The Davids are taking over the smartphone world

NEW data released by IDC on smartphone sales last week shows that there's a new kid on the block. According to the research agency's Worldwide Quarterly Mobile Phone Tracker, in the third quarter of this year, Chinese phonemaker Xiaomi zoomed to the No 3 slot in the global list of top five smartphone makers in the world, behind Samsung (No 1) and Apple (No 2). The Chinese company sold 17.3 million units in the quarter for a 5.3 per cent market, pipping Lenovo (5.2 per cent) and LG (5.1 per cent) to the third spot.

It's true that, as IDC notes, Xiaomi benefited from its focus on China and adjacent markets. This, coupled with innovative marketing, brought triple-digit year-on-year growth. But, as IDC notes again, it remains to be seen how quickly the company can move beyond its home territories to drive volumes higher.

Was this a fluke, one-off phenomenon?

No, expect more non-traditional brands in the Top 5. This is because the next billion smartphone users are not going to come from established and wealthy markets such as those in North America, Europe, Japan and pockets of Asia such as Australia, Singapore and Hong Kong. They will come from emerging markets such as India, China, Indonesia and Brazil. These markets are characterised by less brand loyalty and extreme price sensitivity.

According to IDC, as many as 327.6 million smartphones were sold in the third quarter and this represents a 25.2 per cent rise from the 261.7 million sold in the year-ago quarter. Other data sets show that the mature markets are growing in single digits while the emerging markets are growing at around 30 per cent. With a new type of customer driving change, the smartphone market, like others before it, is beginning to behave differently and many of today's established brands have been, at least temporarily, caught flatfooted.

Tech evolution

Companies such as Samsung, Apple and HTC have developed strong brand loyalty in mature markets by giving customers standout smartphones, each iteration of which have been absolutely state-of-the-art in terms of both hardware and software. All one needs to do is to take up, say a three-year-old smartphone and compare with its latest iteration to understand just how much the technology has evolved. All this, of course, comes at the cost of price. A top-end smartphone costs as much as a high-end computer.

Any comment on smartphones is incomplete without a reference to the legendary platform war between Apple's operating system, iOS, and Google's Android. The latter, because it's open source is used by almost every one of Apple's major competitors to counter its unique business model. The Cupertino-based Apple has built up a super-successful business by updating its phones once a year and selling them at an almost unheard of 30 per cent-plus margin. This model has helped to build the world's biggest technology company in terms of revenue in a span of half a decade.

And yet, Apple's global market share was 12 per cent in the third quarter, down from 12.9 per cent a year ago despite a 16.1 per cent jump in shipment volumes to 39.3 million units from 33.8 million. The reason for this is fairly obvious. It is feeding the replacement market more than the new emerging markets.

Apple's high-margin business model has been a huge success in markets where buyers have higher disposable income. It has been less so in price-sensitive markets. Despite that, Apple is, for now, still making tonnes of money and has made it known that it never considered market share a primary goal.

That's unlike Samsung which has a business model dependent on both high margins as well as volume sales. The Korean company has a bewildering array of smartphone models. At the top end, it has its Galaxy S series that go head-to-head with Apple's iPhones, and its Phablet phone, the Galaxy Note. Samsung also has a wide range of mid to low-tier smartphones aimed at the emerging markets. Over the past few years, this strategy has propelled the company to the No 1 slot with a market share which, till recently, was double that of Apple.

As the IDC numbers indicate, over the past year, smartphone makers such as Xiaomi and Lenovo and country-specific brands such as Micromax in India have eaten into Samsung's low to mid-tier phone market.

Samsung's market share has fallen from 32.5 per cent in the third quarter of 2013 to 23.8 per cent a year later. Its volume shipments - in an expanding market - also went down to 78.1 million in the third quarter from 85 million in the year-ago quarter. The drop in market share shows in Samsung's financial results. In the third quarter, the company's mobile division saw a 73.9 per cent drop in profit to 1.75 trillion won (S$2.09 billion). This is its worst performance since the second quarter of 2011. The company has announced that it is reviewing its phone strategy in the mid to low-tier markets.

Market share

In the second quarter of this year, Samsung had a 28.8 per cent market share in India and a 9.8 per cent share in China. Apple, meanwhile, had a dismal 1.4 per cent market share in India and a slightly more respectable 6.5 per cent in China. As Kiranjeet Kaur, senior market analyst, IDC Asia Pacific, told this writer, every player in the market is under siege, with Chinese vendors expanding overseas and other local vendors trying to protect their territories.

She adds: "Except for the China brands, the other local brands have only recently made inroads into global markets and are largely dependent on local shipments for growth.

"But local brands such as Micromax in India or i-Mobile in Thailand continue to play on their local strengths and gain share in the market. While the China brands have a more focused approach to penetrate the other emerging markets in Asia, the other local brands in the region are looking outside of Asia to expand. Even the local South-east Asian brands such as Cherry Mobile and Ninetology have had limited success so far in expanding into neighbouring countries."

The bottom line is that the next billion smartphone users are not going to buy S$900-1,000 (before subsidies, if any) phones. They want phones in the S$200-300 range. At the same time, these customers are not willing to compromise on features or quality. Only those companies that are able to give a good combination of both - the latest features as well as the right price - will emerge winners. Xiaomi exemplifies this point dramatically. However, this is the start of the journey, not the end. Expect more such companies to come up as smartphone technology becomes commoditised.

amit@sph.com.sg

@AmitRoyCBT

*Lenovo to take on global smartphone market leaders