The global economic downturn caused by Covid-19 was always going to hit the smartphone market. But as smartphone makers shifted their conferences online, pandemic conditions eased up in China, making it the only phone market in the world that saw sequential growth in the second quarter of the year.
But behind the dazzling results lurk some worrying realities that have cast a shadow over both Chinaโs prospects and the global smartphone market. Chinese leader Huawei is trapped under sanctions. Oppo and Vivo have proved limited in their capacity to produce top-notch handsets.
Function fatigue has set in among consumers. For years, manufacturers have bet on camera technology to sell new devices. Consumers are eager for truly disruptive innovation to raise its head.
Editor’s note
The Insights column is a little different this weekโwe’re bringing you an overview of the state of play of China’s smartphone makers, courtesy of our colleagues at cn.ka.550650.xyz. Translation by Heather Mowbray.
A โnewโ 5G Iphone?
Appleโs Chief Financial Officer Luca Maestri told investors on a recent call, โLast year we started selling new Iphones in late September; this year we expect supply to be available a few weeks later.โ The new phone may launch on time, but delivery and sales will face delays.
It may well be that Tim Cook isnโt worried about the delay. Last year, even though Apple was forced to accept price cuts and massive discounts, the new Iphone 11 became one of the best-selling phones in China. Alongside it came the revamped Iphone SE, whose strong value for money made it the most popular Apple model in the world. Global shipments of the new Iphone SE reportedly reached 12-14 million units in Q2 2020.
The success of these two phones gives Apple reason for confidence. According to data from market research firm CINNO, in Q2 2020, Iphone sales in China increased 62% year-on-year to 13 million units.
With this momentum, the launch of the 5G Iphone, expected in fall 2020, is hotly anticipated.
5G is becoming an essential selling point in the Chinese market. Statistics from the China Academy of Information and Communications Technology show that domestic 5G mobile phone shipments reached 13.911 million units in July. The data shows that 5G smartphones accounted for 62.4% of domestic mobile phone sales, exceeding 60% of the total for the second consecutive month.
The wave of 5G replacements is likely to build over the next few months. Analysis by research firm Counterpoint suggests that more than 50% of global 5G phone sales this year will come from China.
The survival of Huawei
At the end of March, Huawei rotating chairman Xu Zhijun said that 2020 was Huaweiโs most difficult year, and called for the company to come together to overcome its difficulties.
When it rains, it pours.
According to international media reports, Huaweiโs temporary reprieve from a ban on importing US technology expired on Aug. 13 this year. There has been no word of a renewal.
Its relationship with the Google Play Store has been severely disrupted. Huawei devices that came with pre-installed Google mobile services can still download and update Google applications through other channels. But newly released phones, such as the P40, cannot use such services.
Huawei is working to mitigate the loss of the Google Play Store. Its phones come equipped with a Huawei suite of mobile services, and a homegrown operating system called HarmonyOS, or HongmengOS in Chinese, is coming to smartphones in early 2021, the company announced Sept. 3.
On the existing foundations of the HarmonyOS ecosystem, breaking into overseas markets may take a while. Few of the worldโs most popular apps are available in Huaweiโs app store, although some can be installed independently. Richard Yu has predicted that apps like Facebook will eventually join the Huawei app store.
Harder to evade are the USโs new restrictions on the companyโs semiconductor supply chains.
Huaweiโs executive director Richard Yu said at the China Informatization Hundreds Conference 2020 that due to the second round of sanctions by the United States, Huawei will lose its chip making capacity on Sept. 15. As a result, the companyโs smartphone shipments this year might be fewer than last yearโs 240 million, Yu said.
The dwindling supply of chips will severely challenge Huaweiโs market competitiveness in the phone business. Coupled with the ban on overseas GMS services, its vitality in overseas markets has been struck a heavy blow, and this has cast a long shadow over Huaweiโs confident New Year vision.
Xiaomi at ten: a fork in the road
When Covid-19 hit China, Xiaomi’s shipments were already lowest among the four leading manufacturers, which also include Huawei, Oppo, and Vivo.
Despite strength in online sales channels, the epidemic era hasnโt been kind to it. In Q2 2020, the company accounted for only 10.4%, or 9.1 million, of the 87.8 million smartphone units shipped in China, its 21.9% year-on-year drop in sales second worst among the major brands, data from IDC said.
Xiaomiโs setbacks overseas have been worse as it lost production and order capacity due to the virus. In India, one of its strongest markets, Xiaomiโs overall shipments fell 48.7% year-on-year.
Xiaomi models do not have a reputation for value, and it hasnโt come up with an alluring flagship model to attract consumer attention. Its surround-screen model , announced with much fanfare last year, was indefinitely delayed in 2020. The same holds true for chips. After the first generation of its phone chips was released in 2017, Xiaomi hasnโt released any plans for a second generation.
Xiaomi also lags its peers in R&D spending. In 2019, Oppo and Vivo both increased their R&D spend to RMB 10 billion ($1.46 billion) . Xiaomi only invested RMB 7.5 billion in 2019, and plans to reach RMB 10 billion this year.
Lei Jun, Xiaomiโs co-founder and CEO, has pursued business diversification for a while. But despite growth in IoT sales prior to 2020, Xiaomi remains a smartphone company. Its handset shipments account for 50.1% of its total revenue.
Internet of Things (IoT) products have performed well in recent years. But even in this market, Xiaomi is slowing down, weighed down by excessive reliance on hardware sales and the complicated supply chain logistics of selling hundreds of products. Its Q1 2020 earnings report shows little growth in IoT.
Oppo is diversifying
Meanwhile, Oppo has increased its investments overseas and established a semiconductor company called Zheku Technology.
Zheku may be Oppoโs way out. The company has always focused on marketing and offline channels and has suffered a lot during the Covid year. Its eye-catching advertisementsโoften seen on other manufacturersโ gadgetsโare increasingly unable to cover up performance shortcomings. These are now compounded by anti-China sentiment in India, which sent shipments to India plummeting in the second quarter by 51% year-on-year. Oppo has lost more than any other of the top five brands in India.
For Oppo, this year may be the most difficult since it got into smartphones. This is despite Oppoโs accomplishments in 2019: reorganizing its product line, strengthening finances, establishing an independent chip department, developing independent sub-brand Realme, and launching IoT products; it also began to increase R&D to compete with its rivals.
A painful readjustment is now necessary. In the face of these challenges, Oppo recently announced that OnePlus founder and CEO Pete Lau (who will remain founder and CEO of OnePlus) has returned as senior vice president of shared parent company Ouga Holdings, and is fully responsible for the Ouga ecosystemโs product planning and experience, including Oppo.
In desperate times, Oppo is rallying its troops, and wants to reorganize its product line by bringing back veterans of the brand, strengthen differentiation, guard its market share, and regain the attention of its customersโwho have very much glanced away.
