Mobile World Congress 2018

China’s cutthroat smartphone market is coming down to a handful of major brands

Slowing demand is threatening Chinese smartphone companies like Gionee, Coolpad and LeEco, all of which mainly rely on domestic sales 

PUBLISHED : Friday, 23 February, 2018, 7:32am
UPDATED : Tuesday, 27 February, 2018, 4:25pm

Consumers in China are waiting longer for more significant upgrades in features before replacing their smartphones, contributing to a slowdown in sales in the world’s largest mobile handset market. 

Major Chinese smartphone firms are expected to increase their combined market share on the mainland this year, with the gains coming at the expense of small suppliers after the country recorded its first decline in smartphone shipments last year.

“More of the smaller smartphone players will be forced to exit the market in 2018 as we expect handset shipments in China to continue declining,” said Tay Xiaohan, a senior market analyst at technology research firm IDC.

Smartphone sales in China are dominated by the top five brands – Huawei Technologies, Oppo, Vivo, Xiaomi and Apple – with a 77 per cent share of the market, up from 67 per cent in 2016, according to Counterpoint.

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These larger, deep-pocketed Chinese smartphone suppliers have won a big chunk of the market through aggressive marketing, more attractive handset designs and features, and by offering a wider array of models available in a range of prices to entice both younger and affluent buyers.

That leaves an estimated 200 Chinese smartphone companies to fight for the scraps. Just two years ago, there were as many as 300 of these firms offering inexpensive, knock-off handsets.

Demand in China had doubled each year between 2010 and 2012 during the period when 3G mobile services were being rolled out across the country, but gradually slowed down from 2013 ahead of the deployment of faster 4G services by the mainland’s three mobile network operators.

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Data from IDC showed that smartphone shipments on the mainland decreased 4.9 per cent to 444.3 million units last year. 

“In 2017, the minor upgrades that Chinese smartphone companies made to their offerings were not enough to move consumers to splurge on new models, resulting in a general slowdown in the market,” IDC’s Tay said. “A key space to look out for in the coming year would be how the top smartphone companies seek to [drive consumer upgrades] through their US$200 products.”

“The top-20 smartphone brands control 93 per cent of the market,” said Counterpart research director Neil Shah. “That means 180 other brands are competing for just the remaining seven per cent share, which means we could see a potential exit for some of these firms this year.”

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He said the slowdown in China “has caused serious pain for tier-2 and tier-3 smartphone brands, such as Gionee, Coolpad and LeEco, which largely depend on domestic sales”. A further slowdown this year would make it more difficult for these companies to compete in terms of scale in component supply deals for production and in marketing, he said.

With fewer marketing resources at their disposal, small Chinese smartphone companies will be absent at this year’s edition of Mobile World Congress (MWC), the world’s largest exhibition for the mobile industry, to be held in Barcelona, Spain, from February 26 to March 1.

This year’s absentees include Meizu, Gionee and Coolpad, which took part the past three years, and LeEco, which was at the event in 2015 and 2016.

Shenzhen-based Huawei, the world’s biggest telecommunications equipment supplier, and Vivo will exhibit at the MWC, but will not launch any new smartphone models. 

Hong Kong-listed companies ZTE and Lenovo Group will also be exhibiting at this year’s show.

More of the smaller smartphone players will be forced to exit the market in 2018 as we expect handset shipments in China to continue declining.
Tay Xiaohan, IDC senior market analyst

While Meizu’s domestic market share decreased last year, a spokesman said on Thursday that the company was profitable last year as its international sales have grown by more than 50 per cent. 

“Meizu’s rapid international growth is set to continue in 2018, and we’re already in talks with a number of potential partners to bring our products to even more countries next year,” the spokesman said.

Gionee declined to make any further comment from what its chief executive recently made public.

Coolpad did not respond to direct messages left on the firm’s WeChat account. 

Chinese smartphone brands have succeeded in competing against the likes of Apple and Samsung Electronics chiefly by heavy marketing and offering similar design and features at a lower price. But that strategy has its limitations as most of these brands “are too identical to stand out from others”, said Zhao Ziming, a senior analyst at Beijing-based consultancy Cyzone. 

The reliance on heavy marketing to gain buyers has burdened these brands with unsustainable costs.

Examples of lavish marketing programmes include hiring top celebrities for major advertising campaigns online, on television shows and in billboards prominently displayed at airports, undergrounds and bus stations.

Cat Fu, a smartphone vendor in Shenzhen’s electronics-manufacturing hub of Huaqiangbei, said most retailers now only sell smartphone brands that are well established.
“Young consumers normally go for Oppo, Vivo and Xiaomi, while mature buyers generally go for Huawei’s phones,” said Fu. “They will hardly consider smartphones that are less known.”

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Gionee, which is based in Shenzhen, had recently been the most active in marketing and promotions among the small Chinese smartphone brands.

In November last year, Gionee threw down the gauntlet to Apple and its rival brands in China by releasing a family of full-screen smartphones, the cheapest of which sells for a tenth of the price of the iPhone X. At that time, Gionee said it was the world’s first smartphone supplier to equip all new handsets with full 18:9 aspect ratio displays.

Last month, however, a court in the southern coastal city of Dongguan froze for two years the 41.4 per cent stake in Gionee of company chairman and chief executive Liu Lirong because of the firm’s failure to repay a number of its suppliers.

Liu recently said that the company had overextended itself after spending a combined 9 billion yuan (US$1.4 billion) in marketing and investments over the past three years.

O-film Tech, a maker of touch screens as well as fingerprint identification and video head modules, said Gionee owed the company payments totalling 626 million yuan as of February 6 this year.

Gionee’s troubles followed those of LeEco. The cash-strapped internet conglomerate and smartphone supplier founded by entrepreneur Jia Yueting last year retreated from its expansion in the United States and abandoned its US$2 billion purchase of American television maker Vizio amid a mountain of debt, huge losses and court orders freezing its assets.

Coolpad, the struggling smartphone company controlled by LeEco, last year was sued by Ping An Bank to repay a loan worth 80 million yuan.

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Counterpoint’s Shah estimated that smartphone shipments in China last year for Gionee, Coolpad and LeEco were down by 25 per cent, 77 per cent and 80 per cent, respectively, from 2016.

“These brands have fallen off the cliff,” he said. “They need to pull off a comeback. similar to Xiaomi’s, but that looks very difficult.”

Beijing-based Xiaomi was once the world’s most valuable unicorn – a start-up worth more than US$1 billion – and top smartphone supplier in China. The company’s smartphone sales, however, hit a severe slump in 2016, which senior management blamed on supply chain issues caused by its rapid expansion.

Xiaomi, which raised a US$1 billion loan from a syndicate of banks last year, recently set itself a goal of retaking the top spot in the domestic market within 10 quarters, backed by a strategy to build up the number of its bricks-and-mortar stores to complement the firm’s online retail platform.

“China, the world’s largest consumer electronics market, is the foundation of Xiaomi, and the high ground that global smartphone makers are vying for,” Xiaomi founder and chief executive Lei Jun said earlier this month. “Only if we win the local market can we continue to support steady expansion overseas.”