A closer look at China’s smartphone market

In February 2013, China surpassed the United States to become the world’s largest smartphone market. More than half a decade on, it still proves an elusive target for international sellers. A glance at reports from the past several quarters reveals the top spots dominated by homegrown names: Huawei, Vivo, Oppo, Xiaomi.

Combined, the big four made up roughly 84% of the nearly 100 million smartphones shipped last quarter, per new numbers from Canalys. Even international giants like Apple and Samsung have trouble cracking double-digit market share. Of the two, Apple has generally done better, with around 6% of the market — around six times Samsung’s share.

But Apple’s struggles have been very visible nonetheless, as the company has invested a good deal of its own future success into the China market. At the beginning of the year, the company took the rare action of lowering its guidance for Q1, citing China as the primary driver.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Tim Cook said in a letter to shareholders at the time. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

When it came time to report, things were disappointing, as expected. The company’s revenue in the area dropped nearly $5 billion, year over year. On the tail of two rough quarters, things picked up a bit for Apple in the country. This week, Tim Cook noted “great improvement” in Greater China.

“We’re happy with our performance across the board, including a return to growth in mainland China,” the CEO noted in far more upbeat fashion. “We accomplished this despite strong headwinds from foreign exchange, which impacted the top-line growth rate by 300 points compared to a year ago, equivalent to $1.5 billion of revenue. In constant currency, our revenue grew in all five of our geographic segments.”

Despite the moderate enthusiasm, however, it’s a stretch to suggest the company righted the ship here. Apple itself notes that the improved figures arrive thanks in part to a new trade-in program and promotion. That is to say, in spite of some fixes, the aforementioned headwinds persist.

The truth is, China isn’t immune to broader industry trends. A report from IDC at the top of the year notes declining numbers from a market that until recently had experienced stratospheric growth. Contributing factors will sound familiar to anyone who’s been following the global market. To quote the firm, “Due to a confluence of factors such as economic pressures, longer replacement cycles, and smaller wallet share, smartphone shipments in the Chinese market were down over 10% in 2018.”

Like the rest of the world, upgrade cycles have slowed in the country as smartphones have gotten better and upgrades have become more incremental. The skyrocketing cost of flagships, meanwhile, has priced many out of the market.

While it may seem invincible at times, China’s economy has suffered of late. As The New York Times noted in July, the country’s pace of growth has fallen to its slowest rate in almost three decades.

This is the result of what’s being regarded as a kind of perfect storm: the population of working-age citizens has shrunk, due to its one-child policy, while costs of living and labor have both increased. LG and Samsung have both moved production from China to places like Vietnam, and Apple has reportedly considered following suit.

More recently, of course, trade pressure has had a marked impact, exacerbating an already troubled situation. Public confidence has dropped as trade talks have broken down and tariffs have increased. In late-May, the Chinese government seized Baoshang Bank, prompting further consumer concern.

No company has been more firmly in the crosshairs of the looming trade war than Huawei. While it’s gotten a bit of a reprieve, the hardware giant has already started to feel the pinch of economic pressures internationally. It has, however, continued to see domestic growth, even as the rest of that market contracts.

Huawei poland

(Photo by Jaap Arriens/NurPhoto via Getty Images)

The U.S. trade ban has actually helped accelerate Huawei’s growth in China, as the company frames purchases as patriot support in recent marketing pushes. “[T]he US-China trade war is also creating new opportunities,” Canalys’ Mo Jia explains. “Huawei’s retail partners are rolling out advertisements to link Huawei with being the patriotic choice, to appeal to a growing demographic of Chinese consumers willing to take political factors into account when making a purchase decision.”

The company has also been bolstered by aggressive pricing — a big differentiator in an era when flagships are routinely priced out for many consumers. Huawei, like others, is expected to get a sales bump in the coming year as 5G becomes more widely available later this year via China Mobile, China Telecom and China Unicom.

The new technology is expected to bolster sales in 2020, as it will with the larger global smartphone market. Apple is expected to be late on the draw on the 5G front, as it sorts out its modem supplies. Once it does introduce a 5G iPhone in 2020, pricing will almost certainly be a concern.

Whichever company is able to offer a 5G handset at a reasonable price will be uniquely suited to ride that next wave of growth. Huawei might be just the company to do it, assuming it’s able to continue weathering increased trade pressures.