Cutthroat Chinese Smartphone Industry May Foreshadow Future Of Western Markets

Cutthroat Chinese Smartphone Industry May Foreshadow Future Of Western Markets

One startup smartphone maker has become so popular, now everyone is trying to make a smartphone. In a market that has recently started to slow down, there are questions about what red-hot Chinese smartphone maker Xiaomi need to do in order to remain profitable.

In China, entrepreneurs are finding the world’s largest market for smartphones hard to resist.  Even the construction workers and rock musicians are mimicking Xiaomi , a local trailblazer, with their own smartphones.

Yet for the first time in six years, the Chinese smartphone market started to shrink in early 2015, with sales falling for the one-time leader Xiaomi. This sudden about-face has started to raise questions as to whether there was any hope for companies such as Gree Electric Appliances Inc. of Zhuhai, SANY Group Co. Ltd. and Cui Jian, a veteran rockstar.

This market slowdown could prove to be too much for everyone but the biggest handset makers, much less the wide array of me-toos, according to analysts. In an already crowded market, filled with price wars, those entering the market will have to convince shoppers to leave the already established brands, with handsets that outperform even the high end models, according to Gartner, a U.S. research firm.

“It’s not that easy to go bankrupt making phones, but it’s also not easy to be profitable,” said Gartner analyst CK Lu. “If you don’t have good differentiation, you’re putting yourself in a saturated market.”

As of the end of March, China had 155 different brands of smartphones selling more than 1,000 each month, up from 110 just two years ago, according to Neil Shah, analysis for Counterpoint Research. In India, there were 103 different brands, with more than half being Chinese.

Gartner states that the smaller players who compete only get one-fifth of the market, with the remaining being held by the 10 largest incumbents – including Lenovo, Apple and Samsung.

It could cost a few hundred thousand dollars to bring a smartphone market to China, with the money going towards designs from manufacturers and licensing. For even larger scale the design involvement, offline sales distribution and marketing can send costs soaring to the hundreds of millions of dollars, according to Shah.

Few companies are likely to survive without big sales, such as Xiaomi , or other companies who show support for the smartphone divisions that are losing money, such as Lenovo.  Their best hope is to link the smartphones to new divisions such as smart home appliances and wearable devices.

Xiaomi and its fairy tale success have enticed new hopefuls into the market. Xiaomi was valued by investors in December at $45 billion, this just five years after it was founded, making the company one of the most valuable startups in the world.

Smartisan, a Chinese startup established in 2012, has become very popular just as Xiaomi has due primarily to focusing on marketing by word of mouth and on social-media, rather than advertising.

“Xiaomi’s phones were definitely already successful (in 2012),” according to a Smartisan spokeswoman. “Because of that, getting investment and bringing in talent for smartphones became much easier… Before Xiaomi, this would have been very difficult.”

“Xiaomi does so many products now,” Chen Xudong President of Lenovo Mobile Group. Xiaomi has expanded its market from being an online smartphone vendor to manufacturing other home appliances and consumer electronics.

Instead of replicating Xiaomi’s original model, Nicole Peng, Chinese research director of Canalys, stated that the opportunities for these entrants lie in the manufacturing of smart appliances and wearables along with smartphones, similar to the current strategy of Xiaomi.

“I think no more than three new brands can be commercially successful in the short term, any others will only acquire a tiny portion of the market,” stated Peng. “But if they want to be profitable just selling phones, the chances are very, very low.”

The trends in China may bode poorly for global smartphone makers, who are both trying to enter the Chinese market and also may soon be competing with Chinese makers at home. Xiaomi, for instance, already has stores in the United States and United Kingdom meaning that consumers will soon have access to its full line of high quality low price phones. Its surely only a matter of time before other rivals invade western markets, meaning already thin margins will likely become even thinner.

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