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Patrick Zhou, principal analyst, joined Strategy and Planning Division, H Corporation in 2005 and is now responsible for delivering analysis, insight and recommendations of mobile internet and device to board of directors. He is influential and was awarded the Gold Medal last year, the highest... More
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  • Most Concerned Of Handset Industry

    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.

    Jul 11 10:02 AM | Link | 1 Comment
  • 360 Is A Real Threat To Xiaomi

    360 is a real threat to Xiaomi

    As we all know, Xiaomi has gained pretty good reputation in the market. According to the survey by Capital Research, Xiaomi is even better known than many major handset makers in the eyes of college students.

    From my perspective, as I said before, so far Xiaomi shows its strength mainly by MIUI, online promotion and frequent update of software version. ( ( Xiaomi, the fastest mover to the trend in the convergence of Cloud and Device, has benefited from the disconnection of Cloud Layer and Device Layer.

    However, as I said before, open cooperation model will be more competitive than enclosed model in the mid-to-long term. Thus there are only two to three years of window opportunity for Xiaomi since its establishment. Its current advantages and differentiators would be cannibalized little and little by new beneficial alliances. The move of 360 exceeded my expectation around one year and was ascribed to strong capability of Mr. Zhouhongyi in industry integration and promotion. Although ARPU of mobile internet services in China is too low to subsidize hardware, Mr. Zhou persuaded device makers to attack the rising competitor while sharing effect of online promotion. This will be obviously likely to shorten the opportunity the window opportunity of Xiaomi which is still eager to find a killing application like MicroBlog.

    Next, 360 and device makers will probably challenge Xiaomi in UI and software integration, imposing greater threat to its current differentiators. The boom of turnkey solution of chipsets is also a catalyst to professional labor division and cooperation model.

    Although we could not determine Xiaomi would be doomed to fail, 360 has been a severe threat to the business model and current situation of Xiaomi which was beaten by Tencent through Weixin.

    Who would be Chinese Nike in handset industry? Xiaomi? Maybe. But I tend to believe it comes from handset makers.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 25 10:55 AM | Link | Comment!
  • Xiaomi Handset – Edition Ⅱ - Is The Mode Sustainable?
    Xiaomi Handset - Edition Ⅱ

    - Is The Mode Sustainable?

    How does the market respond to Xiaomi so far?

    • Xiaomi has been consistently very hot since the product release conference in August 2011. Yesterday, I went to Huaqiangbei(the famous distribution center of electric consuming devices in China)and was told by a shop owner that 700 RMB was added to the official price of a Xiaomi handset (RMB1999) but was still accepted by many people.
    • One friend told me that he went to a tier-3 city for travel and surprisingly found he was asked to help buying a Xiaomi handset from a young stranger when he heard that my friend worked as a VC buy in Shanghai. Another VC friend also told me her friend working in CCTV asked her to get a Xiaomi handset.
    • My colleague booked a Xiaomi handset on the website before the Spring Festival but did not get it until a week ago.
    • It was said that 400-500 thousand Xiaomi handsets were shipped last year and the shipment of this year is estimated to be over 1 million.

    Why is it so hot?

    • Firstly, it is attributed to the marvelous online propaganda including the internet forum. Chinese young people are eager to have a phone which can reflect their preference.
    • Secondly, MIUI, which is similar to HTC Sense, is wonderful and actually the most competitive point of Xiaomi.
    • Thirdly, Jike, a group of people in Chinese which are synonymous to 'opinion leader' in English, usually have strong impact on nearby people.

    Among the three factors mentioned above, I personally think the core highlight goes to MIUI. The following are some highlights of MIUI.

    Users can feedback any problems found to Xiaomi Corporation very easily.

    Plenty of favorite screen background pictures can be chosen from online databases.

    Latest news can be read through the scroll bar on the main page instead of 'entering' the widget of microblog.

    Users can take pictures by clicking any zone within the central chosen frame instead of a button.

    Important short messages can be put into 'favorite' by pressing the message long time and then clicking 'collect'.

    Users will not be disturbed by incoming call or messages when they enter the mode of reading.

    When users press the button 'Home' long time, the screen will show what applications are running in the phone. Users can cease the running of all of them by clicking the button 'One Button, Remove All'.

    Users can easily find the recommended application software from their friends. This speeds up the transmission of good software.

    What about the company profit?

    • The bidding price of a handset for telecom carriers is estimated to be around RMB1700. The BOM cost is estimated to be around RMB1400. This means the manufacturing margin is only 22%. After deducting the expense rate of 21% (Suppose the total expense rate of manufacturing, shipping, packaging, repair, and royalties is 13%, R&D expense rate is 3%, marketing expense rate is 4% and administration rate is 1%), we get the operating margin of 1%. Even if we take the higher margin of handsets sold through electronic commerce into consideration, we can briefly judge that the company runs around the breakeven line.
    • However, the current situation accords with the expectation of the management team. In next 2-3 years, the shipments of Xiaomi handsets are expected to increase dramatically on the condition that quality control and repair service are well operated.

    Is the mode sustainable?

    Yes but with a limited opportunity window.

    Why does the opportunity window exist?

    • Value of vertical integration. China market has now rich resources along the industry chain but lacks an influential entity to integrate them and then make an epoch-making product.
    • Sustainable competitiveness of MIUI in short term. It is very difficult to for device makers to overtake Xiaomi in device software in next 2 years because with the inherit gene of internet, Xiaomi tends to understand users' wants better. Meanwhile, other ISPs are very cautions to get involved into hardware business.
    • Great potential premium of device. Once Xiaomi finds a killing mobile application in next 2 years and maintains its leading position like Sina which launched microblog, it is highly likely that Xiaomi can realize the second leap by premium of device and stickiness of users.
    • Immaturity of cooperation between ISP and device makers. Although ISP and device makers have all realized that cooperation is very important, they hesitate to be aggressive because of low ARPU and uncultivated business and consuming model. As far as I know, the so-called cooperation of customized handsets is more like a marketing approach than a way to add practical customer value.

    Why is the opportunity window limited? Two years?
    • Threat from device makers. Domestic new nobles of smartphones are taking aggressive strategies, doubling or even tripling their shipments over last year, highlighting their technologies in process performance, grabbing the attention of media, and improving capabilities in internet services and device software.
    • Threat from ISP. Mi chat, the ever promising application of instant messaging, has been nearly killed by Weixin developed by Tencent. Big ISPs are leveraging the advantages of their platforms and customer bases to catch up and shut the door of any emerging opportunities.
    • Threat from open ecosystem of ISP and device makers. The trend in the detachment of device software from device hardware will lower the value of vertical integration. The ISP-reselling device market will come to grow from next year. In my opinion, the market will constitute 10% of overall market in 2017 and 20% in 2020. This would be further discussed in another article.

    LINK: Xiaomi Handset - Chinese Apple?

    Written by Patrick Zhou on March 6th, 2012.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Mar 10 10:23 PM | Link | Comment!
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