Fear is growing for macroeconomic weakness in China. 2Q GDP growth of 7% was in-line with government guidance, but lower than 7.5% in 2Q14, depreciating currency has sparked fear across sectors and borders, consumer consumption appeared weak. And most devastating news in financial analysts eyes, is that the stock market has dropped from a peak of 5178 (on Jun. 11) to 3667 as of yesterday (Aug.17), a 29% drop from the top.
Many people were panicking that smartphone market in China is doomed for the above reasons. They are not wrong. 2Q sell-through data from GfK is showing a 10% Y/Y drop in China, while North America was up 10% Y/Y. After three years of Xiaomi, Xiaomi copycats, and their social media blitz, Chinese consumers are a little worn out. China will probably never see as big a unit shipment surge (like that in 2013) again, ever. Its smartphone penetration already quite high, and 4G roll-out will proceed at a much more rationale pace, given the lack of generous carrier subsidies. But I think it is way too soon to lose hope on China. Why? because North America could still grow 10% Y/Y, because iPhone shipment could still deliver 100% growth in South Korea (June Q in 2015). China naysayers are ignoring one secular trend that will keep the market thriving for the next 3 years:
Middle class to-be in China will drive the largest scale upgrade to premium smartphone in the world: this is already showing in the same GfK data for 2Q15. Although unit shipment was down 10% Y/Y, sales were up an impressive 17%. ASP rose 28% Y/Y from 1,400 yuan to 1,800 yuan. Also, "high-end" category rose from 10% a year ago, to 17% of total shipment in 2Q. Apple's market share gain in China is far from over. But Samsung should see a drastically different outlook. Domestic OEMs in China is catching up on build quality, user experience, and brand image. And they are 50-100% cheaper with the same performance. Samsung's brand equity, will follow Blackberry and HTC's footsteps and fall to zero quickly. There is no way out for Samsung, without its ecosystem, there is no way it can out-innovate its competitors in China. Flexible OLED is a differentiator competitors cannot have, but it also happens to be a feature real consumers find no use for. Apple, on the other hand, is quite different. iPhone is an object of desire, just like a LV bag or a Hermes belt. It easily conveys income level and taste. It is the ultimate affordable luxury - it is obtainable, but at the same time, it represent the ultimate mobile computing experience. A LV bag owner may feel poor at the sight of a Berkin bag, but an iPhone owner has no competition - it is the best mobile handset, period. Owners of the silly Vertu phones are merciless ridiculed and pitied nowadays.
The upgrade will not only happen in tier-2 and above cities, where markets are getting saturated quickly. It will be unleashed in tier-3 cities and below, by sheer scale, that is a much larger market then all of the top tier cities combined.
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