The Chilling Thing Smartphone Sales Said about China Debacle

“Saturation” is the new Economic Reality. But this is Worse.

Smartphones conquered even impoverished consumers in desperately poor countries, giving them access to things they couldn’t even imagine a few years ago. The devices and the activities they spawned have been one of the world’s growth engines. China’s consumers adopted them at stunning rates. But even that growth engine is slowing down on a global basis. And in China, it just skidded backwards into the ditch.

Globally, smartphone sales in the second quarter rose 13.5% to 329.6 million units, the slowest year-over-year growth rate since 2013, Gartner reported today. What drove growth were cheaper 3G and 4G smartphones in emerging markets in Asia/Pacific – excluding China – Eastern Europe, the Middle East, and Africa. The winners in these markets were Chinese and local brands.

But in China – the world’s largest market for smartphones, accounting for 30% of global sales last quarter – unit sales fell 4%, the first decline ever.

Gartner’s explanation of the phenomenon, after years of mind-bending growth, featured the very unwelcome S-word:

China has reached saturation – its phone market is essentially driven by replacement, with fewer first-time buyers. Beyond the lower-end phone segment, the appeal of premium smartphones will be key for vendors to attract upgrades and to maintain or grow their market share in China.

It’s getting tough in China. “Saturation” inspires fear. It turns a market into a war zone of pricing and innovation, of margin pressures and profit declines. There will be shakeouts and losers. But in China, it’s worse: the market actually shrank.

Don’t blame Apple. Its large-screen iPhones have been kicking butt in China – and elsewhere. Globally, Apple’s market share rose by 2.4 percentage points to 14.6%. Unit sales rose 36% to 48.1 million. Apple saw strong iPhone replacements in all markets, but “particularly in China,” according to Gartner. In China, iPhone sales soared 68% to 11.9 million units.

But Samsung, still number one globally, saw its market share drop 4.3 percentage points in Q2 to 21.9%. And unit sales fell 5.3% to 72.1 million.

The chart shows global smartphone sales. The declining sales of Lenovo include those by Lenovo and Motorola in both quarters. Note how super-hyped Chinese maker Xiaomi is falling further behind Huawei and Apple.


Apple ate their lunch….

Apple’s double-digit growth in the high-end segment continued to negatively impact its rivals’ premium phone sales and profit margins. Many vendors had to realign their portfolios to remain competitive in the midrange and low-end smartphone segments. This realignment resulted in price wars and discounting to clear up inventory for new devices planned for the second half of 2015.

China dished out a brutal lesson in operating systems. For a company to grow in a shrinking market it must surgically remove market share from other players. And that’s what Apple’s iOS did, taking share from Android for the third quarter in a row. Android lost out with a shrinking share of a shrinking market.

That debacle in China dragged down Android’s global growth to 11% year-over-year. Its global market share dropped 1.6 percentage points to a still phenomenally successful 82.2%.

And Microsoft’s operating system? Forget it. Gartner, gently: “In light of Microsoft’s recent cuts in its mobile hardware business, we’ll await signs of its long-term commitment in the smartphone market.” I wasn’t quite as gentle when I wrote a few weeks ago, Microsoft Tallies True Costs of M&A Boom: Layoffs, Write-Offs, Shut-Downs, and Economic Decline

The fact that smartphone sales in the world’s largest smartphone market declined in the second quarter, for the first time ever, is another warning that the official GDP growth figure of 7% is delusional.

“Saturation” is becoming a new economic reality in China. For years, global companies have been spoiled with hyper-growth. That era is over.

But actually shrinking sales are worse than what could be expected in a merely “saturated” market, which would imply flat or slowly growing sales. It’s hard to blame “saturation” for shrinking sales. Something more complex is going on, something that the official figures refuse to acknowledge.

Smartphones are not the only consumer item facing this debacle of shrinking sales in China after years of breath-taking growth. Numerous other products are now wading through the same mire. For example, passenger vehicles sales in China, the largest auto market in the world both in terms of manufacturing and sales, declined in June and July from a year ago. But incredulous manufacturers are still building plants and adding capacity.

So Volkswagen, whose sales in China – its largest market – have declined three months in a row, is now busy denying that it’s slashing production to deal with ballooning overcapacity; yes, it’s slashing production, but for other reasons, it said. Overcapacity is too terrible in the car business. It simply cannot be publicly acknowledged.

And GM has already figured out how it will deal with its overcapacity in China. Read… LEAKED: GM Sees Overcapacity Fiasco in China, Hopes Americans Will Buy Lots of Chinese-Made Buicks

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  17 comments for “The Chilling Thing Smartphone Sales Said about China Debacle

  1. Mark C. says:

    Interesting that the Windows phone is relegated to the dust bin (other) like their Zune

    • Vespa P200E says:

      I used to work at MSFT and still have a bright orange cap I got from PocketPC event and on the back it says “Say NO to Nokia”. Funny as PoketPC phone OS was going thru inferiority complex of sort from Nokia’s defunct Symbian smart phone OS.

      As for Zune – what a joke as 1st version was re-badged Toshiba Gigabeat.

      BTW – from MSFT hardware garbage bins:

      History of Microsoft’s Hardware Misadventures Garbage Bins.

      1. Talking Teletubbies, Barney, Arthur, DW – Hard to believe but MSFT ventured into interactive stuffed animal market in the late 90’s. Stories abound with MSFT test labs haunted by these dolls talking away when tested for reliability. Also came with software and peripheral to connect it to PC.
      2. LCD Touch screen remote (with Harman) – Chalk it up to another exorbitantly priced late 90’s hardware remote control developed with Harman with touch screen LCD. Bulky. Guess who’s the top dog in remote? Logitech via purchase of Harmony remote.
      3. PC speaker (with Philips) – It was actually very good speakers but like the Harman remote exorbitantly priced late 90’s hardware. Guess who’s the top dog in PC speakers? Logitech via purchase of Labtec.
      4. 900 GHz Wireless phone – Yes it was for home use and hooked to Win 95/98 PC to access the voice mail function. It was OK phone but another exorbitantly priced late 90’s hardware.
      5. Sidewinder game pads, joysticks and wheels – Pulled out of market in 2002. Logitech’s Wingman is still on the market.
      6. Wifi router, USB and PCI cards – Pulled out of market in 2003 as could not compete. Besides it was rebadged SMC products.
      7. Webcam – Almost launched it in 2000 but killed it before mass production began. Black model had built-in microphone and white only had camera. MSFT re-entered the market few year ago well after Logitech and Creative dominated the market. Guess who’s the top dog in Webcam? Logitech of course.
      8. Photoviwer with floppy disk – Launched in 2002 with a floppy drive! Transfer digital photos to 2.5” floppy and view it on TV via standalone hardware with remote.
      9. Zune – RIP. 1st version was rebadged Toshiba Gigabit. Actually a decent hardware but the Ipod wanna be’s music download service went down with it. This is the 1st time tried to compete with Apple and LOST.
      10. Soon RIP is the Tablet Surface as the XP tablet laptop was a failure when it came out 10 yrs ago. Now MSFT is pissing off the PC hardware customers by charging them $70 for the Win 8 OS when Android is FREE not to mention direct competition. Just shows how desperate MSFT is as the real enemy was not GOOG afterall but old nemesis AAPL.

      • Petunia says:

        We went thru 7 xboxes in about 5 years. Some were on warranty some not. We finally gave up on MS hardware reliability, it doesn’t exist, and moved on. My millennial son learned from the experience that MS hardware is to be avoided. There is a whole generation out there which thinks MS is a big ripoff and they will affect the company going forward.

        • Vespa P200E says:

          Xbox ring of death…

          Yep I recall sitting thru few meetings when the problem surfaced back in 2003. Xbox team got very desperate and tried to pull other depts into their grave back then. Quite a few top honcho heads rolled out of MSFT’s Millenium building over this overheating fracas…

          Call it amateur mistakes as original Xbox was really a PC cobbled together and Xbox360 was designed by bunch of rookies who had balls to sue Nvidia and tried to design lot of components ‘cos they were too good or something…

    • That’s too bad. I have a Windows Phone and really like it. The problem I saw was they mistakenly went after the low budget crowd. The only “high powered” Windows Phone has only 8 gigs of memory. I settled for it, but wanted at least 16 gigs.

  2. Vespa P200E says:

    Smart phones, tablets, laptops, flat screen TVs, blu ray players, etc. the engines of Chinese exports have all topped out in saturated markets.

    Declining sales growth of iPhone 6 in China (though AAPL’s #s made it hard to pinpoint by country) started the all mighty AAPL share price slides recently. Samsung’s high end Android smart phone are facing lots of headwinds everywhere by up and coming Chinese copies and their last 2 qtr’s #s showed that even Samsung is under pressure. Heck MSFT’s Nokia and GOOG’s Motorola got out of the business as well after bruising losses and eye popping write-downs.

    More downsides on once all mighty Nasdaq!

  3. Mark says:

    I propose that Smartphone’s have impoverished people everywhere on this planet with over priced phones, insanely expensive rates and countless updates, lets not forget about the ” updates ” scheme.

    • NotSoSure says:

      I propose that every transaction requires 2 sides and that the muppets are as responsible for this as much as the guy selling the “update”.

    • night-train says:

      Mark, I agree. It occurred to me a few years ago that while real incomes for regular folks have been flat, or even sliding back, in addition to the things people have had to spend money on, now includes $300-600 monthly for things that previously didn’t exist. Internet and household computers weren’t in household budgets 30 years ago. Cable was $20-30/monthly, including one premium channel. Some have given up landline, but still paying a premium for phone service, especially those who have to have latest/greatest. Prior to cell phone revolution, most people had a couple of landline phones which they kept forever. And those with 4-5 family members with each needing a phone and laptop, or moving toward iPad now I guess, jeeze. It boggles the mind. I know it is more complex than what I have laid out, but it still seems unsustainable.

      • Mark says:

        Bingo guys, I agree with both of you 100%.

        Night-train. You hit the nail on the head. All of these new expenses have been contributing to tapping people out over the past 30 years. And I don’t think the majority of them have woken up to it yet.

        But NotsoSure. Is preying on the week minded morally right or an ethical thing to do? I know snake oil sales men have been doing it since the beginning of time but it doesn’t make it right nor an honest business practice. Human flaw.

        Personally I have 1 Smartphone that I have ever owned. And pay 100 dollars a moth on to use. It’s a SCAM, but my justification is it’s a business expense for me. I have no tablets ( won’t get one either ), no smart watch ( won’t get one either ), a laptop would be useful for me but don’t really need one until I travel more, so my trusty desktop is fine.

        • Chris says:

          “But in China – the world’s largest market for smartphones, accounting for 30% of global sales last quarter – unit sales fell 4%, the first decline ever.”

          So much dependent on one nation…seems worth a look under the Chinese hood….

          My guess is there will be an outright decline in middle class Chinese rather than any increase over the next decade. Negative Chinese demographics and the collapse of perhaps the greatest credit bubble of all time (China +1400% in 14 years) combined with slowing global exports don’t bode well.

          Over the next 10yrs, the OECD demographic est. show there will be 15 million fewer 0-64yr/old Chinese but 63 million more 65+yr/olds…2015 is the peak total population for 15-64yr/old Chinese population and the decline in this segment plus the 0-14yr/old segment (which began declining in the ’70’s) really pick up speed from here. China is set to hit peak total population in 2030 and begin outright declines…just like Japan is now.

          Since WWII, (for every nation I’ve researched) once the core 15-64yr/old population has started declining, government debt has skyrocketed while private credit plummeted, and growth collapsed. Why will China be different? And is the smart phone (and most other markets) doomed?

  4. michael says:

    I missed a great investment opportunity when QUALCOMM was $14 per share. Who would want a phone attached to their hip? Today the only cell phone I have is a work phone. Useful yes, worth $50 to $100 a month, No.

  5. annette howey says:

    Another snake oil scam I notice in my town is security alarm companies setting up in homes. in a town where we know of each others’ lifestyles, I notice it’s the people who have no spare cash getting conned into these contracts.

  6. MC says:

    A friend of mine who works in accounting for a big Canadian corporation hit the nail squarely on the head with a simple phrase: “Those at the top have come to believe one time booms are the new normal”.

    Smartphones have been an incredible success story but, like everything else, their tumultous growth has been a one time boom that is already turning into a modern CEO’s worst nightmare: a replacement market. It means to keep on having sales growth you need to “steal” customers from the competition and that requires a lot of effort, one way or the other.

    To make matters worse, this is an extremely competitive market. Get a much hyped product wrong and you are in serious troubles.

    To quote but a few, Sagem, Garmin and NEC have all thrown the towel in because of their inability to compete with the various Samsung, Apple and LG. Motorola, Nokia and ASUS aren’t doing well by any stretch of imagination: Microsoft has been savagely slashing prices on all Nokia models here, either to get rid of unsold stocks or in a last ditch attempt to get a pop in sales figures.

    To make matters worse, smartphones are one of those things Chinese companies have learned to manufacture all too well: out of the top ten smartphone manufacturers (by volume) seven are Mainland Chinese. Only Samsung, LG and Apple are resisting the onslaught.

    If Chinese products are highly variable in quality (and downright garbage in some sectors), these Chinese smartphones are surprisingly high quality. If my brother abandoned Motorola after over a decade for a Huawei, you know our good friends in Shenzen and Guangzhou must be doing something right. He even dropped the thing (a P8 Lite) in the kitchen sink and it started working perfectly once again after being dried with a heat gun.

    Hell, since my Garmin phone (laugh as much as you want: I deserve it) is starting to show signs of strain I have been thinking about getting a Huawei as well or even a Xiaomi. The only alternative I see is an iPhone 4S since in all good conscience I cannot budget more for a phone, even if used for work.

  7. Domenic says:

    I have always resisted buying a cell phone (maybe I just never needed one) As a matter of fact my boss even tried to give one to me free and I never even had to pay for usage. Even then I never wanted it.

    I assumed he just wanted to have me on call. I told him he had to pay me a doctors wage if I was to be tethered. Unlike the business I am closed on Sundays.

    Unless you own a business and require constant contact a cell phone is not needed. IMO

    lol Try to find a pay-phone nowadays!

  8. Julian the Apostate says:

    I guess I’m one of the few who actually benefited from the smart phone. I remember $600 to $800 monthly phone bills back in the 80s, now I have a smartphone as does the wife, with unlimited talk and text + 10 gigs shared for like $170/month. The service works just about everywhere now, and I don’t have to go into the truckstop phone room with 30 other guys all talking at once. I’m planning to upgrade to the 5s next month, and it shouldn’t cost me a dime extra. (The phone rooms have been dismantled and re-tasked) like the man said, it’s hard to find a pay phone.

  9. Wolf, great article. I love how you dig into this stuff.

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