Despite stagnant shipment in the first quarter, Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) will see smartphone sales rebound in the second quarter as their Chinese competitors start to be stuck in the Chinese market bottleneck. The flash-memory scandal of Huawei should also boost the duo's sales.
Samsung and Apple remained the two largest smartphone makers in the world, in spite of their stagnant sales in the first quarter this year, according to IDC's latest global smartphone shipment report. They were followed by three Chinese vendors Huawei, OPPO and Vivo, which continued their relatively strong growth.
But the two groups' sales prospects may reverse in the second quarter. The Chinese brands face new problems. Apple and Samsung remain strong in fundamentals and as their recently launched products start registering massive sales in the second quarter.
In recent years, several Chinese smartphone vendors have been emerging strongly. They have even set up sales goals of catching up or even surpassing Samsung and Apple. This gives people an impression that the two smartphone giants are in serious trouble. The latest quarterly global market report by IDC seems to support this impression.
Samsung Q1 Smartphone Sales Stagnant; iPhone Rose 0.8%
Samsung, the world smartphone leader, saw its shipment stagnant at 79.2 million units in the first quarter this year while its market share eased one percentage point to 22.8%, according to the IDC report.
Top Five Smartphone Vendors' Performance Q1 2017 (Shipments in Millions)
Vendor
1Q17 shipment
1Q17 Market Share
1Q16 Shipment
1Q16 Market Share
Y-O-Y Change
Samsung
79.2
22.8%
79.2
23.8%
0.0%
Apple
51.6
14.9%
51.2
15.4%
0.8%
Huawei
34.2
9.8%
28.1
8.4%
21.7%
OPPO
25.6
7.4%
19.7
5.9%
29.8%
Vivo
18.1
5.2%
14.6
4.4%
23.6%
Others
138.7
39.9%
140.0
42.1%
-1.0%
Total
347.4
100%
332.9
100.0%
4.3%
Source: IDC Quarterly Mobile Phone Tracker, April 27, 2017
Apple's global iPhone shipment rose 0.8% to 51.6 million units in the first quarter this year; its global market share eased 0.5% percentage points to 14.9%.
As Apple reported on May 3 that its China revenues fell 14 percent year on year to $10.7 billion in the March quarter, it is apparent that its loss in China nearly offset all its gains elsewhere.
As a whole, the two market leaders remain strong. Their sales were stagnant in the first quarter just because they did not actively launch new products. For example, Apple only launched in late March the red iPhone 7 and 7 Plus as well as an upgraded version of the iPhone SE. The market still waits for the all new iPhone 8.
For Samsung, it launched its new flagship product S8 (see photo below) only near the end of the first quarter. Its sales potential was not fully realized in the first quarter.
Source: i.ytimg.com
In spite of the stagnant sales, Apple and Samsung maintained huge amount of shipments in the first quarter and commanded huge leads in market shares over the Chinese vendors. Even Huawei, the undisputed leader of the Chinese corporations, still lagged behind Apple by more than five percentage points - a gap equals to the total shipment of Vivo. The distance between Huawei and Samsung was even wider.
Shipment From 3 Chinese Vendors Rise Over 20%
The three top Chinese smartphone makers Huawei, OPPO and Vivo indeed all gained market shares of more than one percentage point from the first quarter of 2016. All of them also managed to get annual shipment rises of more than 20%.
But they should not be blindly optimistic as troubles are already looming. Firstly, they face stiffer competition from the two market leaders. Samsung and Apple are scheduled to launch their flagship products in the second and the third quarters.
Apple launched the red iPhones while Samsung launched its flagship S8, both in late March. It is fair to say that Samsung and Apple did not sell new products in the first quarter. The second quarter will be different. Their newly launched products will be fully on sales.
Huawei Faces Flash Memory Scandal For Flagship P10 Phone
Secondly, Huawei was recently found to have misled customers by using slower flash memories in some units of its new flagship phone, P10. This is because Huawei failed to secure enough supply of the fastest flash memory UFS2.1. The worst problem is that Huawei had not notified users beforehand. The scandal may damage Huawei's brand image and slow sales for other models in the second and third quarters.
In addition, Huawei's latest quarterly results showed its net profit margin was a decade-low, especially with its mobile phone business. Even its founder Ren Zhengfei was reportedly concerned with the company's profitability (See my previous article). In order to ensure a certain level of profit, Huawei may cut production of some low-price smartphones and withdraw from markets with its market share below 10%. Hence, Huawei may lose some smartphone shipments in the short term.
China Offline Smartphone Sales Rise Only 3.9% In February
Moreover, OPPO and Vivo, the champions of Chinese channel-type makers, suffered from a drop of offline revenue growth. China's offline smartphone sales rose only 3.9% to 34.873 million units in February compared with a year ago, according to a Sino Market Research report. The growth rate was a disaster compared with the 19.8% growth rate registered in January and the 17.4% recorded for the whole of 2016.
Some may argue that February 2017 was a low season for all consumer goods in China as the Chinese New Year day fell on January 28 while the date fell on February 8 last year. As Chinese consumers rush to buy presents days before the Chinese New Year and seldom go shopping in the next few weeks, consumer sales were inflated in January but deflated in February this year.
However, related data also show that China's offline smartphone market enjoyed a yearly growth rate of over ten percent in each month of 2016. That means the Chinese New Year Day effect does not explain February's weak offline smartphone sales.
The weak data does indeed reflect a slowdown in offline channel market. China's offline smartphone market may have reached a bottleneck.
Even worse, traditional non-channel type Chinese makers have also built up their offline channels. OPPO and Vivo may not be able to monopolize their channel sales advantages. As other Chinese vendors now also emphasize channels, this will not only increase the twins' cost of access to channels but also suppress their shipments.
Conclusion: iPhone And Samsung Sales May Recover In Q2
Apple and Samsung still command a strong customer base in the global smartphone market. Their shipments will recover in the second quarter following the launch of new products in late first quarter.
More importantly, their main competitors Huawei, OPPO and Vivo find their growth-oriented business models may have reached a bottleneck. They cannot continue indefinitely to seek growth disregarding mounting deficits.
The market created by the extensive offline channel networks of OPPO and Vivo is near saturation. The twin also face keener offline competition from fellow Chinese vendors. They all face diminishing returns (i.e. the number of new customers) from new channel investments.
Worst of all, all Chinese smartphone vendors, being late and relatively small players in the world market, still see their production disrupted by insufficient and unsteady parts supplies. This is why Huawei has to use different flash memories in its new P10 smartphones.
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Source: Apple And Samsung Smartphone Sales To Improve In Q2
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