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How are China’s smartphone titans reacting to the struggling market?

China is home to three of the world’s top five smartphone makers accounting for over one-third of global sales.

The global smartphone industry has been hit hard by the impact of the COVID-19 pandemic, as discretionary spending tightens amid an economic downturn with rising unemployment worldwide. Smartphone shipments worldwide fell by 11.7% in the first quarter of 2020, the largest annual decline ever, according to a recently released IDC report. In China, smartphone sales fell by 22% year-on-year (YoY) with Huawei the only major player avoiding an annual decline.

However, the short term depression of the market cannot stem the inevitable continued penetration of mobile internet in developing markets like India, Africa, Southeast Asia, and South America, where Chinese smartphone makers such as Xiaomi and BBK’s Vivo have emerged as worthy combatants in the battle for market share.

With the uncertainty surrounding the health conditions in many overseas markets, Chinese smartphone companies are under short-term pressure amid fierce competition. Markets like India, which are so crucial to major Chinese players, face huge challenges around the worsening public health crisis.

But there are some positives. 5G devices are becoming more widespread, accounting for around 15% of new shipments in China during the first quarter, and 8.9% globally. Chinese smartphone companies have been at the forefront of this transition to 5G, accounting for well over half of 5G shipments in the first quarter.

How will the three largest Chinese smartphone makers Huawei, Xiaomi (HKG: 1810), and Vivo, which together accounted for 37.5% of global smartphone shipments in the first quarter, fair in the intensifying fight for a shrinking pie in 2020?

Huawei

While Huawei has garnered attention recently for the expansion of its Information and Communication Technologies (ICT) products, especially 5G networks, its smartphone business has been defined by domestic success and challenges abroad posed by the current inability to access Google Mobile Services, due to a ban by US regulators.

The Shenzhen-based telecom giant ranked second in terms of global shipments behind Samsung with a 17.8% market share during the first quarter despite a 17.1% YoY decrease in total shipments. In fact, Huawei managed to grow its market share in China by 6% YoY, while all other Chinese OEMs suffered declines.

Huawei has sold more 5G smartphones than any other Chinese competitor. Photo:Shutterstock.com

Huawei avoided an even sharper overall slump by cutting the prices of their Mate 30 and P30 series, and its sub-brand Honor’s V30 and 9X handsets. Given their industry-leading position boosted in part by a patriotic sentiment fueled by what some Chinese feel is unfair targetting from US regulators, Huawei’s sizeable domestic business was hit harder than Xiaomi or Vivo during China’s COVID-19 outbreak.

However, Huawei stands to recover on the same timeline with the Chinese economy, so as overseas markets continue to be hampered by the pandemic, its competitors have more to fear.

Due to the pandemic, digital sales channels saw increased penetration, accounting for over 50% of smartphone sales in China. To capitalize, Huawei leveraged a partnership with local delivery giant Meituan Dianping to provide same-day delivery of new smartphones using Meituan’s app.

In addition, Huawei’s 5G devices accounted for more than 50% of 5G handsets sold in China, according to Counterpoint Research.

The firm’s smartphone business is increasingly over-reliant on its domestic market, as more than 50% of the company’s smartphone sales were in China. For now, the company seems to be doubling down on its home market, opening a three-story flagship store in Shanghai on June 24, just next to Apple’s flagship outlet in the city.

Xiaomi

Xiaomi grew its global market share to 10.7%, but the company is in a precarious position as the pandemic persists in some of its important markets. Xiaomi was carried by its overseas business in the first quarter, especially buoyed by a 6.1% growth in the Indian market. However, India’s COVID-19 outbreak has worsened in recent months, with the potential to significantly disrupt sales.

India has always been Xiaomi’s most important overseas market. Photo:Shutterstock.com

With Huawei’s regression in overseas markets like the US and Europe, Xiaomi could be poised to seize the opportunity to expand into new markets. The company reported triple-digit growth in Latin America and Africa, having just entered those markets in 2019.

In the European market, Xiaomi shipments increased 145% YoY in the first quarter.

The company even suspended the production of its 4G smartphones, instead deciding to forge ahead with an entirely 5G-enabled lineup. Even Xiaomi’s affordable sub-brand Redmi will be packing 5G connectivity.

Meanwhile, Xiaomi has work to do in its domestic market. In the first quarter of 2020, the firm’s shipments in China declined by 35% YoY. Still, the company released several mid-tier 5G devices, including the Mi 10 5G and Redmi K30 5G, with the aim of bolstering their competitiveness in China, where they maintain around a 9% market share. Xiaomi has already carved out a 14% market share for 5G devices, according to its first-quarter earnings call.

Xiaomi has also released its new operating system, MIUI 12, which comes with enhanced privacy features and robust customization options.

The company forecasted further problems in the second quarter, as European markets still have not rebounded from the health crisis, while India’s predicament seems increasingly unstable. With the largest reliance on the Indian market, this could put Xiaomi in a vulnerable position. Worryingly for Xiaomi, India enforced measures since March restricting e-commerce activity to essential items only, ravaging the most important digital sales channel for smartphone makers during the pandemic.

Vivo

Vivo, one of the brands controlled by Dongguan-based firm BBK Electronics, which also holds Oppo, Realme, and OnePlus, among other smartphone brands, rounded out the top five in terms of smartphone sales in the first quarter. Vivo managed to generate industry-leading growth of 7% YoY resulting in a global market share of 9%.

The company’s affordable Y and S Series models gained serious traction in India, where Vivo beat out Korea-based Samsung for the number two spot behind Xiaomi.

Vivo’s offline expansion into India could not have come at a worse time. Source: Shutterstock.com

In February 2020, Vivo announced that it would launch an aggressive offline assault on the Indian market, aiming to add 250 stores across the country, including 20 flagship experience stores. However, such a strategy proved to be ill-timed, as offline retail traffic has been promptly dashed by the COVID-19 outbreak.

In May, the company attempted to salvage some offline traffic by launching a smart offline retail initiative covering 20,000 retailers and operated by 30,000 Vivo customer service personnel. The system connects interested customers with Vivo representatives via SMS, who will connect the customer to a nearby retailer to close the transaction. While normal retail traffic is still allowed, this system aims to support those nervous to leave their house during the pandemic.

Vivo continues to bolster its position in the Chinese market, as it recently released its newest smartphone series, the X50, which holds the title of the world’s thinnest 5G phone, and competes in the mid-tier market with likes of Xiaomi.

Other brands owned by BKK Electronics are also looking to find their place in a more competitive market.

For example, OnePlus, a premium smartphone brand that has previously thrived in the European market has had to instead focus on the Chinese market where they have had little experience or success. Amid a global economic downturn, the company has even recently announced that it will develop a more affordable device for the mid-tier smartphone segment, to be released in Europe and India.

Oppo, another of BKK’s smartphone brands, has attempted to transition its business to wearables and other Internet of Things (IoT) devices with the debut of a smartwatch, in a bit to diversify its revenue streams. Oppo has also looked to seize some of the overseas market share vacated by Huawei’s retreat, specifically launching more retail initiatives in Europe.

China digest

Outlook

The top Chinese smartphone makers will face significant challenges throughout the rest of the year. Huawei must continue to grow in a saturated domestic market, as its overseas opportunities have been stunted by its ongoing feud with US regulators. Meanwhile, both Xiaomi and Vivo are overly reliant on India as a growth driver, just as India is being struck by the COVID-19 pandemic. Although China’s economy is slowly reopening, a recent outbreak in Beijing has recast doubt over the short-term prospects of offline retail in the country.

While the arrival of the 5G era was supposed to mark the next great advance in mobile technology, the COVID-19 pandemic has interrupted Chinese smartphone companies’ strategies, forcing agile adaptation in the months to come. It is safe to say that 2020 may not behold the grand 5G bonanza the industry anticipated, and for these high-growth companies, expectations will have to be tempered.