Corporate China

China smartphones stall, as ZTE launches Star 1

China's smartphone sales likely to fall for the rest of the year, but competition likely to remain fierce as manufacturers grapple with growing piles of inventory

PUBLISHED : Thursday, 17 April, 2014, 11:26am
UPDATED : Thursday, 17 April, 2014, 11:29am

I've been predicting for a while now that China's booming smartphone sector was set for a rapid slowdown due to a rapid build-up last year, and now the latest sales data is showing that such a downturn may have begun in this year's first quarter. Of course one quarter of data is hardly enough to declare the death of last year's smartphone explosion, and we'll have to see if the coming months continue a downtrend that saw China's cellphone sales tumble 27 per cent in the first three months of the year. Meantime, one of the industry's top players ZTE (0763.HK; Shenzhen: 000063) has just launched yet another new sub-brand aimed at online buyers, reflecting the hyperactive state of competition and intense pricing pressure in the market. 

Let's start this smartphone overview with the bigger picture, which has China's Ministry of Industry and Information Technology (MIIT) disclosing the surprising 27 per cent drop in smartphone sales in the first quarter. That still translates to a hefty 100 million units shipped, showing just how much sales ballooned last year when China overtook the US to become the world's largest smartphone market. The number of new models shipped during the quarter totaled 607, down a more modest 9.5 per cent from a year earlier.

It's worth noting that these new figures are for all cellphone shipments and not just smartphones. Older 2G models saw the biggest decline, tumbling 70 percent as more users migrate to newer 3G and 4G services. But smartphone sales also stalled, with total shipments for 3G phones from two of China's three mobile carriers posting sharp declines. Most smartphones are 3G models, and China Unicom (0762.HK; NYSE: CHU) and China Telecom (0728.HK; NYSE: CHA) saw their sales of those models drop 38 per cent and 33 per cent, respectively, in the first quarter.

Those numbers, combined with data for leading carrier China Mobile (0941.HK; NYSE: CHL), equate to a drop of about 17 per cent in sales for 3G phones in the first quarter. Assuming that some of that was offset by sales of newer 4G phones, we can still say that smartphone sales probably dipped around 13-15 per cent for the period. That would extend a trend from the fourth quarter of last year, when China smartphone sales fell 4.3 per cent, according to figures from data tracking firm IDC. That drop marked the first time in more than two years that China's smartphone sales fell.

Meantime, let's look quickly at ZTE's latest product launch for its Star 1 sub-brand of phones specifically aimed at online buyers. The move imitates a similar play by crosstown rival Huawei, and follows a sales tactic used by fast-rising smartphone maker Xiaomi, which sells nearly all of its popular models online.

The new Star 1 line of phones follows ZTE's recent relaunch of another separate brand, nubia, which is aimed at higher end buyers and got a recent boost when China's first lady Peng Liyuan was spotted using one of the models during a recent trip to Europe. The new Star 1 line is aimed at tech savvy online gadget fans, and carries a very affordable price tag that starts at 1399 yuan (HK$1755). Of course its worth noting that most of ZTE's major domestic rivals launched a price war last month that saw them offer high-quality models that sold for 1,000 yuan and less.

ZTE's launch of this new sub-brand isn't all that surprising, and reflects the intense competition in the market that everyone is feeling in the grab for share at any cost. I would expect the softening overall sales trend to continue for the rest of the year as the Chinese smartphone market reaches saturation levels. That means the domestic players could find themselves with growing piles of unsold inventory, forcing many to sell at a loss as competition continues unabated.

Bottom line: China's smartphone sales are likely to fall for the rest of the year, but competition is likely to remain fierce as manufacturers grapple with growing piles of inventory.

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