaptation to channel and market requirements in these countries.

And there is still plenty of smartphone upside in many of these countries, as a large percentage of their installed base today continues to be feature phones. While these markets don’t support the higher ASPs of mature markets, they continue to represent a strong source of smartphone shipment volume going forward for those vendors willing to put in the time, effort, and resources needed to compete there.
A Challenging Outlook

While there are clearly some bright spots around the world, it’s not unreasonable to expect that 2019 will follow a similarly challenging trajectory for the smartphone industry. While there are some interesting new technologies inbound, including foldable phones and the first round of 5G-enabled devices, these devices are likely to carry high selling prices that will suppress their mainstream adoption for the near term. I view both technologies with a bit of apprehension. I’m concerned that carriers will confuse consumers with over-the-top 5G marketing that will lead to some early-adopter dissatisfaction with 5G in the near term, although clearly it will be a positive force in the market long term. And while I’m excited to see foldable display technology ship into the market, I’m not convinced the platforms or app ecosystems are ready to support these new products out of the gate. This too could lead to some early user frustration that could slow more mainstream adoption, although longer-term I’m excited to see what developers cook up for these form factors.

Overall, I expect the near-term narrative around the smartphone market to stay fairly negative. However, it’s important to note that this was always going to happen at some point, and with volumes topping 1.4 BILLION units in 2018, there’s no need to feel too bad for the top players in the market. The question now is how will they react? It will be very interesting to see how these vendors adjust their product portfolios, shift their marketing plans, and fine-tune their ASPs to better compete in what promises to be a much more challenging market going forward.