China is near­ing ‘peak smart­phone’

Mar­ket for the gad­get is near sat­u­ra­tion — so what hap­pens next?


Amer­i­cans still think of China as an emerg­ing mar­ket. Not for smartphones. Just like in the U.S., the smart­phone mar­ket in China is near sat­u­ra­tion. They are now a com­mon tool, owned by the av­er­age fam­ily, like wash­ing ma­chines or rice cook­ers. More than 90% of cell­phone sales in China are smartphones.

In the first quar­ter of 2015, ac­cord­ing to IDC, China’s smart­phone ship­ments dropped to 98.8 mil- lion units, a 4.3% drop from a year ear­lier, the first quar­terly fall in six years.

So China is now close to “peak smart­phone.” What hap­pens next? A few pos­si­bil­i­ties: 1. Ap­ple booms as a sta­tus sym­bol

“Ap­ple is per­ceived as a luxury brand in China, so its brand sta­tus is just as im­por­tant as its util­ity in the Chi­nese mar­ket,” says Liz Flora, who watches the China luxury mar­ket as edi­tor in chief at Jing Daily. “It can ben­e­fit even in a sat­u­rated smart­phone mar­ket since ris­ing in­comes mean that many con­sumers will up­grade in or­der to ben­e­fit from the sta­tus of own­ing an Ap­ple prod­uct.”

Ap­ple is al­ready ex­peri-

enc­ing an ex­tra­or­di­nary boom in China with its iPhone 6 and 6 Plus, pro­pel­ling the com­pany to the top in China in terms of ship­ments in the first three months of this year, ac­cord­ing to IDC.

It beat out home­grown up­start Xiaomi, which is known for its pow­er­ful but very af­ford­able phones — de­vices that cost about onethird the price of the new­est iPhone mod­els.

That has reversed a cou­ple of years of decline for Ap­ple in China, when its early strong start in the coun­try was eroded by ri­val brands mak­ing big­ger-screen phones than Ap­ple of­fered un­til very re­cently.

Af­ter the iPhone 6 duo were first re­vealed, Bene­dict Evans of the Sil­i­con Val­ley ven­ture cap­i­tal firm An­dreessen Horowitz ar­gued that Ap­ple had sys­tem­at­i­cally “done its best to close off all the rea­sons to buy high-end An­droid be­yond sim­ple per­sonal pref­er­ence.” He went on: “You can get a big­ger screen, you can change the key­board, you can put wid­gets on the no­ti­fi­ca­tion panel (if you in­sist) and so on. Pretty much all the ex­ter­nal rea­sons to choose An­droid are ad­dressed — what re­mains is per­sonal taste.”

That ap­par­ently un-Ap­ple nod to­ward greater choice — al­lied with the 6’s at­trac­tive form fac­tor that bears many pre­mium de­sign el­e­ments — seems to have ce­mented Ap­ple’s cat­walk chic in China, plac­ing it above the hoi pol­loi Sam­sungs and the Xiaomis that all the uni­ver­sity stu­dents are fid­dling with. That will only be bol­stered by an even more sat­u­rated phone mar­ket.

ike BMWs or Mercedes in China’s cities, the new­est iPhone model is a fairly com­mon sight, but it’s still clearly a cut above all the Fords, Chevro­lets and BYDs out there.

The Cu­per­tino, Calif., com­pany’s huge brand ca­chet is no ac­ci­dent. “Ap­ple has been ac­tively cul­ti­vat­ing its luxury brand sta­tus in China. Af­ter hir­ing An­gela Ahrendts from Burberry, it was able to land the Ap­ple Watch on sev­eral prom­i­nent Chi­nese fash­ion mag­a­zines in­clud­ing Vogue China,” Flora says.

“Thanks to its luxury sta­tus in China, Ap­ple is in a dif­fer­ent league from other smart­phone brands in the coun­try. Peo­ple aren’t just buy­ing Ap­ple smartphones for them­selves; the brand is also seen as a great gift op­tion.… Luxury gift­ing is on the decline due to China’s anti-cor­rup­tion cam­paign, but brand-name con­sumer elec­tron­ics are con­sid­ered a dis­creet al­ter­na­tive to tra­di­tional luxury brands such as Louis Vuit­ton or Her­mès.” 2. More pre­mium com­pe­ti­tion

In China’s sat­u­rated smart­phone mar­ket, other brands will re­al­ize that they not only need to make more pre­mium mod­els, they need to do a much bet­ter job of them than they have in the last few years.

Sam­sung made the re­cently re­leased Galaxy S6 and S6 Edge look more pre­mium, with more metal and no cheap plas­tics. But Xiaomi is also do­ing the same with its Mi Note and Mi Note Pro, which look set to af­fect Sam­sung more than Ap­ple.

Sam­sung is feel­ing this pain the most. Once the China mar­ket leader, IDC says Sam­sung has now slipped to fourth place in terms of ship­ments — plum­met­ing 53% year-on-year, in con­trast to Ap­ple’s 62% gain — and it looks set to sink fur­ther if the new phones don’t pro­duce a turn­around. 3. Sub-brands aimed at younger buy­ers

Look­ing at the phone mar­ket as a whole, many Chi­nese brands will cre­ate or ex­pand sub-brands to chal­lenge Xiaomi. Yes, Xiaomi has been pushed down to No. 2 by Ap­ple, but Xiaomi still grew 42% in terms of ship­ments in the first quar­ter of 2015 from a year ear­lier, and it’s still the fastest grow­ing Chi­nese brand. Xiaomi’s ef­fect on Ap­ple might be less sig­nif­i­cant than many an­a­lysts first thought, but Xiaomi could still spell ruin for sev­eral other Chi­nese and over­seas brands aim­ing at the lower to mid-price seg­ments.

The dirt-cheap Coolpad, from China’s Coolpad Group, briefly out­sold Ap­ple in late 2012 be­fore its util­i­tar­ian phones started to fall out of fa­vor. It was one of the first to set up a (hope­fully hip and cool) sub-brand to take on Xiaomi, and now oth­ers are fol­low­ing.

Len­ovo, which is strug­gling with fall­ing ship­ments af­ter fail­ing to live up to its prom­ise of beat­ing Sam­sung to the top spot in China, will come out with its Shenqi sub-brand this year.

In China, smartphones are al­ready cheap, and price com­pe­ti­tion won’t work by it­self. The av­er­age sell­ing price of a smart­phone in China more than halved from 2010 to 2014; but in North Amer­ica, prices de­clined by only 25%, ac­cord­ing to Citi­corp.

Now that China is at peak smart­phone, gad­get brands need to get more cre­ative.

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