Chinese firms edging out Samsung and Apple in the smartphone industry

Chinese firms edging out Samsung and Apple in the smartphone industry
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Aggressive pricing and strategic partnerships drive China’s rising profile in the global smartphone market. It may not be long until “Made in China” becomes a mark of prestige.

Smartphones may be a ubiquitous part of life in the developed world, but one might be surprised to learn that since 2013, global smartphones sales have begun to surpass those of conventional phones. At face value, this seems rather implausible when comparing the low purchasing power of consumers in the developing world with the relatively high price of smartphones. However, two key developments have enabled this remarkable trend.

First, a steady rise of Chinese developers has resulted in the increasing affordability of smartphone devices. While Apple and Samsung devices tend to command prices exceeding $600, some Chinese models now retail for less than $100.

Second is the phenomenon of technological “leapfrogging.” Delayed development enables manufacturers to skip over older industrial models in favor of more efficient ones. For example, across Africa and Southeast Asia, the implementation of new infrastructure has centered on mobile networks and renewable energy, rather than conventional energy and landlines.

Consequently, these countries have also become early adopters of mobile-based services, such as mobile banking and healthcare. Combine these factors with the growing youth population and it is clear why some estimates project that emerging economies could account for over 60% of the global smartphone market within the next decade.

Aggressive pricing for the lower end market

Currently, Apple and Samsung account for roughly half of the global smartphone market. Chinese manufacturers cannot compete with the two powerhouses in both branding and product quality.

Instead, Chinese smartphone makers have sought to leverage two key strengths, the first of which is price competitiveness. Consumer literacy tends to be lower in emerging markets and, consequently, price tends to overshadow other purchasing factors, such as prestige and quality. That is one explanation for why Chinese firms have captured a significant market share, not only abroad but also at home.

In 2013, the introduction of lower-end Chinese smartphones contributed to Samsung losing over half of its market share within a year. For now, Apple occupies the top spot, but local firms Xiaomi and Huawei have greatly narrowed the gap.

Across Africa, several mobile service providers have established strategic relationships with Chinese manufacturers to capitalize on their lower model prices. In 2012, Huawei partnered with Safaricom to create an affordable mobile package based on Huawei’s Ideos, an Android phone that sells for $50. The strategy has certainly paid off as Huawei accounts for 50% of Kenya’s smartphone market.

Tie in with Chinese state financing

The second advantage Chinese manufacturers are capitalizing on is China’s growing role as a financier of infrastructure development, particularly in Africa. At the public sector level, state-owned Chinese banks typically lend to governments on the condition that they grant Chinese firms with exclusive rights to sell and goods and services.

At the private sector level, similar arrangements are made when Chinese companies engage in project financing and development. In Kenya, Huawei was awarded a $71 million contract to build a nationwide fiber optic network, while in Ghana it has secured over $300 million in government contracts to date.

Favorable terms and conditions

For governments in emerging economies, the second advantage is all the more appealing because, unlike their counterparts in developed countries, Chinese entities do not require adherence to strict environmental and labor rights policies. In exchange for financing, Western institutions like the IMF or World Bank also prescribe political and economic policy requirements that can be unappealing.

In contrast, Chinese entities are disinterested in the internal political affairs of host countries, and the lack of strict regulations leads to streamlined execution of projects. Yet another attractive feature is that, for some cash-strapped countries, the Chinese Export-Import Bank will even provide financing in exchange for payment in natural resources, a deal structure known as the “Angola model.”

Next wave of Asian consumer electronic dominance?

Chinese economic growth has slowed to the point that Beijing recently announced a surprise devaluation of the Yuan. While it too early to understand the full implications of that decision, the move will certainly boost the competitiveness of Chinese smartphones abroad at the expense of Apple and Samsung.

In the 1970s, Japan’s meteoric rise in the global consumer electronics market was driven by domestic firms imitating and gradually out-producing American manufacturers. In the past decade, South Korea established itself as a leader in select industries by applying the same strategy at the expense of Japan.

According to the conventional model of export development, low-cost manufacturing allows for price competitiveness. Sales revenue generates capital for research and development that can unlock innovation, which, in turn, enables high product quality and brand recognition.

Presently, the Chinese industrial profile occupies the first stage of the model. However, if things progress well, it may not be long until “Made in China” becomes a mark of prestige.

Categories: Asia Pacific, Economics

About Author

Sam Doo

Samuel is an IR professional interested in the crossroads of geopolitics and investigative research. He was previously a graduate associate at OPIC, a U.S. developmental finance institution that provides political risk insurance and financing options for emerging market investments. He also previously worked for INTERPOL. He holds a MA from George Washington University and a BA from the University of Michigan.