Most Concerned of Handset Industry
Recently lots of investors have come to visit me and talked about future landscape of handset industry. The fact of poor shipments in H1 much lower than expected seems to have brought pessimistic emotion for most of people. Now I list the most concerned questions and also my answers here which are likely to be wrong and hence only for your reference.
Q1: Will smart phones in China and other developing regions continue to soar or just grow moderately?
A1: The poor shipment in H1 does not mean the same result in H2. In fact, the figure of Q2 for lots of companies has become better than that of Q1. It will continue to improve in H2. The shipment of smart phones in china in 2012 may reach 140 million.
Q2: Who would gain profits from so-called thousand-RMB smart phones?
A2: It is admitted that it is very difficult to gain profits from low-end smart phones. As forecasted as one year ago, the hard time for manufacturing industry in China and continuous launch of turnkey chipsets are getting more and more companies to enter low-end market, imposing tremendous pressure on branding companies. Moreover, more and more obvious commoditization of hardware and software platform worsens the situation. It is highly likely that in two years, only 20% of branding companies have gained profits from low-end smart phones by advantages of scalability and excellent management capability of supply chain. 80% of branding companies would lose money and have to adjust their business model, i.e. exploring niche markets. White-brand companies would also leave mainstream market before the end of two years of happy time from now.
Q3: Will white-brand companies boom in H2?
A3: Probably. According to my survey in Huaqiangbei, lots of counters have begun to sell white-brand smart phones, which were not seen even only two months ago. The whole-sale price for 6573 embedded smart phones with 3.5-inch capacitive touch screen is only RMB 380 while that for 6575 with 4.3-inch capacitive touch screen is less than RMB 700. It is likely that prices would decline by RMB 100-200 at the end of the year, thus nearly ending the life of feature phones.
Q4: Which chipset vendor seems more powerful in smart phone market in China?
A4: Although compared with Qualcomm MTK lags behind in technology and suffers in margin due to pricing war, its advantages in localized design, localized services, localized ecosystem construction are lending more and more support to future growth. There is still growth space for MTK before Qualcomm pays enough attention to China handset market.
Q5: will the profit of smart phone continue to deteriorate for all makers?
A5: Not necessarily. There are two main factors impacting the trend of handset industry, commoditization and fashion. The low profit which we have seen is brought by commoditization. However, fashion is coming to function and will play more and more important role. Xiaomi has started a good beginning and will have many followers most of which have manufacturing DNA and are learning to understand more about consumers. It is highly likely that companies with strong marketing ability in China would become brilliant. Research those companies with successful history of consuming electronics, talented and stable team, and consumer-oriented company structure and you will find what you are seeking. Product quality is still important but inferior to marketing in terms of contribution to handset success.
Written by Patrick Zhou on July 11, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.