How China’s reputation as the world’s smartphone manufacturing hub is being shaken by plunging confidence at home
- A prolonged cooling of China’s smartphone market is sending shivers across supply chains as factories face cutbacks in production orders
- Analysts say makers of display and camera modules are under particular pressure, as smartphone clients clear inventory.
Few industries more exemplify China’s central role in global supply chains than smartphone manufacturing: in 2021, for every three smartphones produced in the world, two were made in China.
China is also the world’s single largest smartphone market – one out of every four phones sold last year was bought by a consumer in China, giving local brands such as Xiaomi, Huawei Technologies Co, Oppo and Vivo a big home market in which to grow first before venturing overseas to take on the likes of Apple and Samsung Electronics.
But a prolonged cooling of China’s smartphone market is sending shivers across supply chains as factories face cutbacks in production orders and local smartphone brands struggle to convince consumers to buy their latest models amid an economic downturn.
The usual buzz around smartphone brands and suppliers has faded, according to an executive at a handset supplier in southern China’s Guangdong province, with clients now making very conservative estimates about upcoming orders after reviewing forecasts for the year ahead.
“Now we don’t know how many [handsets] we are supposed to produce for the next month until the last minute, since our clients have no clarity on how many they can sell either,” said the executive, who declined to be named as he is not authorised to talk with the media. “Their forecasts now are purely symbolic, and it really depends on how consumption power will change under future Covid-19 policies.”
Orders at the executive’s manufacturing company have been cut by 20 to 30 per cent this year. The factory’s clients, which include some of the biggest domestic smartphone brands in China, had been optimistic about 2022 shipment volumes only to have their confidence shattered by the Russian invasion of Ukraine and the strict Covid-19 lockdown in Shanghai in March, the executive said.
Chinese smartphone brands across the board have been affected to some extent, sending a ripple effect across different parties in the supply chain, said the executive. “For us, less than 80 per cent of orders were completed in line with the production schedule.”
This turn of events has been a shock for China’s home-grown smartphone players and their ambitious plans for 2022, with many planning to penetrate further into the high-margin, premium handset segment.
Xiaomi said in February that it would ratchet up its global challenge to Apple by focusing on the high-end segment. However, Xiaomi’s handset shipments decreased 26.2 per cent in the second quarter, according to the Hong Kong-listed company, and a Fitch report estimated that the company’s total shipments growth will fall by a low teen-digit in 2022.
The impact of Covid-19 and harsh lockdown policies to prevent its spread, have had an outsize impact. An outbreak of the Omicron variant in Shanghai led to a draconian lockdown across April and May, which partially sealed off neighbouring provinces that house a lot of smartphone production.
China has maintained its dynamic zero-Covid policy since, putting more cities under lockdowns and conducting massive nucleic acid testing as a go-to-method of containment. That has helped drag the country’s economy down to GDP growth of only 0.4 per cent in the second quarter, the slowest since the economy shrank 6.8 per cent in the first quarter of 2020.
“One of the major trends starting from the fourth quarter of last year [for smartphone brands] was to move into the high-end [segment]. However, most people did not expect the situation to deteriorate to such a gruesome extent,” said Ivan Lam, senior analyst at Counterpoint Research.
That has translated into order cuts and in some cases, zero new orders for the smartphone value chain in the first half of 2022, especially for suppliers of high-end Android products, Lam said. Android OS is a Linux-based mobile operating system that primarily runs on smartphones and tablets not produced by Apple.
“Makers of some key components for mid and high-end products, which usually have a long procurement cycle, are no longer receiving new orders as clients had been excessively stockpiling under more optimistic forecasts,” Lam said.
Lam added that manufacturers of display and camera modules were under more pressure in this situation, as smartphone clients clear inventory.
Sunny Optical, China’s biggest camera module maker for major smartphone brands including Apple and Xiaomi, saw its handset lens sales fall 9.1 per cent in the first half of the year “due to weakening demand in the global smartphone market and a downgrading of specification and configuration for smartphone cameras”.
BYD, the Shenzhen-based electric carmaker and also a smartphone manufacturer, saw its revenue from handset components and assembly slip 4.78 per cent in the first half of 2022.
China’s top chip maker Semiconductor Manufacturing International Corp has already warned of lower production due to the Covid-19 lockdown in Shanghai, one of its major manufacturing bases, as well as weak downstream demand. “Many orders [from smartphone makers] have been cancelled,” said co-CEO Zhao Haijun earlier this year. “Chinese smartphone vendors could reduce shipments by 200 million units this year.”
For the first five months of 2022, major Chinese Android phone brands have cut orders for 270 million units, according to two separate reports by Kuo Ming-chi, an analyst at TF International Securities.
Kuo estimated that MediaTek has cut mid-to-low end 5G chip orders by 30 to 35 per cent for the fourth quarter, with Qualcomm cutting orders by 10 to 15 per cent for high-end chips for the second half of 2022 despite it traditionally being peak season.
The continuous uncertainties and disruptions could have longer-term implications for China’s long-established smartphone supply chain, with many manufacturers spreading their assembly wings outside China.
“The moves are initially driven by the need to diversify to lower the supply chain risks,” said Counterpoint’s Lam. “However, I expect the pace to be slow. It will still take a long time to build a mature value chain like China’s.”