Chinese Saturation Reached: World's Largest Smartphone Market Suffers First Drop In 6 Years

Less than two years ago, the number of smartphone shipments in China soared by roughly 100% year over year, rising over 80 million for the first time. Fast forward to Q1 of 2015 when according to IDC, the Chinese smartphone market - the largest in the world since 2011 when it overtook the US - has not only reached maturity but is now also fully saturated and as a result smartphone shipments suffered their first Y/Y decline, dropping 4.3% on an annual basis.

As IDC notes, "this is the first time in six years that the China smartphone market declined YoY as the market continues to mature."

Worse, on a quarter over quarter basis, the market contracted 8% on the back of a large inventory buildup at the end of last year.

It was not clear if the ongoing slowdown is more driven by the now virtual halt in China's growth but a collapse in consumer end demand is undoubtedly bad for all smartphone makers who are betting on China to be the last great demand frontier.

If there was a silver lining of good news in IDC's report, it was for Apple, which thanks to its recent immitation of Samsung's larger screen strategy, has seen the iPhone 6 demand push persist for one more quarter, with a 62% jump in unit growth, giving AAPL the majority of the market share, or 14.7%, ahead of 13.7% for Xiaomi. This was already largely known when Apple reported a record $16.8 billion in revenue in China in the first quarter.

Per IDC:

Apple was the top smartphone vendor in China in the first quarter of 2015, with consumers still having a strong appetite for the larger screens on the iPhone 6 and iPhone 6 Plus. Xiaomi slipped to the second position as it faced strong competition from other vendors in the low to mid-range segment of the market, while Huawei maintained third position as it saw a good uptake in the mid-range segment. Samsung and Lenovo both led the market at least once last year, but rankings have since changed quickly, highlighting the volatility of consumers' brand preference in China.

Former leader Samsung was far behind, with just 9.7% market share behind Huawei, and ahead only of Lenovo.

 

"Smartphones are becoming increasingly saturated in China," said Kitty Fok, Managing Director at IDC China. "China is oftentimes thought of as an emerging market but the reality is that the vast majority of phones sold in China today are smartphones, similar to other mature markets like the US, UK, Australia, and Japan. Just like these markets, convincing existing users as well as feature phone users to upgrade to new smartphones will now be the key to further growth in the China market."

What does the futures hold for smartphones in China? IDC expects relatively flat growth for China in 2015.  Other trends to expect in China this year include:

  • Multi-brand strategies. Huawei and ZTE are positioning younger sub-brands Honor and nubia, respectively, to chip away at Xiaomi's user base, and to attempt to gain a loyal fanbase. Lenovo is also getting into the mix with the Motorola acquisition, not to mention its upcoming online-focused Shenqi division.
  • Higher price tier competition. More vendors like Huawei, Lenovo, and even Xiaomi are trying to push higher into the mid to high-end segment.
  • Non-traditional channel strategies. Reduced operator subsidies mean that vendors will further expand channels into more vendor-branded retail shops, direct online sales, and eTailers instead. In particular, they are trying to save on the cost that they had to pay to the traditional dealers/distributors in the past.
  • Expansion into overseas markets. With the market in China slowing down, Chinese vendors will focus on increasing their presence in India as well as more Southeast Asia countries in 2015.

"To successfully combat local players overseas, Chinese vendors will need to focus on channel relationships and localized marketing strategies," said Tay Xiaohan, Senior Market Analyst with IDC Asia/Pacific's Client Devices team. "Most of the market's growth will come from sub-US$150 phones as feature phone users switch to low-cost smartphones." Xiaohan adds that the slowdown in China will increase pressure on manufacturers to seek growth in India and Southeast Asia, where striking partnerships with distributors will prove critical.

Which may very well mean that after Apple's latest meteoric rise to the top spot (aided by billions in marketing spend), it may be all downhill from here for the Cupertino company, unless the company that Steve Jobs built and which has since become a financial engineering juggernaut without any clear blockbuster product (sorry Apple watch fanatics, it's a dud), will have to return to its roots of producing brilliant products or soon the Chinese growth avenue will be shut just as fast as it opened.

Finally, if there is one thing that can push further smartphone, er, penetration it is this.

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