Good comments on lower-end competition from Chinese and Indian phone makers.
Sneha Shah: Seeking Alpha
Apple (AAPL) stock has been stuck in a range after falling precipitously from its all time high levels. The stock has been trading in a range between ~$400-450 as the general market exuberance and a big stock purchase plan has helped protect the downside. However, the fundamentals have deteriorated for Apple, as the company has not come out with any major new products even as the competition in the core markets has increased rapidly. Major competitors have come out with a large number of new products in ever shortening product cycles.
The most serious threat has come not from the established Tier 1 global mobile device companies such as Sony (SNE), Samsung (SSNLF.PK) etc. but from relatively unknown Chinese and Indian companies. These companies have been rapidly expanding market share in their domestic markets at the expense of Apple and others. US investors may not understand the rise of these companies as major players in the Indian and Chinese markets. From the low end of the smartphone segment, these companies are now starting to introduce products for the mid range of the market and it would not surprise me if they soon came out to challenge Apple in the premium upper end of the market (some already are).
As the scale of these companies increases, it is inevitable that they start to expand into developed markets as well. Though the success of these companies in foreign markets is far from assured, it does present a threat to Apple. There have been rumors that Apple is preparing to launch a cheaper priced iPhone model for the emerging markets. However, there has been no confirmation from the company so far and no release date as well. I think that Apple has no choice but to introduce a cheaper smartphone for strategic reasons. It should do that soon or it could face BBRY’s fate due to complacence.
Indian Smartphone Companies see a huge surge in market share, especially Micromax
The Indian smartphone companies such as Micromax and Karbonn have managed to rapidly increase their smartphone market share in the current quarter, despite stiff competition from Tier 1 vendors such as Samsung and Apple. Micromax has very successfully marketed its “Canvas” smartphone models and they have now become almost as popular as Samsung’s Galaxy models. Local companies understand the local culture and preferences far better in my view, compared to the global giants. Their product range is tailored to customer needs rather than being a global “one size fits all” as the iPhone. The combined smartphone market share of local Indian companies has surged to an amazing 30% in the current quarter, which means that these companies sold almost 3 million smartphones and generated more than $3 billion in revenues (assuming a price of $120 per smartphone). Apple, Samsung and others have fought hard for the Indian market and have introduced large discounts, exchange schemes and EMIs to lure the Indian customers. They have also outmatched the local players in their advertisement and marketing spend. But these local companies have increased their market share as their products are sold at much lower margins than the Tier 1 vendors.
“Micromax, which ranked second by shipments, and fifth-placed Karbonn are growing faster, according to IDC. Micromax increased shipments to 633,000 smartphones in the last quarter of 2012 from 9,990 a year earlier, while Karbonn grew to 304,000 from zero, according to Gurgaon-based Consumer Media Research. Karbonn introduced smartphones in April 2012”, said Shashin Devsare, executive director at the handset seller.
Source – LiveMint
Coolpad rises in Chinese Smartphone rankings
The Chinese smartphone market is a much larger one than India and has many more players. The Chinese companies dominate the market along with Samsung. The most surprising thing is that small smartphone focused companies such as Coolpad have managed to increase market share beating bigger Chinese and international rivals such as ZTE, Huawei and Apple. The same domestic and smartphone focus has helped these companies grow at a faster pace than rivals. These companies are much more nimble and agile and operate on much lower margins. ZTE and Huawei are already aggressively targeting western markets using their existing distribution networks. ZTE launched 6 new smartphones in India while Lenovo and Huawei are also not far behind.
The Chinese-produced smart-phone Coolpad is now the third-biggest player in China’s smartphone market, surpassing both international and domestic superstars such as Apple AAPL -1.58% and Huawei. A report in May by Sino Market Research attributed 10.2% of China’s smart-phone market to Coolpad in the first quarter of 2013, coming only behind Samsung and Lenovo. That beat Apple by nearly 4 percentage points, and Huawei by 0.2.
Source – Forbes
Apple is missing out on the fastest growing segment
The western smartphone companies have made a strategic error in my view. They have not tailored their products to the emerging markets which needs lower priced quality products. It is impossible for 99% of the Indians to afford an iPhone 5. Apple has now belatedly realized this and is now aggressively discounting the iPhone 4. But at nearly ~$300, even the iPhone 4 remains far more expensive compared to the average smartphone price. BlackBerry (BBRY) too has totally lost the plot by pricing its new smartphones at a crazily high price and is now being forced to eat humble pie. Nokia (NOK) seems to be the only western mobile company which seems to understand the demands of the emerging market customers. Its Lumia 520 is a great product in terms of the price it is sold at and it was not surprising for me to see Lumia smartphones surge during the most recent quarter. I think Apple is being too slow in introducing the iPhone mini, as product cycles in this industry have become amazingly short. Apple cannot afford its one year long product cycle anymore in my view. The company is still powerful and huge, but it seems to be lacking these days in strategic direction. The smartphone market is no longer Apple’s playground which it dominated through its iconic iPhone. It has become a tough super competitive business, and unless you are fast in meeting your customer needs, others will eat your lunch.
Apple is Losing Global Market Share
Top Five Smartphone Vendors, Shipments, and Market Share, 2013 Q1 (Units in Millions)
|Vendor||1Q13 Unit Shipments||1Q13 Market Share||1Q12 Unit Shipments||1Q12 Market Share||Year-over-year Change|
Source: IDC Worldwide Mobile Phone Tracker, April 25, 2013
These players are attaining critical mass and could soon threaten Apple’s western bastions
Many of these smartphone startups are approaching the billion dollar mark in revenues and some like Coolpad have already crossed it. Their scale and size gives them the ability to expand into foreign markets as well. Micromax is already planning an African expedition and you can find some Chinese brands such as Gionee in the Indian market. The brand value of these companies is also increasing as more and more customers start to recognize and appreciate their products. Xiaomi has a good reputation of making high quality premium smartphones which are much cheaper compared to the Tier 1 flagships. Apple needs to be more aggressive with cheaper products even if it decreases the overall corporate margins. It should not become a prisoner to Wall Street’s quarterly fixation, but pay more attention to the long-term strategic implications.
Valuation and Stock Performance
Apple’s stock has not gone anywhere in the last 4-5 months and has disappointed investors who were looking for new product launches. The declining margins have also scared investors who think that Apple may become the new Microsoft (MSFT). I have been positive on Apple stock given its low valuation, large cash reserves, huge buybacks and a decent dividend yield. The company is also growing its software and services revenues rapidly as the iTunes subscriber base continues to grow. However, the product launches have been a bit slow in my view.
Local Chinese and Indian smartphone companies have performed extremely well despite lacking the advantage of global technology giants such as Apple. These companies are lean and mean as they don’t have the technological or marketing heft of the giants. They have to depend on their street smartness to survive in this cutthroat market. I think many of these companies will become aggressive in the western markets. Though the competitive barriers are higher because the telecom carriers control the smartphone sales, these companies make good products at an extremely small fraction of the profits that the Tier 1 companies make. It is estimated that Apple and Samsung made more than 90% of the smartphone industry profits. Apple needs to rethink its strategy and look to fight aggressively in the low and mid end of the smartphone industry. Its little known rivals are starting to encroach on its territory, while it does not have the products to fight in theirs. Currently I am positive on Apple’s stock, given its low valuation and the start of a major product cycle. However, I will watch the smartphone market carefully to see whether Apple is losing more ground to its competitors.