Connected FOR LESS

Chinese smartphones offering high-end features at attractively low prices are conquering the Asian market.

With the market share of the Apple iPhone stagnant or even declining in Asia, Chinese smartphone makers are scoring big wins in key markets with a strategy of selling more for less.

Smartphones have become indispensable to hundreds of millions of people, some of whom are still willing to pay a lot to own a high-quality and fashionable brand. But a growing number are baulking at the idea of spending a fortune on something that has become a basic commodity item. Many are also resisting the implicit message from manufacturers that they should replace their phones every two years if they want to keep up.

Apple didn’t help its prospects in Asia when it set the price of its entry-level 64GB iPhone X at an eye-popping US$999 — in Thailand it is even more costly at 40,500 baht. Chinese challengers are now tapping into consumer resistance to those high prices.

Apple has always positioned the iPhone as a premium product ever since introducing it a decade ago with a price range of $200 to $399. Prices have climbed steadily ever since but Apple’s strategy has been vindicated by a nine-fold increase in worldwide sales over that period to $229.23 billion in 2017.

But Apple and its suppliers today are facing challenges that would be familiar to the PC companies of a decade ago. The once-hip handset is a mature product, smartphone demand is slowing as penetration rises, and premium brands such as Apple and the Samsung Galaxy line are facing stiff competition from lower-priced Chinese makers.

According to Gartner Inc, Apple’s market share in the fourth quarter of 2017 was flat compared with the same quarter in 2016, but iPhone sales fell by 5% from a year earlier. Its biggest challenges are in the most populous countries, especially India and Indonesia, where an iPhone is far beyond most consumers’ reach. They are looking for devices that cost $300 or less.

In India, Apple has only a 2% market share, while Xiaomi of China has surged in just two years to 25%, even more than Samsung at 23%.

In Indonesia, China-based smartphone makers now have more than 30% of the smartphone market. Unlike in India, the winning strategy in Indonesia is not only price-cutting but also the way in which they manage their marketing.

“It’s actually a good thing for consumers in the smartphone market. These Chinese smartphone makers have the know-how and technology to compete internationally,” said Bhakins Chittayanun, an IT product specialist who formerly worked with one of Thailand’s largest mobile phone companies. “They have made the entry price for a good-quality smartphone more affordable.”

DURABILITY EDGE

Mr Bhakins used to carry an iPhone before switching to Android. In his experience, the quality of the Chinese high-end phones is comparable to that of the iPhone but the key difference is in the durability of the hardware.

“The durability [of Chinese products] could be the difference maker,” he told Asia Focus. “However, that is no longer a big deal since many people nowadays change their phones in less than two years or even before they break down. A lot of people don’t bother fixing the phone anymore; they simply buy a new one.”

Nevertheless, he believes the iPhone will remain among the top brands in the global market since it is regarded as a “status symbol of luxury and fashionable lifestyle”. But in order to regain its share, Apple needs to come up with some great new features or functions.

Asked which Chinese brand he thinks could challenge Apple and Samsung worldwide, Mr Bhakins singled out Huawei for its technology, innovation and high R&D spending.

Xiaomi, meanwhile, is thriving for its ability to offer low-cost models in Indonesia, where many people still earn less than $2,000 per year. The other three popular Chinese brands — Lenovo, Vivo and Oppo — are also performing well, each with an estimated 6% share.

According to Risky Febrian, associate market analyst at IDC Indonesia, Chinese vendors excel at a combination of aboveand below-the-line marketing with billboards, flyers, TV commercials and more. Young local celebrities recruited as brand ambassadors also help them connect with buyers.

“The-China-based vendors are becoming more aggressive with their strategies, not just their product lineup but also their overall marketing plans and activities. Their cash-rich initiatives have left local vendors struggling to compete in the market space with their limited resources,” said Mr Febrian.

Lacking the same big marketing budgets, local brands try to be competitive by offering lower prices with similar specs to Chinese brands and focusing their sales in second-tier cities and rural areas.

And while Apple products are widely admired for their quality and functionality, Chinese manufacturers today are offering handsets that can compete on technological functions and design for a lot less money.

“People don’t have to stretch their budget to buy a top-end smartphone anymore. Chinese vendors now boast features that compete with the top end in the market,” Kiranjeet Kaur, an analyst from IDC Singapore, told the Wall Street Journal recently.

Some Chinese makers are now targeting potential Apple customers by offering phones with robust hardware such as metal bodies, or unique features that iPhones do not have. Their key marketing points are longer battery life or special cameras for taking better selfies.

In any case, all manufacturers are competing in a market that is no longer growing at the explosive rates seen in the past, according to IDC.

“The smartphone market will see a 3.3% compound annual growth rate from 2016-21, compared to 10.4% in 2015. The overall smartphone market is quickly maturing. It is still growing but we no longer have dramatic growth as in past years,” said IDC analyst Sean Kao.

MATURING MARKET

Even in China, the days of seemingly infinite growth are over. Smartphone shipments in the country actually declined 4.9% last year to 459 million devices, the first drop since 2009. IDC forecasts that the drop will continue this year.

Consumers in China, the firm observed, were unimpressed by only “minor” changes in handset offerings in 2017, as many had purchased new models a year earlier with hotter features such as larger screens, fingerprint readers and new camera features. Moreover, regular price increases have become a turn-off and people are hanging on to their existing handsets for longer.

Apple and other high-end players could face further trouble in China as pressure to cut carrier subsidies could push up their retail handset prices. The government has asked domestic telecom providers to cut marketing costs by 20%. According to a report by the investment research website Market Realist, this would cover all smartphone subsidies but is expected to affect Apple the most, as it depends highly on subsidies to increase iPhone sales.

China’s smartphone market is now dominated by five companies with a combined 80% share. Huawei leads, followed by Oppo, Vivo, Xiaomi and Apple, the only foreign brand among the top five.

“I think Chinese local brands win for their successful product models and the right pricing strategies that are more compatible with the demand of the Chinese market,” Yang Yang, a research analyst and smartphone market observer from Shanghai, said in a telephone interview with Asia Focus. “But it is worth noting that iPhone still remains the best-selling model in the major Chinese cities.”

According to Mr Yang, Chinese smartphone companies focus on the middle and lower-middle price range which represents the biggest demand, while the iPhone is considered premium luxury brand.

More importantly, he said, Chinese brands better understand how Chinese people actually use their smartphones and create the functions they want.

“Chinese people love to use smartphones to take selfies and share on social media. Chinese brands focus on developing products with an automatic facial beautification function. Several photography features coupled with ultrathin bodies, diverse colours and themes as well as fast-charging batteries have managed to win over Chinese consumers,” he said.

In any case, it is impressive to see how far the smartphone market has come in less than a decade. Apple deserves a lot of the credit for creating demand for smartphones worldwide, but Chinese competitors and others have succeeded beyond expectations at putting quality devices into the hands of millions of people in the developing world.