Apple’s profit growth has stalled. The company started an aggressive Chinese expansion program this winter to rejuvenate its iPhone division. Now IDC is sketching out a fairly gruesome current trend in China; smartphone growth there is collapsing right now. The noted research house now claims that smartphone unit growth in China is dropping from nearly 140% in 2012 to less than 20% in 2014… and just 10% in 2015. This is among the steepest growth rate cave-ins the industry has ever seen in a major market.
Of course, the bitter irony for Apple is that it finally opened up a broad new iPhone 5s and iPhone 5c distribution agreement with China Mobile at the beginning of 2014.
The problem in China is not overall smartphone market penetration, it’s that the urban market penetration that is topping 80%. There are plenty of peasants who don’t have a smartphone. But they cannot afford one, either. India remains a huge, largely untapped market. But with a per capita GDP of $1,500, it will be a while before its mass market consumers are going to flock to $700 iPhone models.
Globally, IDC sees smartphone unit growth dropping to under 20% in 2014. This may not seem like a weak figure compared to the death throes of the PC market, but the smartphone industry has grown utterly dependent on 40%-plus annual growth over the past decade. It’s the steepness of the growth rate decline that made the adjustment to the sudden 2001 mobile phone slowdown so painful, sending operating margins of all vendors plunging during that chilling year.
The problem in 2014 is that while Samsung is still going for aggressive, large-scale volume growth across the price spectrum, there are a number of smaller brands that have also committed to ambitious comeback plans: HTC, Sony, LG, Nokia, etc. In addition, Asian budget vendors like Micromax and ZTE are rapidly expanding in the sub-$200 category.
The mobile handset industry is characterized by cataclysmic periods of change. The one in 2001 ended up wiping out Ericsson, Samsung, Siemens, Mitsubishi, NEC, Alcatel and others as global handset brands. We have now entered a new phase of rapid change, defined this time by sudden deceleration of global smartphone sales growth, and an even more abrupt slowdown in China, associated with faster than anticipated average sales price (ASP) erosion.
Which smartphone brands can thrive in this period of turmoil? The odds do not look good for Apple.
Apple basked in enormous success during an era of super-charged global unit growth and surprisingly stable ASPs. But over the past year, Apple missed the chance to price its value iPhone appropriately and literally delayed its large-scale China offensive until the smartphone growth in that market had already started plunging.
Double-digit revenue and earnings growth in the coming years may belong to companies that figure out how to exploit the dominant trend of demand shifting from $600 models to $150 models. That is no easy wave to surf.
