The Global Smartphone Boom Has Peaked, IMF Warns

As it turns out, Apple executives aren't the only ones who should be worried about slowing smartphone sales: The trend has the potential to hammer global economic growth - especially in Asia, where the rise of mobile technology has created increasingly complex supply chains.

The IMF highlights this dangerous trend in its latest World Economic Outlook (albeit buried on page 34 of the report's first chapter). In it, researchers lead with a stunning statistic. In 2017, global smartphone sales reached 1.5 billion units - that's one smartphone for every fifth person on the planet.

IMF

Taken together, smartphone production and sales contributed $3.6 trillion (4.5%) to the global economy in 2017. Across Asia, sales of smartphones and smartphone components are accounting for an increasing share of total exports. Furthermore, they account for one-sixth of the growth in global trade.

In 2017, China exported $128 billion worth of smartphones to the rest of the world, equivalent to 5.7 percent of its total exports. In Korea (the main supplier of smartphone components) semiconductor exports alone accounted for 17.1 percent of total exports. Similarly, components for smartphone production at the peak (October 2017) accounted for more than one-third of exports from Taiwan Province of China, 17.4 percent from Malaysia, and 15.9 percent from Singapore

However, these data mask a troubling trend: Smartphones' rising contribution to global GDP was last year largely driven by higher prices per unit. Looking past this, the number of units sold actually shrunk for the first time ever.

This growth was driven mainly by an increase in value added per unit, rather than units sold, which declined for the first time on record. As a result, the average sale price of an iPhone increased from $618 in 2016 to $798 in 2017, according to Apple Inc. quarterly financial statements. In the five main Asian economies involved in the tech cycle (China, Korea, Malaysia, Singapore, Taiwan Province of China), total exports grew by 6.7 percent in 2017. Even though tech exports accounted for less than 10 percent of total exports in the region, smartphone-related exports contributed about one-third the growth rate of total exports.

That's because, as the IMF explains, demand for smartphones is highly cyclical and dependent on release dates of new phones. This new cycle differs from tech growth cycles of years' past, which were mostly driven by personal computers.

Two

This new cycle unfurls in two phases, and is heavily dependent on the release of new models of the Apple iPhone:

Apple Inc.’s iPhone releases are the key determinant of the new tech cycle. Reflecting booming global demand, iPhone sales surged from 35.1 million units in the first quarter of 2012 to 78.3 million in the fourth quarter of 2016 (Figure 1.1.2). While a clear quarterly pattern is emerging—in which second- and third-quarter sales are usually weaker, reflecting the expectations of another release in the fourth quarter— the amplitude of this quarterly pattern has only really been established since the release of the iPhone 6/6 Plus in September 2014. Moreover, there are clear spillovers from the fourth quarter of the previous year onto the first quarter of the following year, ahead of the Lunar New Year in China.

The new tech cycle can be subdivided into two components. The first is the prerelease cycle, which comprises the export of all components from several Asian countries to China—the final producer of most smartphones. The second is the postrelease cycle, with shipments of smartphones from China to the rest of the world. Both pre- and postrelease cycles have a strong impact on growth and trade patterns in Asia and beyond.

Looking more closely, the IMF says that global sales of smartphones might actually have plateaued in late 2015, and the market is showing warning signs of becoming over saturated.

Global sales of smartphones may have plateaued in late 2015. By decomposing the cycle from trend for Chinese exports of smartphones, regression results show that the trend is nonlinear and may have reached its peak in September 2015, suggesting that future global demand for smartphones may grow more slowly (driven more by replacement demand than new acquisitions). This is confirmed by updated regression results on Chinese export data up to December 2017 (see Figure 1.1.3). In fact, global shipments of smartphones declined in 2017 for the first time on record (IDC 2018).

Fortunately for the Asian economies where a slowdown in smartphone sales might have the biggest impact, wearable devices, smart appliances and car computers are all seeing gains accelerate - meaning any slowdown in smartphone sales might be offset by increases in other tech products.

Three

In any event, the tech sector's importance to Asia's economy remains paramount - which is perhaps one reason why the Trump administration backed out of adding a plethora of consumer tech products to a list of Chinese goods that have been threatened with tariffs.