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Smartphone Supremacy - Apple Vs. China
   2015-02-05 15:23:44    CRIENGLISH.com      Web Editor: Xie Tingting

By Zhao Yang (About the author)

This past week has put a spotlight on smartphone brands as they continue to battle for dominance in China and around the world. The big news was Apple's record-breaking 18-billion-dollar quarterly profit figure; driven primarily by growing iPhone sales, which accounted for more than two-thirds of the company's 74.6 billion dollars in revenue. In China, Apple's sales were up 70 percent, putting it in first place in terms of units shipped in the 4th quarter of 2014.

Apple's sales rise coincides with Samsung's fall, but behind the two leaders are 13 Chinese smartphone companies, who together have a larger combined market share than either of the two giants. China's rapidly growing cadre of smartphone makers, Xiaomi, Huawei, Lenovo, and ZTE are collectively changing the market. They are poised to be the next big market movers, even as they compete ruthlessly amongst themselves. Using better designs, materials, technology, marketing, distribution and price points, they have been chewing steadily into Samsung's dominance by offering consumers what they want; more choices at better prices. Today, 10 of the top 17 cell phone makers are Chinese; including 3 of the top 5. In 2010 there was only one, ZTE, in the top 5.

The days when Chinese-made smartphones represented poor quality knockoffs have since faded. Sure, you can still find kooky knockoffs online for absurdly cheap prices, but today Chinese smartphone vendors deliver the most bang-for-the-buck, and they are moving aggressively into international markets.

While many pundits predict that the market is more about brands and operating systems, Chinese companies are changing the competitive landscape by designing and adapting their smartphones around the demands of the consumer. Looking at Apple's latest success, there are wisps of darkness. Why did it take so long for Apple to simply give their fan base what they envied in Android devices: bigger screens? In view of this, was the record quarter a trend or a windfall? If it was a signal that Apple will be following market trends more closely in the future, that's great; but how will they square this with their traditional "one icon to serve all" tradition? Apple will also have to contend with Chinese companies who are creating an iOS experience, with similar physical design aesthetics on devices running Android.

For smartphone competition, OS war is crucial. Despite some temporary gains, the major operating system (OS) war between Apple's iOS and Google's Android, continues to be won by Android. The other operating systems offered by Nokia, Microsoft and BlackBerry are marginal and fading fast. This is crucial to the Chinese companies who have thrown in with Android. But far from just following the crowd, Chinese companies like Xiaomi are adding their own secret sauce using their proprietary MIUI Android overlay. Their latest version MIUI 6 delivers an Apple like iOS experience at half the price.

Conventional wisdom is that, from an operating system perspective, Android devices will drive volume, while iOS devices will drive revenues. By 2018, Android is projected to control 80 percent of all global smartphones shipped and 61 percent of revenues, while iOS is projected to control only 13 percent of volumes but 34 percent of revenues.

The only fly in this ointment is the evolution of raw processing power that these phones are acquiring, which will allow many of them to be able to handle more complex operating systems. This is probably what Microsoft is hoping for with their new Windows 10 OS, which will work on phones, tablets, laptops and desktops. In fact, the rapid increase in raw computing power will in essence make the smartphone a rival to desktop and laptop computers. Envision a day when you simply plug in or connect wirelessly to a home or office monitor, keyboard, mouse and printer using your smartphone as your computer; it is not so far off.

While facing fierce market competition, each of the Chinese smartphone makers has their own approach, and the top companies exemplify different strategies. Xiaomi's approach, started in 2010 by a consortium of eight partners including Temasek Holdings, IDG Capital, Qiming Venture Partners and Qualcomm, has experienced the fastest growth. In the third quarter of 2014, it became the world's third-largest handset maker after Samsung and Apple, with a 211 percent year-on-year surge in shipments, according to data from industry consultancy IDC.

Xiaomi's Mi Note was launched at the end of January. It sold out in three minutes. The Mi Note also boasts impressive specs, packing more RAM, a bigger battery and a more powerful camera than the iPhone 6 for significantly less, 370 U.S. dollars, vs. a base iPhone at 749 U.S. dollars. With early reviews of the Mi Note being highly positive, no excess inventory, and lower sales costs due to direct online sales, the founder and CEO Lei Jun is forecasting 100 million in sales for 2015; up from 61.1 million in 2014.

The key to Xiaomi's model is getting rid of the 20 to 25 percent cut that retailers/distributors typically get, and instead using the Internet to sell directly to an increasingly Internet savvy Chinese population. Earnings from accessories and web services help overcome the lower margins earned on the phones themselves.

The end result - phones that consumers love, absolutely nothing like the cheap knockoffs traditionally associated with Chinese manufacturers of days gone by. In going after the premium end of the market, Xiaomi has in essence declared war on the fat margins and business-as-usual practices of its bigger competitors.

The only question is can Xiaomi run fast enough to keep ahead of its competition. Because, while brilliant, everything except its MIUI Android overlay can be easily replicated and adopted by its competitors. With this in mind, people will be looking at its December 29, 2014, forty-six billion dollar valuation.

If Xiaomi is a rabbit, then Huawei is a giant. As a diversified technology company whose emphasis is research and development, Huawei relies on developing its own technology, and as such its approach is diametrically opposite that of Xiaomi's. Huawei phones do use some internationally sourced components from companies like Sony and Samsung, but the heart of the phone is a proprietary Kirin 925 chipset, developed and owned by Huawei.

Started in 1987, it is one of China's foremost technology companies famed for its growth and investment in technology research and development. It has joint ventures and working relations with over 80 percent of the world's top 50 technology companies. Its founder and CEO, Ren Zhengfei is legendary for his business acumen and success.

Huawei's 2014 revenues were at least 287 billion yuan (46.3 billion dollars), up from 239 billion yuan in 2013. Operating profits were between 33.9 and 34.3 billion yuan. Sales growth was led by a 32 percent rise in consumer business due to the increasing popularity of its mid- to high-end smartphones. They also clocked a 27 percent increase in a unit which provides cloud computing and data projects to businesses. While only part of Huawei's massive book of business, it is clear that the company wants to be a dominant player in the smartphone field and to Huawei that means developing and controlling the technology.

In the first week of January, at the Consumer Electronic Show (CES) 2015, Huawei was featuring its Huawei P7, Mate 7, Honor 6 and Honor 6 Plus. Huawei is expected to unveil its Mate 7 Compact in March at the Mobile World Congress (MWC). These offerings are aimed at the premium end of the market, offering consumers high quality devices with a different mix of features, technology and prices. Their main competitors are not Samsung and Apple though; it is the other Chinese smartphone makers; in particular Xiaomi. Its Mate 7, at 2,999 yuan will be a direct competitor in terms of features and price to the Mi Note. However, Huawei's own Emotion UI skin for Android is not as highly regarded as Xiaomi's MIUI.

Xiaomi and Huawei now basically have the same product offerings and target consumers, and the frequent spats between the two firms indicate that the rivalry is heating up. In 2014, Xiaomi's total shipments reached 61 million units, compared with 75 million units for Huawei. The question for Huawei is will it be able to develop its proprietary technology more efficiently than its competitors. Currently, its Kirin 925 chipset is regarded as good but not the best. Part of this problem is that companies like Qualcomm can spread their costs and earn profits by selling to multiple phone manufacturers. To be competitive Huawei might have to do the same, which would in essence erode its competitive edge.

Under this development, Apple may have had a fantastic quarter, but unless it pulls a significant rabbit out of its hat, it may not happen again. A new day in dawning on the smartphone market, Apple and Samsung now face vigorous competition form a pack of hungry and feisty Chinese competitors who are using a variety of strategies to climb to the top of the mountain. Chinese companies are geared for smaller margins; they have proprietary technology; they are fast and they have developed more efficient marketing and distribution methods. Against this, the slower moving Apple and Samsung with their fatter margins and business-as-usual approach will be easy marks.


About the Author

Zhao Yang hosts a China Radio International business flagship program Biz Today. Before that, she has been a financial reporter for CRI's London correspondent bureau. She was actively involved in reporting the financial market in the city of London, and the Chinese economy as well.


The opinions expressed here are only personal, and do not necessarily represent CRI's official policy.

Read all opinion stories by Zhao Yang

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