Smartphone sales are up globally – way up in fact. By volume the market has increased by approximately 52% from last year’s second quarter and has outsold not-so-smart ‘feature phones’ for the second consecutive quarter. This should be good news for the shareholders and traders of the industry’s top brands – mainly heavyweights like Samsung and Apple. But profitability expectations have outpaced actual performance for both companies while LG, Lenovo, ZTE, Huawei , and others steadily gain market share.
2Q13 Unit Shipments
2Q12 Unit Shipments
2Q13 Market Share
2Q12 Market Share
With a population of 1.3 billion and nearly 75% between ages 15-64, China is the most populous and fastest growing smartphone market in the world. But it has also been a place where Apple has struggled to dominate and lagged in both sales and volume.
While sales are down by 14% in this year’s third quarter, CEO Tim Cook attributed much of the latest slump to “bad timing” due to the release of the iPhone 4 in 2012 Q3 as well as December 2012’s release of the iPhone 5. But perhaps the most recent blip in sales alongside the rise of smaller companies foretell a greater problem Apple has (and is likely to continue to have) in the Chinese marketplace. Major challenges of note are:
Given the opportunity, most consumers prefer to browse and compare makes and models so that they can get the best bang for their buck. This is true of cars, clothes, food and now, phones. Apple has essentially one model, with upgrades somewhat infrequently. Smaller companies, especially those based in China like ZTE, Huawei, and Lenovo offer customers inexpensive products with more versatile features. Additionally, Apple is not compatible with China Mobile, the country’s most popular 3G service provider, and instead has partnered with slower performing networks China Telecom and China Unicom. Fewer choices in functionality and performance means Apple will continue to struggle in China’s smartphone market.
While it is true that the iPhone 5 sold impressively upon China’s release in December (around 2 million units), this is by and large due to heavy discounting. After partnering with two service providers, steep discounts meant consumers ultimately paid only about $100 [USD] for one. Apple still has a footing in the Chinese market due to this temporary affordability along with the fact that it is a trendy status symbol. This issue is not unique to China as is witnessed by two separate rating agencies [Moody’s and Standard & Poor’s] which give the company a AA credit rating due to the difficult nature creating new markets and downward price pressures from growing competitors. While Apple remains an expensive (albeit low performing) symbol in China, trends may change more rapidly than the company can adapt.
China is not your average market. Success with consumers often comes with big, gaudy strings attached to a strong, centralized government – one that often favors censorship. These censorship (and, by extension, proprietary) hurdles are one more reason Apple is struggling to dominate the Chinese smartphone market. Google’s Android, while currently the leading operating system, has compromised by limiting access to apps and services but still garners the perception of having too much control for the government’s liking. But Apple will struggle if forced to edit apps and access since it is notorious for a sleek, bug-free experience. The company has already come under fire/investigation for providing pornographic material and a proposed law may give the Chinese government more omnipotence and control in smartphone usage. Local brands such as Lenovo, ZTE, and Huawei fit more comfortably into a knowingly restrictive environment. Apple will need to re-evaluate how much control it is willing to relinquish and how far it really wants to go in order to dominate the Chinese market.